Key Funding Incentives
1 | R&D&I Tax Credit
Japan offers a comprehensive R&D tax credit system designed to reduce the corporate tax burden for companies investing in research and development activities.
• Mechanism: The R&D tax credit allows companies to deduct a certain percentage of their R&D expenses from their corporate income tax. The basic tax credit rate typically ranges from 1% to 14% of R&D spending, with variations based on factors such as the ratio of R&D expenditure to overall expenses (the “R&D expense ratio”) and whether R&D spending has increased compared to previous years. The maximum tax credit is capped at 25% of the corporate tax liability (with exceptions).
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- Enhanced Benefits (2024 Reform): The maximum tax credit rate was temporarily raised to 35% for large companies and 45% for SMEs (with special conditions for wage increases, training, and childcare support). Importantly, the unused portion of the credit can now be carried forward for four years.
• Eligible Activities: The system broadly covers R&D activities aimed at manufacturing new products, improving existing technologies, or developing new techniques. This includes costs for raw materials, personnel exclusively engaged in R&D, and certain test and research expenses.
• Limitations: While advantageous, the credit is generally non-refundable, meaning it can only be offset against tax liabilities, which can limit its benefit for loss-making startups. There are also specific rules and limitations on the total amount of tax credit that can be claimed annually.
2 | Open Innovation Tax Incentive & Innovation Box
Japan uses targeted tax incentives to stimulate collaboration and monetisation of Intellectual Property (IP).
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- Open Innovation Tax Incentive: This incentive provides an income deduction equal to 25% of the amount invested by companies in eligible innovative technology start-ups.
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- Investment Thresholds: The investment must meet certain thresholds, such as at least ¥100 million for a Japanese venture company (¥10 million for Japanese SMEs) or ¥500 million for a foreign-based venture company.
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- Eligibility: The target start-up must be unlisted, incorporated, and have started operations within the last 10 years (15 years in some cases). The investing company must aim to conduct business with high productivity or develop new ventures by utilizing the start-up’s resources.
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- New Innovation Box (from April 2025): A new “Innovation Box” regime will permit 30% of the “qualified income” generated from the assignment or loan of patent rights or copyrights related to AI technology (self-researched and developed in Japan) to be included in deductible expenses.
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- Impact: This dual approach encourages larger corporations to funnel capital into the start-up ecosystem (Open Innovation) and promotes the commercialisation of domestic, high-value IP (Innovation Box).
3 | Government Grants and Public Funding Agencies
Japan’s government, primarily through ministries and agencies, provides direct grants and subsidies for R&D and startup support, often targeting strategic technological areas.
New Energy and Industrial Technology Development Organization (NEDO): NEDO is a key national R&D agency that provides grants for high-risk, innovative technologies. Its primary current focus is operating the Green Innovation Fund (¥2 trillion) to achieve carbon neutrality by 2050, supporting R&D to demonstration in areas like next-generation solar cells, hydrogen supply chains, and CO2 capture. NEDO also continues to support small/medium enterprises and start-ups in new energy technology development through various phases.
J-Startup Program: Launched by the Ministry of Economy, Trade and Industry (METI), this program provides intensive support to promising startups with high potential for global impact. Selected startups receive assistance from government agencies (like NEDO for R&D funding and JETRO for international expansion) and private sector “J-Startup Supporters,” including preferential treatment in government screening processes and assistance with exhibiting at international events.
SBIR Promotion Program: This inter-ministerial initiative promotes R&D by R&D-type startups, supporting projects that address diversified social problems and facilitate smooth social implementation of innovative technologies. It provides grants across initial R&D phases (Proof of Concept and Feasibility Study) and practical application development.
Regional Incentives: Various cities and local governments across Japan offer their own incentive programs, including subsidies, tax benefits, and co-working spaces, to attract and support entrepreneurs in specific regions.
4 | Venture Capital Landscape
Japan’s venture capital (VC) sector has been expanding, with increasing involvement from institutional investors and a growing interest in innovative startups.
Growth: The Japanese startup ecosystem is rapidly expanding, attracting more international investors. While traditionally smaller than some global counterparts, the VC landscape is maturing, with a notable increase in funding rounds.
Key Sectors: Significant VC activity is observed in sectors like AI, SaaS, life sciences, deep tech, and sustainability-focused solutions. Corporate venture capital (CVC) arms of large Japanese corporations are also increasingly active, complementing internal R&D efforts.
Government Role: Government initiatives, such as the “Startup Development Five-Year Plan,” aim to significantly increase the scale of investment in startups, diversify exit strategies, and promote open innovation, further strengthening the VC ecosystem.
Conclusion
Japan’s innovation funding incentives form a comprehensive framework that combines enhanced tax credits (with carryover for unused credit), new IP incentives (Innovation Box), direct grants from key government agencies like NEDO (focused heavily on green innovation), and strategic support programmes for start-ups such as J-Startup. The Open Innovation Tax Incentive further encourages collaboration between established companies and new ventures, while a growing venture capital landscape provides essential growth capital. This multi-pronged approach underscores Japan’s strong commitment to fostering technological advancement and maintaining its competitive edge in the global innovation arena.
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