What changes
The fiscal 2026 tax reform, enacted on 31 March 2026, created a defence special income tax under the Act on Special Measures for Securing Financial Resources for Fundamental Reinforcement of Defence Capabilities. It is charged at 1% of the income tax due. At the same time the special reconstruction income tax, charged since 2013 at 2.1% of income tax, is cut to 1.1%, and its end date moves from 31 December 2037 to 31 December 2047.
Both changes apply to income arising on or after 1 January 2027. For salaries, that means pay whose fixed payment date falls on or after 1 January 2027. The combined surtax stays at 2.1%, so a payment withheld at 10.21% or 20.42% today is withheld at the same rate. The new 2027 withholding tables include both surtaxes, and the year-end adjustment for 2027 is calculated as income tax times 102.1%, as now.
The defence and reconstruction surtaxes are reported and paid together with income tax on one payment slip, and existing payment forms can still be used. Where a tax treaty reduces or removes Japanese withholding, neither surtax applies.
The practical effect is not a higher tax now but a longer one: the 2.1% surcharge that was due to end after 2037 now continues for at least another decade.
Who it applies to
Every withholding agent, including foreign subsidiaries running Japanese payroll, and every income taxpayer, resident or non-resident.
Action for employers
- Load the 2027 withholding tables. Confirm your payroll provider uses the National Tax Agency's tables for 2027 from January pay; they also reflect the 2026 changes to deductions.
- Do not change gross-up rates. Calculations for fees, director pay and non-resident pay at 10.21% or 20.42% stay as they are.
- Update long-range models. Expatriate tax equalisation and net-pay projections that assumed the surcharge ends in 2037 should run it to 2047.
- Keep your payment slips. The National Tax Agency has confirmed that existing withholding payment forms can be used from January 2027, with one slip covering all three taxes.
Sources
- Act on Special Measures for Securing Financial Resources for Fundamental Reinforcement of Defence Capabilities (Act No. 69 of 2023), as amended by the fiscal 2026 tax reform act.
- National Tax Agency, outline of withholding of the defence special income tax and special reconstruction income tax from January 2027, and Q&A (May 2026).
- National Tax Agency, 2027 withholding tax tables.