[Edaily Marketin YunJi Kim Reporter] The Japanese government is rolling out tax incentives to encourage companies to divest non-core businesses. The measure allows companies to defer corporate income tax on capital gains if they use proceeds from the sale of unprofitable businesses to acquire companies related to their core operations. The aim is to encourage companies to divest low-profit businesses and concentrate funds on growth areas. Article

Amid rapidly increasing investment in Japan by global private equity funds (PEFs), some observers predict that if the sale of non-core businesses also increases, carve-out and buyout transactions involving large corporations could become even more active.

According to local industry sources on the 25th, the Japanese government is considering a plan to defer the payment of corporate income tax—currently around 30%—on capital gains if the proceeds from the sale of non-core businesses are reinvested in M&A related to core businesses within a few years. A proposal to eliminate a separate tax deferral period while continuing to invest in the acquired business is also under discussion.

The Japanese government’s push for tax reform stems from concerns that companies are failing to divest unprofitable businesses in a timely manner. According to a government survey, approximately 65% of the capital invested by Japanese companies is tied up in businesses that generate returns below the cost of capital. In effect, a cycle persists in which profits from high-margin businesses are eroded by low-margin ones.

The problem is that even when companies attempt to divest such businesses, the sale process incurs significant tax liabilities. If a capital gain is realized from the sale of a non-core business, the corporate tax burden increases accordingly, making it difficult to immediately reinvest the proceeds into growth initiatives. The Japanese government’s plan is to reduce this tax burden to encourage companies to more actively divest low-profit businesses and use the funds secured to acquire new companies.

Japan has previously encouraged companies to restructure their business portfolios by introducing a tax system for spin-offs in 2017 and establishing a partial spin-off system in 2023. However, because Japanese companies have prioritized maintaining corporate size and employment over divesting low-profitability businesses, the actual number of business divestitures has not increased as rapidly as expected. This new plan is viewed as a step forward from existing systems, as it directly links the sale of non-core businesses to new M&A activity.

Local capital markets are forecasting that this tax support could significantly increase carve-out transactions by major Japanese corporations. This is because a reduction in the tax burden associated with divesting non-core businesses will make it more likely for companies to proceed with divestitures they have previously postponed. In particular, carve-outs—the process of spinning off and selling business units—can provide new buyout opportunities for financial investors such as private equity funds (PEFs).

Against this backdrop, the rapid growth in investment by global private equity funds in Japan is a positive development. According to Deloitte, Japan accounted for more than 26% of total private equity investment in the Asia-Pacific region last year, with the investment volume increasing by 81% compared to the previous year. Seven of the top 10 private equity deals in the Asia-Pacific region also originated in Japan.

An official from the European private equity market, where investment in Japan is on the rise, stated, “Japan is already seeing an increase in the divestiture of non-core businesses due to pressure to restructure corporate governance and enhance shareholder value; if tax incentives are added to this, the number of carve-out deals will grow even faster.” He added, “From the perspective of global private equity firms, this is becoming a market with more opportunities, so there is a greater incentive to look more actively at Japan.”