The "Angel Tax System" is a scheme that substantially lightens the tax burden of individuals who invest in newly founded startups, and of people who start a startup themselves. Not only can you deduct the amount you invest from your income or your stock-sale gains for that year, but the "pre-seed / seed special provision" and the "founding special provision" newly established in 2023 make up to ¥2 billion tax-exempt rather than merely "deferred." On the other hand, the investee is high-risk. This article organizes, with sources, everything from the differences among the four categories, the eligibility requirements, the tax return, and the relief when a loss arises.
① The Angel Tax System is a scheme that lets you receive tax benefits in the "year" you invest. There are four categories: Preferential Measure A, Preferential Measure B, the pre-seed / seed special provision, and the founding special provision[National Tax Agency No.1544].
② Preferential Measure A deducts (investment amount − ¥2,000) from total income (the cap is the lower of total income × 40% and ¥8 million); Preferential Measure B deducts the full investment amount from stock-transfer gains (no cap).
③ The pre-seed / seed special provision and the founding special provision (from 2023) deduct from stock-transfer gains, and up to ¥2 billion there is no adjustment to the acquisition cost = tax-exempt (waived), with the excess deferred[Ministry of Economy, Trade and Industry].
④ Note: Preferential Measures A and B and the special provisions are in principle "tax deferral," where at the time of sale the acquisition cost is lowered and taxed (only the up-to-¥2-billion portion of the special provisions is truly tax-exempt). The income deduction of Preferential Measure A applies to income tax only and does not extend to residence tax.
⑤ Even if the investee fails, there is relief that lets you carry the loss forward for three years.
Comparison of the four categories
| Category | How the deduction works | Cap / tax exemption | Main targets (guide) |
|---|---|---|---|
| Preferential Measure A | Deduct (investment amount − ¥2,000) from total income for that year | The cap is the lower of total income × 40% and ¥8 million | Small-scale startups less than 5 years since founding |
| Preferential Measure B | Deduct the full investment amount from stock-transfer gains for that year | No cap (but deferred) | Less than 10 years since founding, etc. |
| Pre-seed / seed special provision | Deduct the full investment amount from stock-transfer gains | Tax-exempt up to ¥2 billion (the excess is deferred) | Earlier-stage startups, such as less than 5 years since founding |
| Founding special provision | Deduct the amount of your own funds invested in a company you establish from transfer gains | Tax-exempt up to ¥2 billion (the excess is deferred) | People who establish a startup themselves |
You choose either Preferential Measure A or B (pre-seed / seed) — one or the other. In general, the relationship is that a "year with high income and few transfer gains" favors A, while a "year with large stock-transfer gains" tends to favor B and the special provisions.
The heart of the 2023 reform: from "deferral" to "tax exemption"
This is the most important point. Under the conventional Angel Tax System (Preferential Measures A and B), even if you received a deduction at the time of investment, the acquisition cost of the stock was lowered by that amount, and you were taxed when you later sold. In other words, it was "tax deferral."
- Preferential Measures A and B: deduction at the time of investment → the acquisition cost is adjusted and taxed at the time of sale (deferral).
- Pre-seed / seed special provision and founding special provision (from 2023): up to ¥2 billion there is no adjustment to the acquisition cost, and the deducted amount becomes tax-exempt (waived) as is. Only the portion exceeding ¥2 billion is deferred[Ministry of Economy, Trade and Industry].
For example, in a year when you sold held stock and produced a ¥100 million transfer gain, if you reinvest that ¥100 million into a startup eligible for the pre-seed special provision, the calculation is that the tax on the ¥100 million transfer gain (about ¥20.31 million) disappears (within the ¥2 billion allowance, you won't be chased for it in the future either). It is designed to "channel the profit obtained from listed stocks or a business sale into the next generation of startups tax-free."
Requirements for eligible startups (in detail)
It is not the case that "any startup is eligible." The investee must satisfy the requirements common to all categories, plus the years-since-founding and business requirements for each category, and must receive confirmation from the prefecture / Bureau of Economy, Trade and Industry[Small and Medium Enterprise Agency].
(1) Company requirements common to all categories
- Must be a small or medium-sized enterprise (an unlisted, unregistered stock company).
- The external capital ratio must be at or above a certain level: investment from parties other than a specific shareholder group (the founder and their relatives / related corporations) must be one-sixth or more of the issued shares (Preferential Measures A and B). Under the pre-seed / seed special provision this is eased to one-twentieth or more.
- Must not belong to a large corporate group's ownership (not more than 1/2 held by a single large corporation such as one with capital exceeding ¥100 million, nor more than 2/3 held by several).
- Must not conduct a business falling under adult-entertainment businesses and the like.
- Must acquire newly issued shares through a cash payment (conclusion of an investment contract).
Differences by industry (judging "small or medium-sized enterprise" / excluded industries)
The deduction amount and the business requirements themselves do not depend on industry, but the criteria for judging "whether it is a small or medium-sized enterprise" differ by industry under the Small and Medium-sized Enterprise Basic Act (satisfying either one of capital or number of employees is fine)[Small and Medium Enterprise Agency].
| Industry | Capital | Number of employees |
|---|---|---|
| Manufacturing, construction, transport, and others | ¥300 million or less | 300 or fewer |
| Wholesale | ¥100 million or less | 100 or fewer |
| Services | ¥50 million or less | 100 or fewer |
| Retail | ¥50 million or less | 50 or fewer |
- Startups shortly after founding usually meet these criteria (be careful only if you made the capital too large or have many employees).
- Adult-entertainment businesses and the like (sex-related special businesses) are not eligible. Also, industries that do not fall under the "small or medium-sized enterprise" of the Small and Medium-sized Enterprise Basic Act in the first place, such as finance and insurance, are not eligible either.
- The business requirements (the ratio of research and experiment costs / the sales growth rate / researchers or people engaged in new business activities) are common to all industries, but which requirement is easier to meet changes by industry. In practice, R&D types meet it with "research and experiment costs," fast-growing service / IT types with a "sales growth rate over 25%," and human-capital-intensive types with "two or more researchers or people engaged in new business activities."
(2) Business requirements for Preferential Measure A (less than 5 years since founding)
In addition to the above, Preferential Measure A requires that the company be less than 5 years since founding, with a negative operating cash flow (if it has passed its first business year), and further satisfy one of the following business requirements according to the number of years since founding.
| Years since founding | Business requirement to satisfy (any one) |
|---|---|
| Less than 1 year (first business year not yet passed) | Researchers or people engaged in new business activities number 2 or more and are 10% or more of full-time officers and employees |
| Less than 1 year (business year passed) to less than 2 years | The above, or research and experiment costs, etc. exceed 3% of revenue |
| 2 years or more to less than 3 years | Research and experiment costs, etc. exceed 3% of revenue, or the sales growth rate exceeds 25% |
| 3 years or more to less than 5 years | Research and experiment costs, etc. exceed 5% of revenue |
(3) Business requirements for Preferential Measure B (less than 10 years since founding)
Preferential Measure B is for companies less than 10 years since founding (a negative operating CF is not a requirement). The business requirements are set according to the number of years: for less than 1–2 years since founding, "2 or more researchers / people engaged in new business activities and 10% or more, or research and experiment costs, etc. over 3%"; for 2 years or more to less than 5 years, research and experiment costs, etc. over 5% or a sales growth rate over 25%; and for 5 years or more to less than 10 years, research and experiment costs, etc. over 5%.
(4) Pre-seed / seed special provision (earlier stage)
Eligible for the ¥2 billion tax exemption. It targets startups meeting "very early stage" requirements such as being less than 5 years since founding and with a negative operating profit/loss (below 0), and as noted above the external capital ratio is eased to one-twentieth or more[Ministry of Economy, Trade and Industry].
(5) Founding special provision (when you establish it yourself)
Likewise ¥2 billion tax-exempt. It targets the investment of your own funds into a company you established that is less than 1 year since founding and that satisfies the requirements for a specific newly established small or medium-sized enterprise, and the like. You receive confirmation that the requirements are met as of December 31 of the year of founding.
(6) Requirements on the investing individual (you)
- You must acquire the shares of the eligible company through a cash payment (contributions in kind or purchases from another person are not eligible).
- You must not be a family shareholder, etc. of the investee (managers, relatives, and the like who already hold a large shareholding ratio are not eligible; the founding special provision is an exception in which the incorporator themselves is eligible).
- Application is also possible via an investment limited partnership (fund).
How to check whether a company is eligible
- In equity-based crowdfunding (such as FUNDINNO), whether "Angel Tax System Preferential Measure A / B / pre-seed / seed" applies is stated for each deal. It is an entry point that makes it easy for individuals to participate from small amounts.
- When investing directly in an individual company, judge by whether that company has received the prefecture / Bureau of Economy, Trade and Industry's confirmation (advance confirmation / definite confirmation) or can issue a confirmation document. For the latest figures of the requirements, please check the Small and Medium Enterprise Agency's requirements page (in Japanese) and the METI's application guideline (in Japanese).
Tax return and required documents
- The Angel Tax System requires a tax return (it cannot be received through year-end adjustment).
- The investee company applies to the prefecture / Bureau of Economy, Trade and Industry for confirmation of the requirements → a "confirmation document" and the like are issued and delivered to the investor.
- The investor files by attaching, in the tax return, the confirmation document, a statement of stock-movement status, and a copy of the investment contract, and the like.
- For the founding special provision, the company established receives confirmation that "the requirements are met as of December 31 of the year of founding," and the incorporator submits that confirmation document when filing.
- For the basic filing procedure, see How to file a tax return with e-Tax. Because there are many documents and the judgments are difficult, if the amount is large it is safer to consult a tax accountant.
What if it fails? Relief for losses (3-year carry-forward)
The reality is that startup investment has a high probability of failure (bankruptcy, or becoming worthless without being able to list). If the shares of a company eligible for the Angel Tax System fall in value or become a loss due to bankruptcy or the like, that loss can be aggregated with other stock-transfer gains for the year, and any amount that cannot be fully deducted can be carried forward for three years thereafter. It is a system designed to provide for both when you profit (deduction at the time of investment) and when you lose (loss carry-forward). That said, the fundamental principle is never to make an investment decision solely because "it saves tax." This is a domain to approach with spare funds you can afford to lose (Cautions on tax-benefit-driven investments).
[This site's perspective] Easily overlooked cautions
- There is a part that does not extend to residence tax: the "income deduction from total income" of Preferential Measure A applies to income tax only and is not reflected in the residence tax calculation (the transfer-gain deduction of B and the special provisions works on both the income-tax and residence-tax taxation of transfer gains).
- It is different from NISA / iDeCo: those provide tax exemption for listed stocks and investment trusts. The Angel Tax System is a benefit for investment in unlisted startups and for founding one (it can be used together with the new NISA).
- Do not mistake "deferral" for "tax saving": Preferential Measures A and B are deferral that will be taxed in the future. What truly disappears is only up to the special provisions' ¥2 billion allowance.
- Reinvesting into the pre-seed special provision in a year with large transfer gains is the typical pattern that can maximize the tax benefit.
FAQ
What is the Angel Tax System?
It is a tax benefit that lets you deduct the investment amount from income or stock-transfer gains when an individual invests in a newly founded startup or establishes a startup themselves. There are four categories: Preferential Measures A and B, and the pre-seed / seed special provision and founding special provision newly established in 2023; under the special provisions, up to ¥2 billion becomes tax-exempt rather than deferred.
Which is more advantageous, Preferential Measure A or B?
A deducts (investment amount − ¥2,000) from total income (the cap is the lower of total income × 40% and ¥8 million); B deducts the full investment amount from stock-transfer gains (no cap). A year with high income such as salary and few transfer gains tends to favor A, while a year with large stock-transfer gains tends to favor B and the special provisions. A and B are a choice of one or the other.
What specifically does "tax-exempt up to ¥2 billion" mean?
Under the pre-seed / seed special provision and the founding special provision, for the amount deducted from stock-transfer gains at the time of investment, the adjustment that lowers the acquisition cost at the time of a future sale is not carried out as it conventionally was. In other words, the deducted amount is waived (tax-exempt) as is. The portion exceeding ¥2 billion is tax deferral as before.
What happens on the tax side if the investee goes bankrupt?
If the shares of the eligible company fall in value or become a loss due to bankruptcy or the like, the loss can be aggregated with stock-transfer gains for the year, and any amount that cannot be fully offset can be carried forward for three years thereafter. However, because the invested principal does not come back, it is important not to invest solely for the purpose of tax saving.
What kinds of companies are eligible for the Angel Tax System?
The common requirements are that it be an unlisted small or medium-sized enterprise, with investment from parties other than the founder group at one-sixth or more (one-twentieth or more for the pre-seed / seed special provision), not belonging to a large corporate group, and not an adult-entertainment business or the like. In addition, Preferential Measure A requires being less than 5 years since founding with a negative operating CF plus the researcher / research-and-experiment-cost / sales-growth-rate requirements according to years since founding, and Preferential Measure B requires meeting the requirements for less than 10 years since founding. Eligibility is decided by the prefecture / Bureau of Economy, Trade and Industry's confirmation, and in equity-based crowdfunding the application is stated for each deal.
Does eligibility change by industry?
The deduction amount and the business requirements themselves do not depend on industry, but industry is relevant in two respects. One is the criteria for judging "small or medium-sized enterprise": manufacturing is capital of ¥300 million or less / 300 or fewer employees, wholesale is ¥100 million and 100, retail is ¥50 million and 50, and services is ¥50 million and 100 — differing by industry (satisfying either one is fine). The other is exclusion: adult-entertainment businesses and the like are not eligible, and industries that do not qualify as a small or medium-sized enterprise, such as finance and insurance, are not eligible either. Note that business requirements such as research and experiment costs and the sales growth rate are common to all industries, but which requirement is easier to meet changes by industry.
Data sources
- Overview of the Angel Tax System, the four categories, deferral / tax exemption: National Tax Agency No.1544 Overview of the Angel Tax System, etc. (in Japanese)
- Preferential measures, the pre-seed / seed special provision, the founding special provision (¥2 billion tax exemption): Ministry of Economy, Trade and Industry — Measures for angel investment (in Japanese) / Ministry of Economy, Trade and Industry — Angel Tax System (in Japanese)
- Requirements and procedures (confirmation documents / application): Ministry of Economy, Trade and Industry — Angel Tax System application guideline (revised 2025) (in Japanese)
* This article provides general information and a system explanation; it is not a recommendation of any particular investment, nor tax or investment advice. Requirements, caps, and procedures may be revised, and judging whether a company is eligible is also needed on a case-by-case basis. For application, please confirm with the Bureau of Economy, Trade and Industry, the prefecture, or a tax accountant.