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Tax Guide

Financial Year – 1 April – 31 March
Currency – Japanese yen (JPY)

Corporate Tax Summary

Residence – Domestic corporations in Japan are subject to tax on their worldwide income.

Foreign corporations which have a registered branch in Japan are subject to tax on domestic sourced income, as a branch is regarded as a Permanent Establishment (PE). Foreign corporations who do not have a registered branch (a representative office) are not taxed in Japan unless they receive specified kinds of income such as interest on loans, rent of real property and income from personal services performed in Japan.

If a Japanese subsidiary of a foreign corporation pays dividends or royalties to its foreign parent corporation, a withholding tax is imposed at 20.42%. If an international tax treaty exists between the countries, the withholding tax rate can be reduced to 5% – 15% or be exempted, on condition that the application for consideration under the tax treaty is made before payment. Japan has international tax treaties with many foreign countries.

There are various kinds of taxation in Japan designed to prevent international tax avoidance.

Transfer Price Taxation: If transactions between foreign affiliates are not made at an arms-length price and the lower profit is recorded in Japan, the profit of the transaction is reassessed and taxed at the arms-length price. A company is required to prepare and keep documentation of its transfer price policies if the transaction value is more than JPY 5 billion.

Anti-Tax Heaven Rule: If a Japanese company establishes a designated tax heaven subsidiary in a lower tax burden country, the income of that subsidiary must be included in the Japanese company’s income.

Thin Capitalisation Rule: Interest paid by a Japanese subsidiary on debt to the foreign parent company is disallowed to the extent the average balance of debt on which the interest is paid is more than 3 times the equity of the foreign parent in the net assets of the Japanese subsidiary.

Earnings Stripping Rule: This rule limits the amount of allowable deductions for net interest paid by a Japanese subsidiary on debt to the foreign parent company under certain conditions.

Under the Japanese tax rule, certain expenses such as depreciation must be booked in order to be deducted as a tax expense. If these are not booked, they are not allowed for tax purposes.

Corporate taxable income is calculated through the tax adjustment process to the accounting net income resolved at the General Shareholders Meeting (GSM). The GSM should be held within 3 months after the end of the fiscal year. However, the corporate tax due must be estimated and paid within 2 months after the end of the fiscal year, even if the accounting net income has not been resolved at the GSM. Accordingly, it is possible to request a one-month extension for the filing of the corporate income tax return. If the tax due is not paid and/or the tax returns are not filed by the due date, delinquent taxes and penalties are imposed. It is quite challenging for foreign companies to meet these deadlines as the accounting income may not be fixed within a relatively short period.

Basis of Taxation – Corporate income tax is calculated as taxable income (taxable revenue minus taxable expenses) times tax rate minus tax deductions. If a company chooses to file as a blue tax return enterprise (self-assessment system), it becomes eligible for various tax privileges. The due date for the application is the earlier of the first fiscal year end or the day after 3 months from the date of incorporation.

The financial statements resolved at the GSM should be attached to the corporate tax returns, but no independent audit is required on the financial statements. Accounting books and records should be prepared in Japanese yen using the double entry bookkeeping method, but there is no Japanese language requirement nor Japanese GAAP requirement. They can be prepared according to other GAAP, IFRS, etc. The books and records should be maintained at the headquarters in Japan for 10 years. Certain expenses, such as depreciation, are tax deductible only when they are recorded in the accounting book. Entertainment expenses are not fully tax deductible for large corporations but can be deductible to some extent for small corporations. Directors‘ bonuses paid on an ad-hoc basis are not tax deductible. Accrued expenses, such as accrued bonus, unused vacation, retirement remuneration and other expenses, are not tax deductible.

Local tax returns, such as inhabitant taxes and enterprise tax, are filed together with the corporate income tax return. Inhabitant tax per capita is levied based on the amount of capital, regardless of taxable income. Enterprise tax is corporate tax deductible when it is paid.

Net operating loss can be carried forward over the next 10 years subject to blue tax return filing status. Under certain circumstances, carry back of net operating loss is allowed for blue tax return enterprises.

Revenues for accounting purposes are generally taxed except for dividends received. Dividends from a foreign subsidiary are also tax exempt to some extent.

Reference
Corporate Income Tax Rate (%) 30.64%
Branch Tax Rate (%) 30.64%
Withholding Tax Rate
Dividends – Franked 20.315% to 20.42%
Dividends – Unfranked N/A
Dividends – Conduit Foreign Income N/A
Interest 15.315%
Royalties from Intellectual Property 20.42%
Fund Payments from Managed Investment Trusts N/A
Branch Remittance Tax N/A
Net Operating Losses (Years)
Carry Back 1 year
Carry Forward 10 years

Individual Tax Summary

Residence – A permanent resident is taxed on worldwide income at a progressive tax rate from 5% to 45%. As with corporate income tax, blue tax return filing status provides various tax privileges. Certain income, such as interest, dividends, payroll, retirement remuneration and professional fees for lawyers and accountants, are subject to withholding tax. Commuting allowance, commonly paid together with the payroll, is exempt from tax to some extent.

Basis of Taxation – Payroll income tax is withheld monthly from salaries according to tax rate tables. An employer is obliged to pay the withholding tax to the tax office by the 10th of the following month. Even if the tax is withheld on a monthly basis, the annual tax due should be computed based on annual taxable income. The balance between the withholding tax paid throughout the year and the final tax amount due is adjusted each year in the December salary. This procedure, called year-end tax adjustment, is obligatory for employers. However, if an employee’s total income exceeds JPY 20 million, the employee must file an individual tax return. Employers should report annual withholding tax information to the tax office by 31 January.

Payroll deduction items other than withholding tax are individual inhabitant tax and social insurance premiums. Individual inhabitant tax is imposed on a resident who has a domicile in Japan as of 1 January. It is levied on the income earned in the previous year. The municipal office calculates the individual inhabitant tax and issues a statement to the company no later than 31 May of that year. The company is required to withhold the individual inhabitant tax over 12 months from June to May of the following year. The payment of the withholding inhabitant tax must be made by the 10th of the following month.

There are four types of social insurance in Japan. These are health insurance and welfare pension insurance (social insurances in narrow terms), and employment insurance and worker’s accident compensation insurance (referred to as labour insurances). Both the employer and employee share the cost of the premiums for social insurance (narrow terms) and employment insurance almost equally. Premiums for worker’s accident insurance are paid by the employer only. Annual statutory reporting of these social insurances is required every July.

Japan’s Social Security Agreement provides that employees covered by the agreement, who work outside of their home country for periods that are not expected to exceed 5 years, are subject only to the social security systems in the home country, not those of the country of employment.

A non-permanent resident is defined as a person who has maintained a domicile or residence in Japan for five years or less during the past ten years. A non-permanent resident is taxed only on his/her Japanese source income and foreign source income paid in Japan or remitted into Japan. Japanese source income includes salaries, wages and other compensation for personnel services attributable to a period of service in Japan (i.e. excluding of work days outside of Japan).

A non-resident is defined as an individual who has resided or intended to reside in Japan for less than one year up to the current date. A non-resident is taxed on his/her Japanese source income only at the flat rate of 20.42%. If the total number of days in Japan is 183 days or less, a tax treaty exemption could apply.

Filing Status – Individual tax is calculated on a calendar year basis and the tax return should be filed from 16 February to 15 March every year. In the case of a tax refund, the tax return can be filed before 16 February.

Personal Income Tax Rates

Taxable Income Tax Payable – Residents Tax Payable – Non Residents
up to JPY 1,950,000 5%
JPY 1,950,000 to 3,330,000 10%
JPY 3,300,000 to 6,950,000 20%
JPY 6,950,000 to 9,000,000 23% 20.42%
JPY 9,000,000 to 18,000,000 33%
JPY 18,000,000 to 40,000,000 40%
over JPY 40,000,000 45%

Goods and Services Tax (GST)

Rate 10%
Taxable Transactions Consumption tax is categorised as an indirect tax in which almost every domestic transaction and every transaction for the import of foreign goods, with the exception of financial transactions, capital transactions, medical services, welfare services and educational services, is subject to taxation at the rate of 10%. A reduced tax rate of 8% is applied for daily necessities such as food, drink and periodical newspaper subscriptions.
Consumption tax is also applied to electronic commerce such as the delivery of an electronic book, music, advertisements, or cloud services that an overseas company performs outside of Japan. Transfers of goods or the provision of services etc., conducted by a company in Japan which qualify as export transactions, are exempt from consumption tax.
Registration Consumption tax due is calculated as the total amount of consumption tax on sales minus the total amount of consumption tax on purchases. The calculation is made through the accounting book record. As no “tax-qualified invoice system” has yet been introduced in Japan (to be introduced from October 2023), no consumption tax registration is required to obtain a consumption tax number. A prerequisite for the application of the purchase tax credit is the keeping of accounting books and bills etc. with respect to purchase credit in the taxable period. If these accounting books or bills etc. are not maintained in a well-organised manner, the amount of consumption tax payable on a taxable purchase or removal of foreign goods from a bonded area is not creditable.
Filing and Payment If a company’s consumption taxable sales during a base period are more than JPY 10 million, the company must file a consumption tax return. A company’s base period is two fiscal years prior to the current year. The consumption tax return must be filed and paid within 2 months after the fiscal year end.

As no base period exists for a newly established company, it is not required to file a consumption tax return unless its capital is JPY 10 million or more. However, some small corporations could file the consumption tax return by electing voluntary consumption tax status by the first fiscal year end. Some small start-up corporations with less than JPY 10 million capital, and which qualify because of certain sales threshold amounts and number of employees, would also be required to file the consumption tax return.

Other Taxes Payable

Tax Reference
Payroll Tax Payroll income tax is withheld monthly from salaries according to tax rate tables. An employer is obliged to pay the withholding tax to the tax office by the 10th of the following month.
Stamp Duty Stamp Duty is paid by affixing and cancelling a stamp on the taxable documents (various contractual agreements, promissory notes, articles of incorporation, etc.) which are listed in the Stamp Duty Act.
Fixed Asset Tax Companies are required to file a depreciable asset report, which summarises depreciable assets held as of 1 January every year, to the municipal tax office by 31 January.
The municipal tax office calculates the Fixed Asset Tax and issues a statement to the company.

Business Office Tax is levied on companies located in big cities such as Tokyo and Osaka. If a company in such a big city reaches a certain threshold of office space (square metre) and number of employees, the Business Office Tax return should be filed to the municipal tax office within 2 months after the fiscal year end.

Last updated: 16.06.2020

Contact us:

President, CPA/LTA in Japan
Kazuhiko Chiba
President, CPA/LTA
Phone: +81 3 5228 1682