Accountancy in Japan

>> Taxation in Japan

Corporation tax

Both branch offices and companies are subject to corporation tax, inhabitant tax and enterprise tax on their income. The rates of these taxes are decided by their capital, income, and location.

All corporations except those specifically exempt by the law are subject to corporate income taxes imposed by both the national and local governments.

Corporate income tax (national tax)

The corporate income tax is generally a flat rate of 23.4% (23.2%*) of taxable income. Taxable income is based on net income before income taxes per the corporation’s financial statement; this is adjusted to take into account a multitude of tax rules. To calculate taxable income, for example, non-taxable items included in the financial statement as net income (such as dividend income from a more than 1/3 owned Japanese corporation) are subtracted, while others (such as excess entertainment expenses considered non-deductible) are added to net income.

Paid in capital of JPY 100  million or less Paid in capital in excess of JPY 100 million
Taxable income up to JPY 8 million 15% 23.4% (23.2%)
Taxable income in excess of JPY 8 million 23.4% (23.2%*)

* Applied from the period beginning on or after April 1, 2018.

Local corporation tax (national tax)

Local Corporation tax was introduced and applied from the period beginning on or after October 1, 2014, the purpose of which is to transfer part of Local Inhabitant Tax (see below) to national tax, to adjust the allocation of taxable source among local prefectures.

Inhabitant tax (local tax)

Inhabitant tax, levied by the local prefecture and municipality, is computed as a percentage of the corporate income tax liability. The combined prefectural and municipal tax rate may not exceed 16.3% of the national tax, and some offer rates considerably lower than this.

Enterprise tax (local tax)

Each prefecture levies an enterprise tax. However, for the purposes of local enterprise tax, taxable corporate income is calculated in a different way from that used for the national corporate income tax. The amount of enterprise tax is deductible from the corporate income taxes when paid.

The following example is for a corporation whose capital amount is JPY 10 million. Its annual taxable income is JPY25 million and located in Tokyo.

Business year beginning on or after  October 1, 2014

Business year beginning on or after October 1, 2014
Annual profit up to JPY 4 million 3.4%
from JPY 4 to 8 million 5.1%
over JPY 8 million 6.7%

For corporations with capital of JPY100million or more, this tax is levied by the size of their business. This is designed to cover 5/8 of corporation enterprise tax revenue. The tax base consists of profit, capital and other value-added items such as wages, interest and rentals.

Local corporate special tax  (national tax)

Local corporate special tax was introduced as a temporary measure* pending integrated tax reform including consumption tax. Local corporate special tax is separated from the specified portion of enterprise tax. Local corporate special tax is levied on all corporations liable to pay corporation enterprise tax. The tax amount is computed based on income or gross proceeds, and it must be paid to the local government.

* It has officially been decided to repeal this Tax from the business year beginning

October 1, 2019

Taxable Base Type of Corporation Tax Rate
Taxable income Company whose paid in capital more than 100 million 414.2

Blue returns

Any corporation, including a newly established Japanese corporation and a local branch of a non-Japanese corporation, may apply for permission to file a blue return. The blue return offers a variety of tax privileges. With respect to the first business year of a new corporation, the application must be made by within three months from the date of incorporation or by the last day of the first business year, whichever is earlier. Approval to use the blue return is generally granted provided the corporation’s bookkeeping system accords with certain accepted procedures.

Privileges granted to blue return corporations include:

  1. Carried-over net losses for nine years, which are incurred from business years for which blue returns have been filed, can be deducted as expenses in the accounting period.
  2. Carried-back losses incurred within one year before an accounting period qualify for a refund of corporation tax provided the tax office accepts the calculation.
  3. Most of the special depreciation allowances and the special tax credits provided for in the Special Taxation Measure Law apply to blue return corporations only. Therefore, a start-up company that expects loses in the first few years will generally benefit from using the blue return.
  4. The various tax-free reserves provided for in the Special Taxation Measures Law are permitted to be deducted as expenses on the condition that a blue return is filed.
  5. The tax authorities cannot make corrections unless any mistakes made by the corporation in the calculation of income and other matters are ascertained from an audit of books and documents. Corporations that file the alternative white return are not accorded this privilege.

Branch profits tax

A foreign company having a certain fixed place of business (“permanent establishment”), such as a branch in Japan, is subject to tax on domestic source income attributable to the permanent establishment based on a tax treaty, and must file a tax return.

The taxation principle applied to foreign corporations was changed, under 2014 tax reform, from an entire income approach to an attributable income approach, in line with the OECD Model Tax Convention amended in 2010. This change will be effective from accounting periods beginning on or after April 1, 2016.

Personal income tax (pay as you earn)

Income tax (national tax)

Income tax is composed of withholding income tax and assessment income tax. Withholding income tax is withheld at source from payments to individuals as well as to corporations. The tax rate is usually a flat 20.42% or less. However, tax withheld from salaries, wages, bonuses, retirement allowances, etc. paid to resident individuals is often higher than 20.42% because the amount of tax is computed by applying a progressive rate.

Assessment income tax is levied on individuals, only at progressive rates. Non-resident taxpayers are subject to assessment income tax only in certain cases (for example, if they possess a permanent establishment or real estate  in Japan, etc.).

Progressive tax rates

The following tax rates apply to the taxable ordinary income amount and the taxable retirement income amount separately:

Rate of income tax

Taxable Income (Yen) Tax rate applicable to taxable income band Deduction (Yen)
From But not over
0 1,950,000 5.105%
1,950,000 3,300,000 10.210% 99,548
3,300,000 6,950,000 20.420% 436,478
6,950,000 9,000,000 23.483% 649,356
9,000,000 18,000,000 33.693% 1,568,256
18,000,000 40,000,000 40.840% 2,854,716
40,000,000 45.945% 4,896,716

Capital gains tax

Capital gains are not given preferential treatment. They are included in corporate taxable income and are subject to tax at the ordinary corporate income tax rate.

Fixed assets tax

Tax payers

The registered owner as of January 1st of each year pays fixed assets tax on land, buildings, ships, aircraft or any other kind of depreciable assets. “Registered owner” means the person registered as the owner of the property in the registration book maintained by a national juridical office.

Taxable fixed assets

Fixed assets tax is levied on all kinds of land, buildings, and depreciable assets.

Tax base

The tax base for fixed assets tax is its fair market value. In practice, land or buildings are taxed based on their value assessed by the municipality. Municipalities appraise the fair market value of land and buildings every three years.

Tax rate

The annual tax rate is 1.4%. Municipalities may levy tax at a rate higher than 1.4%, but no higher than 2.1%. Fixed assets tax  is not levied if a taxpayer owns less than the following amount of fixed assets located in the same municipality:

Land: JPY 300,000
Buildings JPY 200,000
Depreciable assets: JPY 1,500,000

Consumption tax

A tax of 8% is imposed on non-exempt goods and services. When a business enterprise purchases goods and services in Japan, it pays this tax to the supplier

or the customs office. When a business sells goods or services, it is required to collect this tax from the consumer. Export transactions, international communications and international transportation services are exempt from consumption tax (export tax exemption).

The basic formula for calculating the tax  is as follows: Tax due =

Total amount of consumption tax on sales (8% of taxable sales)
Total amount  of consumption tax on purchases (8% of taxable  purchases)

Measures to facilitate calculation of tax

  1. Allowing for tax-exempt enterprise:

An enterprise whose taxable sales amount is not more than JPY10 million for the base period is a tax-exempt enterprise unless it chooses to become a taxable enterprise.

  1. Simplified tax system:

An enterprise whose taxable sales amount is not more than JPY50 million for the base period can choose to apply the simplified tax system in which the tax liability is calculated based on taxable sales  amount only.

Other taxes

Registration tax

The tax for registration of a Kabushiki Kaisha (Japanese corporation) is generally levied at 0.7% of the company’s paid-in capital.

Real property acquisition tax (prefectural)

Real property acquisition tax is levied on the acquisition of land or buildings (inclusive of rebuilding). The tax is not levied on the acquisition of depreciable assets other than buildings.

The tax base is market value of the acquired land or buildings, usually substantially lower than the purchase price. The tax rate is 3%.

The tax is not levied if the tax base  is less than:

  1. JPY100,000 in the case of land;
  2. JPY230,000 in the case of a new

building constructed by the taxpayer himself; or

JPY120,000 in the case of other buildings.


Latest version updated 13th October 2017

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127

Million

Population

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Japanese Yen

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GDP

377,962

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