Exclusive-Japan eyes tax breaks for non-core business sales in governance reform push, sources say

TOKYO, Aug 25 : Japan's government is considering tax breaks on gains from sales of non-core businesses, a move that could accelerate long-delayed corporate restructuring and spur industry consolidation, two people with knowledge of the matter said.

The plan would remove a major obstacle to companies shedding non-core businesses and redeploying capital into growth areas, in what could become one of Prime Minister Sanae Takaichi's most significant initiatives to advance corporate governance reform.

Under the plan, roughly 30 per cent corporate tax on gains from sales of non-core businesses would be deferred indefinitely, provided companies reinvest the proceeds within several years in acquisitions aligned with their core operations and commit to investing in those businesses, one of the sources said.

The proposal is expected to be submitted as part of tax reform requests due at the end of this month, with details to be worked out before a final tax reform package for the next fiscal year is approved at year-end, said one of the sources, who declined to be identified as the matter is still private.

POOR CAPITAL ALLOCATION

The initiative is modelled on Germany's tax reform in the early 2000s, which largely exempted corporations from taxes on gains from share disposals, helping dismantle the country's dense network of cross-shareholdings and making it easier for companies to reshape their business portfolios.

Non-core businesses often remain trapped within sprawling Japanese conglomerates because gains from divestitures are taxed, reducing the incentive to transfer assets to owners better positioned to extract value from them.

The result is often inefficient capital allocation. A recent government study found that about 65 per cent of Japanese companies' invested capital remains tied up in businesses that fail to earn their cost of capital, largely offsetting value created by higher-performing units.

Such capital trapped in low-return operations is seen as limiting growth investment and weighing on long-term corporate value.

Japan has already introduced a range of measures to promote business overhauls over the years, including spin-off tax rules in 2017 and a partial spin-off regime in 2023, but business divestitures taking advantage of those rules have remained relatively limited.

A 2020 industry ministry report showed Japanese companies often lack clear divestment criteria and have traditionally prioritised maintaining group size, employment and corporate stability over portfolio reshaping.

The tax reform, if implemented, is likely to boost already sizzling M&A activity in Japan.

Deal activity involving Japanese ​companies last year more ​than doubled from the ⁠previous year to a record $353 billion, according to LSEG. Divestitures of Japanese businesses accounted for $44.7 billion of that total.