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.
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)
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
The followings are taxes generally imposed:
- Corporate tax
- Consumption tax
- Withholding income tax
- Inhabitant tax
- Business Tax
- Fixed property tax
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.
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
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.
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.
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.
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.
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”
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.
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.
Corporate tax is calculated using the following formula.
Taxable income * Corporation tax rate
The corporation tax rate differs depending on capital and taxable income.
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).
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.
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”.
Primarily, the “Non-taxable transactions” are the following transactions:
- Selling or leasing of land
- Bank interest
- Leasing of dwellings
“Exempt sales” primarily means exporting items and services from Japan.
Under consumption tax law, there are two tax rates:
- 10% in general
- 8% for food and beverage and certain other types of products.
They are the same as the due date for corporate tax.
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)
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.
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.
