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.
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 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, 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.
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 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|
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:
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 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.).
The following tax rates apply to the taxable ordinary income amount and the taxable retirement income amount separately:
|Taxable Income (Yen)||Tax rate applicable to taxable income band||Deduction (Yen)|
|From||But not over|
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
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.
Fixed assets tax is levied on all kinds of land, buildings, and depreciable assets.
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.
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:
|Depreciable assets:||JPY 1,500,000|
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 =
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.
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.
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 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:
building constructed by the taxpayer himself; or
JPY120,000 in the case of other buildings.