The Angel Tax System and Fundraising: Selling Points for Individual Investors and Designing the Issuance Scheme

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

When a seed-stage company discusses terms with individual investors, it is often asked, "Does your company qualify for the Angel Tax System?" The system tends to be seen as a tax-saving scheme for investors, but whether a company can be an eligible company depends on the issuer satisfying the requirements and completing the application process with the prefectural government or equivalent authority. If the company responds vaguely without understanding how the system works, it may miss a selling point that could be a strong motivation for investors to invest.

The Angel Tax System allows individual investors who invest in startups to receive preferential tax treatment. According to the Ministry of Economy, Trade and Industry (METI), the preferential treatment arises at two points: "at the time of investment" and "at the time of sale of the shares." Several preferential categories are available at the time of investment. At the time of sale, a loss arising from the sale of unlisted shares can be offset against other capital gains on shares in the same year, and any loss that cannot be fully offset can be carried forward and deducted over the following three years. The same three-year carryforward is allowed where the shares lose their value because the company goes bankrupt or is dissolved without having listed.

The overall framework of preferential treatment under the Angel Tax System

The preferential treatment at the time of investment is divided into several categories according to combinations of the deduction base, the deduction limit, and the eligible company's years since incorporation and external capital ratio, and METI presents the following four types (including Preferential Measure A-2, which relaxes the external capital ratio of Preferential Measure A).

• Founder Special Provision: a tax exemption under which the full amount invested from one's own funds at the time of incorporation is deducted from capital gains on shares for that year (investments up to JPY 2 billion are tax-exempt, and any excess is tax-deferred). Eligible companies are those less than one year after incorporation with an external capital ratio of 1/100 or more.
• Preferential Measure A: a tax deferral under which the full amount invested less JPY 2,000 is deducted from total income for that year (the deduction limit is the lower of 40% of total income and JPY 8 million). Eligible companies are those less than five years after incorporation with an external capital ratio of 1/6 or more (relaxed to 1/20 or more as Preferential Measure A-2 if the company requirements of the Pre-Seed/Seed Special Provision are met).
• Preferential Measure B: a tax deferral under which the full amount invested is deducted from capital gains on shares for that year (no deduction limit). Eligible companies are those less than ten years after incorporation with an external capital ratio of 1/6 or more.
• Pre-Seed/Seed Special Provision: a tax exemption under which the full amount invested is deducted from capital gains on shares for that year (no deduction limit; investments up to JPY 2 billion are tax-exempt, and any excess is tax-deferred). Eligible companies are those less than five years after incorporation with an external capital ratio of 1/20 or more.

The deduction for a loss on transfer at the time of sale is available regardless of whether the investor received preferential treatment at the time of investment. However, if the investor did receive preferential treatment at the time of investment, note that the tax-deferred portion of the deducted amount is subtracted from the acquisition cost when calculating the loss on sale.

The value of the proposal from the company's perspective and design of the external capital ratio

From the issuer's perspective, being an eligible company under the Angel Tax System is an effective selling point for individual investors. Even for the same investment amount, whether the investor receives a tax exemption or tax deferral at the time of investment, or can use the loss carryforward if a loss arises in the future, directly affects the investor's after-tax return. In particular, the Founder Special Provision and the Pre-Seed/Seed Special Provision are tax exemptions and therefore have strong appeal for individual investors.

That said, whether a company is an eligible company is determined by whether it meets objective requirements, and the system cannot be applied solely at the investor's wish. Detailed company requirements are set for each stage of the company, such as years since incorporation, the external capital ratio, the number and proportion of researchers and employees engaged in new business, the sales growth rate, and the status of the business plan. Identifying early on which category the company falls into is key to moving negotiations with investors forward smoothly. The external capital ratio condition also bears directly on the design of the investor composition. Under Preferential Measure A, the rule is 1/6 or more, but this is relaxed to 1/20 or more if the company requirements of the Pre-Seed/Seed Special Provision (such as an operating loss below zero) are met. Which investors must invest how much to clear the requirement is a figure that should be estimated in advance when the capitalization table is prepared.

Main requirements for companies and investors

Among the requirements set by METI, the main company requirements for direct investment, in which an individual subscribes directly for a startup's shares (including investment through a civil-law partnership or an investment limited partnership), are as follows.

• Being a small and medium-sized enterprise less than five years after incorporation (less than ten years if Preferential Measure B is applied).
• Meeting the requirements set for each number of years (business years) since incorporation (such as the number and ratio of researchers or employees engaged in new business, the ratio of research and development expenses, the sales growth rate, trends in operating cash flow and operating profit or loss, and whether there is a business plan).
• Having accepted 1/6 or more of its investment from outside parties (other than a specific shareholder group) (1/20 or more if the Pre-Seed/Seed Special Provision is applied).
• Not being owned by a large corporate group, being an unregistered and unlisted stock company, and not conducting businesses falling under adult entertainment businesses and the like.

There are also conditions that the investing individual must satisfy. These include, where the investee is a family company, not belonging to the shareholder group at which the cumulative shareholding ratio of the top three shareholder groups first exceeds 50%; not being an individual who had the company succeed to the entire business that the individual operated, or a relative of such an individual; and having acquired the shares by paying in money. These conditions must be satisfied as of the date of payment (or, if advance confirmation is obtained, the date of that application).

Where the company receives investment through an investment limited partnership (LPS) certified by the Minister of Economy, Trade and Industry or through a certified small-amount electronic offering handler (ECF), part of the company requirements is waived. No external capital ratio condition applies, and the requirements for each number of years since incorporation are limited to those concerning the business plan, operating cash flow, and operating profit or loss. In this case, the certified LPS or certified ECF operator issues the confirmation certificate, so no application for confirmation to the prefectural government is needed.

Applications for confirmation to the prefectural government and developments in tax reform

To actually use the Angel Tax System, the startup applies to the prefectural government or equivalent authority and obtains confirmation that it meets the requirements and that the investment has been made. Once the authority receiving the application issues a "confirmation certificate," the company gives it to the investor, and the investor completes the procedure by submitting it to the tax office when filing a final tax return.

There is also an "advance confirmation system" under which a company can obtain confirmation of whether it meets the requirements before receiving investment. Companies that have received advance confirmation have their names and other details published on METI's website, which has the advantage of allowing them to negotiate with individual investors while showing in advance that they are eligible companies under the Angel Tax System. However, advance confirmation only confirms that the company is an eligible company as of the application date, and the company must again obtain confirmation from the prefectural government or equivalent authority after payment and receive a confirmation certificate.

Application guidelines and submission forms are revised according to the timing of investment, so when applying in practice, the company must check the latest forms corresponding to the investment date. In addition, under the FY2025 tax reform, two revisions apply to shares acquired on or after January 1, 2026. The first is an extension of the reinvestment period. The investor must attach to the final tax return for the year in which the capital gains on shares arose a document stating, among other things, that the investor expects to reinvest during the following year. If this is done, investments made by the end of the following year (up to two years) can also qualify for Preferential Measure B, the Pre-Seed/Seed Special Provision and the like, in the form of a refund of the previous year's income tax. The second is the introduction of a holding period for the tax-exemption measures. If shares to which a tax-exemption measure was applied are transferred by the end of the year following acquisition, the tax-exemption measure no longer applies and the treatment switches to tax deferral, except in certain cases such as an IPO or M&A. The fact that the applicable rules change depending on the timing of the investment should not be overlooked. Note that what the Outline of the FY2026 Tax Reform (approved by the Cabinet on December 26, 2025) set out regarding the Angel Tax System was an extension of the issuance deadline for shares issued by stock companies conducting certain businesses under the National Strategic Special Zones Act or the Act on Regional Revitalization. It does not include any change to the requirements of the measures discussed in this article.

Points to note for investments using stock acquisition rights such as J-KISS

In seed-stage fundraising, an increasing number of companies adopt convertible investment using stock acquisition rights issued for value, such as J-KISS, instead of issuing shares directly. For this method, under the FY2024 tax reform, if all the requirements of the Angel Tax System are met at the time the individual investor acquires the shares (the exercise date of the stock acquisition rights), the amount paid to acquire the stock acquisition rights is also included in the share acquisition amount covered by the system. The stock acquisition rights covered here are stock acquisition rights issued for value that require payment upon acquisition, and J-KISS and similar instruments fall into this category.

However, this measure applies only where the stock acquisition rights were acquired on or after April 1, 2024 and the shares were acquired through payment made upon exercise of those rights. Rights acquired on or before March 31, 2024 are not covered. Cases where the stock acquisition rights are mandatorily converted into shares without exercise, or where the company acquires the stock acquisition rights under a call provision and delivers shares as consideration, are not covered either. Because J-KISS has two conversion routes, exercise by the investor and acquisition by the company, the treatment under the Angel Tax System differs depending on which route is used for conversion. The difference between the conversion routes is explained in J-KISS Conversion (Exercise) Procedures: A Practical Guide to Avoid Scrambling at Series A. In addition, for shares obtained by exercising stock acquisition rights acquired through a certified small-amount electronic offering handler (ECF), the ECF operator cannot issue a confirmation certificate. Even in this case, the company can separately apply to the prefectural government for confirmation. The premise is that the requirements are met at the time the shares are acquired through exercise of the rights, and note that the preferential treatment is not fixed at the time the stock acquisition rights are issued. The investor also receives this treatment in the final tax return for the year in which the shares were acquired.

Legal preparation in fundraising practice

Whether the Angel Tax System can be applied is not determined by the investor's enthusiasm alone. It depends on whether the company can prove, in the form of a "confirmation certificate" obtained through an application to the prefectural government, that it meets the requirements. Confirmation of the company requirements according to the years elapsed, calculation of the external capital ratio, and supporting documents such as the business plan and research and development records must be prepared systematically from the stage of designing the investment scheme, rather than gathered in a rush after the investment is completed.

Applying the specific requirements and calculating an individual investor's income deduction fall within the expertise of tax accountants, but the company's important role is to check, from a legal standpoint, that the application documents submitted to the prefectural government do not conflict with the capital policy and the terms of the investment agreement.

In fundraising that uses the Angel Tax System, it is essential to assess not only whether the company requirements are satisfied but also, at the same time, the design of the J-KISS to be issued and the balance of the investment agreement as a whole. The structure and main terms of J-KISS are explained in detail in What Is J-KISS? How It Works, the Valuation Cap, and Its Advantages and Disadvantages, and the timing of legal consultation in When a Startup Should Consult an Attorney about Fundraising.