1. Introduction
The Tax Reform for 2018 has extended the applicable period of entertainment expense taxation by two years. In this News, we will mention the basic tax rules for entertainment expenses in Japan.

2. Entertainment expenses
Japan’s Corporation Tax Law sets the limit of deductible “entertainment expenses” and other related expenses (“entertainment expenses, etc.”) against income. “Entertainment Expenses, etc.” include expenses disbursed for the purpose of reception, entertainment, consolation, gift, etc. to the following persons:

　●Customers / Clients
　●Vendors
　●Directors of the company
　●Employees of the company
　●Shareholders of the company, etc.

From the above, the so-called “internal entertainment expenses” are included in “entertainment expenses, etc.” even where such expenses are disbursed for the company’s employees.

3. Special treatment for SMEs
A small-medium sized enterprise (an enterprises whose paid in capital is JPY100 million or less (except for an enterprise wholly owned by a parent company whose paid in capital is JPY500 million or more, “SMEs”) can deduct either up to JPY8 million or 50% of its eating and drinking expenses for tax purposes. In fact, most SMEs select the deduction of up to JPY8 million for the year.
On the other hand, companies other than SMEs are only allowed to deduct 50% of eating and drinking expenses.

4. 50% deduction of eating and drinking expenses
“Eating and drinking expenses of JPY5,000 or less per person” are excluded from “entertainment expenses, etc.” However, eating and drinking expenses for internal purposes are out of scope of such exclusion; even if the expenditures are JPY5,000 or less per person, eating and drinking expenses for internal directors or employees are treated as entertainment expenses. Also, in order to qualify as deductible expenses, a company is required to make and keep documents recording participants’ names for meals and other related information.

5. Conclusion
In this News, we mentioned entertainment expenses and tax rules. Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us.

(Reference)
National Tax Agency (Japanese)
https://www.nta.go.jp/taxes/shiraberu/taxanswer/hojin/5265.htm
(Accessed on July 17, 2018)