Information on Japanese taxes

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Question

What types of entities are used in establishing a business presence in Japan?

Answer

Foreign companies entering the Japanese market generally establish a business presence using one of the following three methods:

  • Opening a representative office
  • Opening a branch office
  • Establishing a subsidiary

Generally speaking, a representative office has no obligation to file a tax return for corporate tax and other related taxes.


Question

What kinds of initial notifications/applications related to taxes need to be submitted upon establishment of a subsidiary or a branch?

Answer

Mainly, these applications need to be submitted:

  • Notification of Corporation Establishment
  • Application for Special Provision for Extension of the Due Date for Filing a Final Return Form
  • Application Form for Approval of Filing Blue Return
  • Notification of Establishment/Relocation/Closure of a Salary-Paying Office
  • Application for Approval Made in Relation to the Special Provision for Due Dates for Withholding Income Tax
  • Report on the Selection of Taxable Proprietor Status for Consumption Tax

Guidelines for Notification of Corporation Establishment, etc. | National Tax Agency (nta.go.jp)


Question

Please define what a “Blue Return” is.

Answer

By submitting “Application Form for Approval of Filing Blue Return”, you can get the status of “Blue Return”.

Privileges of “Blue Return” are as follows:

  • Carried-over net losses, which can be deducted from future taxable income.
  • Special depreciation allowances and special tax credits

Question

What kinds of taxes are imposed on corporations in Japan?

Answer

The followings are taxes generally imposed:

  • Corporate tax
  • Consumption tax
  • Withholding income tax
  • Inhabitant tax
  • Business Tax
  • Fixed property tax

Question

Please explain the outline of the Corporate tax.

Answer

Corporate tax is assessed on taxable income of corporations.

For more detailed information, please refer to the link below. NTA explains how to calculate the taxable income.

outline.pdf (nta.go.jp)


Question

What’s the difference between “Accounting Profits” and “Taxable Income”?

Answer

The Accounting Profits are calculated by subtracting expenses from revenues.

The Taxable Income is calculated by adjusting limitations on tax deductibility from the accounting profits.

The primary limitations are below:

  • Entertainment expenses
  • Donation Expenses
  • Provision
  • Bad debt loss

Question

What are “Entertainment expenses”?

Answer

Simply put, they are the expenses used to attract or entertain customers or clients.
Almost the same as an “accounting entertainment expenses”.

It’s not necessary to clearly understand everything about it since its definition is complicated.

Practically, tax specialists judge whether costs are categorized as “Entertainment expenses” rather than company accounting staff.


Question

What are “Donation Expenses”?

Answer

Gifts of money or assets without economic purposes are treated as “Donation Expenses”,  regardless of nominal expressions such as donations or contributions.

They are allowed deductions to a certain limit, on the other hand, if the donation is to foreign-related corporations such as a parent corporation outside Japan, the whole expense is disallowed.


Question

What provisions are common in Japanese accounting practice?

Answer

The following are common provisions in Japanese accounting practice:

  • Provision for bad debt
  • Provision for bonuses
  • Provision for retirement benefits

Question

Why is “Bad debt loss” named as one of the primary limitations?

Answer

Under Japanese tax law, conditions are specifically stipulated for their deductibility with respect to their cases and timing. Unless these conditions are met, tax deductions are not allowed.


Question

What should be taken into account when deciding a director’s remuneration?

Answer

A director’s remuneration has to be a fixed amount that is paid monthly throughout a fiscal year.

If not, the director’s remuneration cannot be deducted from taxable income for corporate tax purposes.


Question

What should be taken into account when deciding an amount of capital?

Answer

From accounting and tax perspectives, there are the following things that need to be considered:

  • If a company’s capital is over 100 million yen, the corporate tax rate is higher than in the case the capital is less than 100 million yen.
    Note: Please refer to the Question “Please explain how to decide the corporation tax rate.”
  • If a company’s capital is 500 million yen or more, the company is subject to an accounting audit.
  • “Thin capitalization rule” and “Earning stripping rule”

Question

Please explain the “Thin capitalization rule”.

Answer

Generally speaking, this rule limits the deductibility of certain interests paid on liabilities on a foreign-related corporation.

Simply put, this rule is applied in the case that an average balance of interest-bearing liabilities exceeds three times a Japanese subsidiary’s equity amount.

As this calculation is more complicated, most people don’t need to know the full details. If you need to understand more details, please consult us.


Question

Please explain the “Earning stripping rule”.

Answer

Generally speaking, this rule is limiting the deductibility of certain interests paid to a foreign-related corporation.

A limitation amount is calculated based on a Japanese subsidiary’s taxable income.

If both the “Thin capitalization rule” and ” Earning stripping rule” are simultaneously applicable, whichever one produces the larger non-deductible amount will be  applied.

As this calculation is more complicated, most people don’t need to know the full details. If you need to understand more details, please consult us.


Question

Please explain how to calculate the amount of corporate tax.

Answer

Corporate tax is calculated using the following formula.

Taxable income * Corporation tax rate

The corporation tax rate differs depending on capital and taxable income.


Question

Please explain how to decide the corporation tax rate.

Answer

Generally speaking, in order to decide the corporation tax rate, companies are classified into two categories depending on their amount of capital:

  • Large Corporations (Corporations with a capital amount exceeding 100 million yen.)
  • SMEs(Corporations with a capital amount of 100 million yen or less. Except for ones that are wholly owned by a large corporation with a capital amount of 500 million yen or more.)

Tax rates are below(as of 2023):

  • For the “Large Corporations”

23.20%

  • For the “SMEs”

15% for the amount of taxable income not exceeding 8 million yen per year.

The rest of the taxable income is the same as For Large Corporations(mentioned above).


Question

When is the due date for filing the final tax return?

Answer

The filing due date for the final tax return is the 2 months after the fiscal year-end.

By applying for an extension beforehand, the due date can be extended.


Question

When is the due date for tax payment?

Answer

It is the same as the due date for filing the final tax return.

In the case in which a company has already applied for the extension, it is necessary for the payment to be completed within the 2 months after the fiscal year-end in order not to be subject to “Interest tax”.


Question

Please explain the outline of the Consumption tax.

Answer

A taxable enterprise for consumption tax purposes must file a tax return and pay the difference between consumption taxes received and consumption taxes paid.

NTA provides information about the Consumption tax. Please refer to the link below.

Basic knowledge|National Tax Agency (nta.go.jp)


Question

What kinds of services or goods can be subject to the “Consumption tax”?

Answer

The “Consumption tax” is imposed on the consumption of services and goods in Japan.

It is similar to VAT.

There are some exceptions to the “Consumption tax” such as “Non-taxable transactions” and ”Exempt sales”.


Question

Please explain the “Non-taxable transactions”.

Answer

Primarily, the “Non-taxable transactions” are the following transactions:

  • Selling or leasing of land
  • Bank interest
  • Leasing of dwellings

Question

Please explain the “Exempt sales”.

Answer

“Exempt sales” primarily means exporting items and services from Japan.


Question

Please explain the rate of consumption tax.

Answer

Under consumption tax law, there are two tax rates:

  • 10% in general
  • 8% for food and beverage and certain other types of products.

Question

When is the due date for filing the final tax return and tax payment?

Answer

They are the same as the due date for corporate tax.


Question

Please explain the outline of the Withholding income tax.

Answer

Corporations that make certain payments such as salaries, remuneration, or fees, are obligated to withhold taxes upon payment and pay the withheld amount to the tax office.

NTA provides information about the Withholding tax. Please refer to the link below.

Information about Withholding Tax | Withholding Tax | National Tax Agency (nta.go.jp)

Withholding Tax Guide


Question

Please explain the outline of the Inhabitant tax.

Answer

Inhabitant tax is imposed by prefectures and municipalities.

For more detailed information, please refer to the link below. The Bureau of Taxation explains basic knowledge about the Inhabitant tax.

https://www.tax.metro.tokyo.lg.jp/book/guidebookgaigo/guidebook2022e.pdf#page=30

Question

Please explain the outline of the Business Tax.

Answer

Business Tax is levied by prefectures on business conducted by corporations.

Taxable income is calculated based on the income of corporations.

For more detailed information, please refer to the link below. The Bureau of Taxation explains basic knowledge about Business tax.

https://www.tax.metro.tokyo.lg.jp/book/guidebookgaigo/guidebook2022e.pdf#page=26

This information is a simplified version of facts about tax rules for everyone to understand in a simple way.
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