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The Securities and Exchange Law provides that continuing financial disclosure of companies to the investing public must be reported on a consolidated and non-consolidated basis. In contrast, the Commercial Code provides that financial disclosure to shareholders must be prepared on a non-consolidated basis and the Corporate Tax Law provides that corporate tax must be calculated on a non-consolidated basis.

Amendments introduced this year provide that financial disclosure under the Commercial Code, with respect to certain companies, must be prepared both on a consolidated and non-consolidated basis and that corporate tax under the Corporate Tax Law can be calculated on a consolidated basis.

Financial statements

The purpose of the amendments to the Commercial Code is to provide a more accurate picture of the financial performance of a company group that consists of a large parent company and its controlled subsidiaries. Consolidated financial disclosure under the Commercial Code will be provided to shareholders of the parent company. However, for the time being, only large parent companies that have continuous disclosure obligations under the Securities and Exchange Law must prepare their financial statements on a consolidated basis. The parent company must provide its consolidated and non-consolidated financial statements in its convocation notice for its shareholders' meeting. However, the maximum prescribed amount of the annual dividends of the parent company is calculated on a non-consolidated basis.

Taxation system

The new consolidated taxation system allows a company group, consisting of a Japanese parent company and its wholly-owned (directly or indirectly) Japanese subsidiaries, to pay taxes as if they were one entity. The company group will have to file an application to the tax authority in order to opt-in to the consolidated taxation system. If the application is accepted, in general, the consolidated taxation system continuously applies to the company group in the following financial years. The consolidated tax payable for the company group is principally calculated based on the aggregate taxable income of each of the parent company and its subsidiaries. Therefore, losses of the companies in a company group can be offset by gains of other companies in the company group in calculating the consolidated tax payable. However, the parent company and each subsidiary are jointly and severally liable to pay the consolidated tax amount. Moreover, a provisional 2% surtax will be assessed on consolidated filings, though the surtax will not apply to companies that file separately.

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