Japan Enacts its 2026 Tax Reform: an Article-by-Article Commentary on the Pillar Two Amendments

On March 31, 2026, Japan enacted its 2026 Tax Reform. This implements the January 2026 OECD Side-by-Side package (excluding the Simplified ETR Safe Harbour) into Japan’s Global Minimum Tax regime in the Corporation Tax Act, its Enforcement Order, and its Enforcement Rules.

The relevant legislative instruments were promulgated on 31 March 2026, and include:

-the omnibus amending act;

-the amending cabinet order;

-the amending ministry ordinance; and

-a separate ministerial notice under CTA article 82-3(7).

The omnibus act was enacted on 31 March 2026, promulgated the same day, and took effect on 1 April 2026 except where otherwise provided.

Below, we provide an analysis of the Pillar Two amendments. Base-law references below are to the consolidated CTA, CTA Enforcement Order, and CTA Enforcement Rules as in force from 1 April 2026.

1. CTA article 82-3(7): the new Side-by-Side Safe Harbour 

The Side-by-Side Safe Harbour is inserted by a new CTA article 82-3(7), inserted by the 2026 amending act. It provides that where the UPE of a specified MNE group is located in a jurisdiction designated by the Minister of Finance as internationally recognized as satisfying the listed requirements and any additional MoF-ordinance conditions, the amounts described in article 82-3(2)(1) to (3) are deemed to be zero; for stateless constituent entities, the zeroing rule applies to article 82-3(2)(4) to (6). In functional terms, that is Japan’s domestic implementation of the OECD Side-by-Side safe harbour.

The statutory conditions in article 82-3(7) are important. First, the designated jurisdiction must have tax laws enacted before 1 January 2029 that impose tax on company income at a rate of at least 20%. Second, the jurisdiction must either impose a QDMTT-type tax or impose a 15%+ tax, based on current-period profit or loss, where ordinary company taxation is considered too low relative to book income. Third, the jurisdiction must have a broadly framed CFC-type or worldwide inclusion rule that, in substance, can pull subsidiary income into the parent’s taxable base. Fourth, it must have a foreign tax credit mechanism limited to taxes such as a QDMTT. Read against the OECD Side-by-Side package, these are the OECDs “eligible domestic tax system + eligible worldwide tax system + QDMTT credit limitation” provisions.

As to be expected Japan did not hard-code a named foreign jurisdiction in the statute. Instead, article 82-3(7) works through ministerial designation, and new article 82-3(16) requires the Minister of Finance to publish a notice when a jurisdiction is designated, including where paragraph 7 applies mutatis mutandis under paragraph 14. 

That designation mechanism is already live. The Official Gazette index for 31 March 2026 lists Notice No. 89, titled Notice designating a country or region under CTA article 82-3(7). The first Japanese designation is the United States.

The Side-by-Side safe harbour applies not just to constituent entities but also joint venture entities, which in Japanese statutory terms is achieved by reading article 82-3(7) together with the connected provisions, including article 82-3(14).

Appendix article 15 to the 2026 amending act overrides the 2025 act’s transitional rule and makes the new CTA article 82-3(7), together with connected provisions in paragraphs 11 and 14, applicable to target fiscal years beginning on or after 1 January 2026, even though the omnibus act’s general commencement date is 1 April 2026.

2. CTA article 82-11(4) and (5): the UPE Safe Harbour for the UTPR