Tax Claims in Japanese Bankruptcy: How are They Categorized and Prioritized?

Japanese Attorney at Law - Bengoshi L.L.

01 Jun 2025 • 9 min read

When a Japanese entity enters bankruptcy proceedings (破産手続 - hasan tetsuzuki), various creditors come forward with their claims. Among these, claims asserted by national and local tax authorities (租税債権 - sozei saiken) hold a special position. Japanese bankruptcy law provides a detailed and often complex framework for categorizing these tax claims and determining their priority in payment from the debtor's estate. Understanding this hierarchy is crucial for all stakeholders, as it significantly impacts the distribution of available assets.

What Constitutes a "Tax Claim" (租税等の請求権 - Sozei tō no Seikyūken) in Japanese Bankruptcy?

In the context of Japanese bankruptcy, "tax claims" are broadly defined as "claims that are collectible under the National Tax Collection Act or by its example" (国税徴収法又は国税徴収の例によって徴収することのできる請求権 - kokuzei chōshūhō mata wa kokuzei chōshū no rei ni yotte chōshū suru koto no dekiru seikyūken). This definition, often referred to as "claims for tax, etc." (租税等の請求権 - sozei tō no seikyūken), is important because it encompasses not only core national and local taxes (like income tax, corporate tax, consumption tax, and fixed asset tax) but also certain other public dues and ancillary amounts such as:

Principal Tax (本税 - honzei): The main tax amount due.
Delinquent Tax / Interest on Tax Arrears (延滞税 - entai-zei): Charges imposed for late payment of taxes.
Additions to Tax / Penalties (加算税 - kasanzei): Penalties for underreporting, failure to file, or non-payment.
Certain Social Insurance Premiums: Some social insurance contributions are collected using procedures similar to tax collection and are thus treated analogously for priority purposes.

General Principles of Tax Claim Classification in Bankruptcy

The treatment of a tax claim in Japanese bankruptcy depends on several factors, primarily:

Timing of the Underlying Cause: Whether the taxable event or obligation giving rise to the tax claim occurred before or after the commencement of the bankruptcy proceedings.
Specific Payment Due Date (具体的納期限 - gutaiteki nōkigen): For pre-petition tax claims, a critical determinant is their "specific payment due date." This is the actual, individualized deadline for payment as notified to the taxpayer (e.g., in a tax assessment notice or a tax return filing deadline), which may differ from the general statutory due date (法定納期限 - hōtei nōkigen). Its proximity to the bankruptcy commencement date is key.
Nature of the Tax: Whether the tax is related to the ongoing administration and liquidation of the bankruptcy estate itself, or if it's a pre-existing liability of the debtor.
Type of Tax Component: Whether it's the principal tax amount or ancillary charges like delinquent tax or penalties.

Based on these factors, tax claims are categorized into different priority tiers, primarily as Administrative Claims, Priority Bankruptcy Claims, or Subordinated Bankruptcy Claims.

I. Tax Claims Treated as Administrative Claims (財団債権 - Zaidan Saiken)

Administrative claims (zaidan saiken) are the highest priority claims and are paid from the bankruptcy estate before any distributions are made to other creditors (Bankruptcy Act, Article 151). They represent costs considered essential for the bankruptcy process or are given priority for strong public policy reasons.

Several types of tax claims can qualify as administrative claims:

These are taxes that arise after the bankruptcy proceedings have commenced and are incurred as a necessary consequence of the bankruptcy trustee (破産管財人 - hasan kanzainin) managing and liquidating the estate.

Rationale: These are considered costs of the bankruptcy process itself, benefiting all creditors by enabling the orderly administration and realization of assets.
Examples:
- Fixed Asset Tax (固定資産税 - kotei shisan zei) and City Planning Tax (都市計画税 - toshi keikaku zei): For tax assessment years that begin after the commencement of bankruptcy, if the trustee continues to hold and manage real estate belonging to the estate. For example, if bankruptcy commences on October 15, 2025, and the property assessment date for fixed asset tax is January 1st each year, the tax for the year 2026 on property still held by the trustee on January 1, 2026, would be an administrative claim under this category.
- Consumption Tax (消費税 - shōhi zei): On sales of estate assets made by the bankruptcy trustee (e.g., sale of buildings, inventory).
Priority Level: These types of administrative tax claims (Art. 148(1)(ii)) generally rank among the highest, alongside the trustee's remuneration and other direct costs of administration (as per Article 152(2)).

B. Certain Pre-Petition Taxes with Recent or Unexpired Due Dates (Bankruptcy Act Art. 148(1)(iii))

This category elevates certain pre-petition tax claims to administrative status based on the proximity of their specific payment due date to the bankruptcy commencement.

Scope: Tax claims for which the underlying taxable event occurred before bankruptcy commencement are treated as administrative claims if, at the time of bankruptcy commencement:
1. Their specific payment due date had not yet arrived; OR
2. Their specific payment due date had arrived, but not more than one year had passed from that due date to the date of bankruptcy commencement.
Rationale: This provision aims to give priority to relatively current and pressing tax obligations of the debtor.
Examples: This can cover various taxes like income tax, corporate tax, consumption tax, or resident taxes, depending on their individual assessment cycles and when their specific payment due dates fall in relation to the bankruptcy. For example, if a quarterly fixed asset tax payment was due on July 31, 2025, and bankruptcy commenced on October 15, 2025, this installment would be an administrative claim because less than a year has passed since its due date. Installments due post-commencement for that same tax year (based on a pre-petition assessment date like Jan 1, 2025) would also be administrative claims under this rule as their due dates were unexpired.

C. Delinquent Tax on Administrative Principal Taxes

If the principal amount of a tax is an administrative claim, any delinquent tax (interest for late payment - 延滞税 - entai-zei) accruing on that principal amount is also treated as an administrative claim. This applies whether the delinquent tax accrued before or after the bankruptcy commencement.

II. Tax Claims Treated as Priority Bankruptcy Claims (優先的破産債権 - Yūsenteki Hasan Saiken)

If pre-petition tax claims do not meet the criteria for administrative claim status, they may still be treated as priority bankruptcy claims (yūsenteki hasan saiken). These claims rank below all administrative claims but take precedence over general unsecured bankruptcy claims (Bankruptcy Act, Article 98).

Scope: This category typically includes pre-petition tax claims for which the specific payment due date expired more than one year before the commencement of bankruptcy proceedings. For instance, using the example above, if bankruptcy commenced on October 15, 2025, any fixed asset tax installments for the 2024 tax year whose specific due dates were before October 15, 2024 (e.g., April 30, 2024, and July 31, 2024) would generally be priority bankruptcy claims.
Delinquent Tax: Delinquent tax that accrued before the commencement of bankruptcy proceedings on these priority bankruptcy principal taxes also ranks as a priority bankruptcy claim.
Ranking within Priority Claims: Among priority bankruptcy claims, national taxes (国税 - kokuzei) and local taxes (地方税 - chihōzei, collectively often referred to as 公租 - kōso) generally have the highest priority, followed by other public dues (公課 - kōka like certain social insurance premiums), and then by certain private claims that have general statutory lien status (e.g., some employee wage claims).

III. Tax Claims Treated as Subordinated Bankruptcy Claims (劣後的破産債権 - Retsugoteki Hasan Saiken)

Certain tax-related claims are relegated to subordinated bankruptcy claim status (retsugoteki hasan saiken), meaning they are paid only after all administrative claims, priority bankruptcy claims, and general unsecured bankruptcy claims have been satisfied in full (Bankruptcy Act, Article 99, Paragraph 1). This category includes:

Delinquent Tax Accruing After Bankruptcy Commencement on Priority Bankruptcy Principal Taxes: If the principal tax is a priority bankruptcy claim, any interest or delinquent tax charges that accumulate on that principal after the bankruptcy proceedings have started are treated as subordinated. (This contrasts with delinquent tax on administrative principal taxes, which remains administrative).
Additions to Tax / Penalties (加算税 - kasanzei等 - tō): Penalties imposed by tax authorities, such as those for failure to file, underpayment, or non-payment of taxes (e.g., no-filing additional tax, underreporting additional tax), are generally treated as subordinated claims, regardless of when the underlying tax obligation or the act giving rise to the penalty occurred. This is due to their punitive nature. Even if a trustee files a tax return late for the estate and an addition to tax is imposed, that addition is typically subordinated.
Certain Post-Petition Taxes Not Related to Estate Administration: If a tax arises post-petition from a cause not linked to the trustee's administration or liquidation of the estate (which is a rare scenario for most common taxes), it could be considered subordinated.

IV. Taxes Not Forming Part of the Bankruptcy Estate or Claims (Non-Estate Liabilities)

Some tax liabilities may not be considered claims against the bankruptcy estate at all, either administrative or bankruptcy claims. These become, or remain, the personal responsibility of the debtor (if an individual) or are simply uncollectible from a dissolved corporation.

Examples:
- If a trustee abandons a piece of real estate from the bankruptcy estate, fixed asset tax assessed for the period after the abandonment (based on an assessment date occurring after abandonment) is not a liability of the estate.
- For an individual debtor, their personal income tax or resident tax for the calendar or fiscal year following the year in which bankruptcy proceedings commenced is generally their own new liability, not a claim in the bankruptcy.
- The PDF also mentions complexities with National Health Insurance premiums (国民健康保険料 - kokumin kenkō hokenryō), where treatment of installments due post-commencement for a pre-commencement insurance year can vary by municipality, with some considering them non-estate personal liabilities.

It's important to note that for individual debtors, most tax claims are non-dischargeable (非免責債権 - hi-menseki saiken) (Bankruptcy Act, Article 253, Paragraph 1, Item 1). This means that even if they are not fully paid through the bankruptcy process, the individual remains liable for them after discharge.

Assertion and Handling of Tax Claims by Authorities

Delivery Demand (交付要求 - Kōfu Yōkyū): Tax authorities typically assert their claims in bankruptcy by issuing a "delivery demand" (kōfu yōkyū) to the bankruptcy trustee (for taxes classified as administrative claims) or to the court (for taxes classified as bankruptcy claims, though these are often routed via the trustee in practice).
Exemption from Standard Claim Investigation: Unlike other creditors, tax claims are generally not subject to the trustee's formal claim investigation and objection process (債権調査 - saiken chōsa) that applies to other bankruptcy claims (Bankruptcy Act, Article 134, Paragraph 1). If the trustee disputes the validity or amount of a tax claim, they must generally use the specific tax appeal procedures (e.g., request for reinvestigation, administrative appeal, tax litigation) rather than the bankruptcy claim objection process.
Verification of Due Dates and Amounts: The trustee must still meticulously review the delivery demands, verifying the calculations, the applicable tax periods, and, crucially, the specific payment due dates (gutaiteki nōkigen) to correctly classify each component of the tax claim according to the priority rules.

Impact of Pre-Petition Tax Liens and Seizures (滞納処分 - Tainō Shobun)

Continuing Effect of Pre-Petition Seizures: If tax authorities have lawfully seized assets of the debtor before the commencement of bankruptcy proceedings as part of a tax delinquency procedure (tainō shobun), those seizure proceedings can generally continue despite the bankruptcy (Bankruptcy Act, Article 43, Paragraph 2). The tax authority may realize the seized assets and apply the proceeds to the outstanding tax debt, effectively acting like a secured creditor with respect to those specific assets.
No New Seizures Post-Commencement: However, after bankruptcy proceedings have commenced, tax authorities are prohibited from initiating new seizures of property belonging to the bankruptcy estate to collect pre-petition tax claims (Article 43, Paragraph 1). They must instead rely on their priority status within the bankruptcy distribution scheme.

Examples of Specific Taxes and Their Treatment

The general principles above apply across various types of taxes, but their practical application often depends on the specific tax's assessment cycle and due date rules:

Consumption Tax (消費税 - shōhi zei): For pre-petition periods, unpaid consumption tax is classified based on its specific payment due date. If the trustee makes taxable sales of estate assets post-petition (e.g., selling company buildings or inventory), the consumption tax arising from these sales is an administrative claim (Art. 148(1)(ii)).
Corporate Income Tax (法人税 - hōjin zei): Similar to consumption tax for pre-petition liabilities. For the fiscal year in which bankruptcy commences (the "dissolution business year" - 解散事業年度 - kaisan jigyō nendo), any tax due is often an administrative claim (Art. 148(1)(iii)). Taxes arising during subsequent liquidation periods (清算事業年度 - seisan jigyō nendo) from income generated by the estate (e.g., from asset sales) are typically administrative claims (Art. 148(1)(ii)).
Fixed Asset Tax (固定資産税 - kotei shisan zei): This local tax is assessed annually as of January 1st, with payments often due in quarterly installments. As illustrated earlier, the classification of each installment for a given tax year depends on its specific payment due date relative to the bankruptcy commencement and the one-year look-back rule for Art. 148(1)(iii) status. Tax for assessment years beginning after bankruptcy commencement on property still held by the trustee is an administrative claim under Art. 148(1)(ii).
Social Insurance Premiums (社会保険料 - shakai hokenryō): Employer contributions for health insurance, pension, etc., are generally treated as public dues (kōka) and follow similar priority rules to taxes, depending on their due dates.

Conclusion

The treatment of tax claims in Japanese bankruptcy is a nuanced area governed by a detailed hierarchy of priorities. The classification of a tax claim as an administrative claim, a priority bankruptcy claim, or a subordinated bankruptcy claim depends heavily on factors such as when the tax obligation arose, its specific payment due date in relation to the bankruptcy commencement, and whether it relates to the administration of the estate itself. Bankruptcy trustees must carefully analyze each tax claim to ensure its correct categorization and payment in accordance with the statutory waterfall, balancing the public interest in tax collection with the overarching bankruptcy goals of fairness to all creditors and orderly estate administration.