Japan's government is weighing tax breaks on gains from the sale of non-core businesses, two people with knowledge of the matter told Reuters. The plan would defer roughly 30% corporate tax on such gains indefinitely, provided proceeds get reinvested in core operations — a move that could unlock long-delayed restructuring under Prime Minister Sanae Takaichi.
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 could become one of Prime Minister Sanae Takaichi's most significant initiatives to advance corporate governance reform.
How the deferral would work
Under the plan, roughly 30% 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 worked out before a final tax reform package for the next fiscal year gets approved at year-end.
The initiative is modelled on Germany's tax reform in the early 2000s, which largely exempted corporations from taxes on gains from share disposals. That reform helped dismantle Germany's dense network of cross-shareholdings and made it easier for companies to reshape their portfolios.
Capital trapped in low-return units
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. As a result, capital allocation often turns inefficient: a recent government study found that about 65% 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.
Japan has already introduced measures to promote business overhauls, including spin-off tax rules in 2017 and a partial spin-off regime in 2023, but divestitures taking advantage of those rules have remained relatively limited. A 2020 industry ministry report found Japanese companies often lack clear divestment criteria and have traditionally prioritised maintaining group size, employment and corporate stability over portfolio reshaping.
Deal activity already at a record
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, and divestitures of Japanese businesses accounted for $44.7 billion of that total.
Source: Reuters
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