3. Japanese business taxes
In the previous section on reducing Japanese business taxes, I described seven general categories into which many foreign companies doing business in Japan tend to fall. Next we need to consider the taxes that companies are liable to pay when doing business in and with Japan.
Japanese business income taxes include the following:
- every Japanese company, irrespective of domestic or foreign ownership, is treated as a Japanese resident and is liable to pay corporate taxes (~42% including national and local income taxes and 'inhabitants' tax) in Japan on its total income whether earned in Japan or overseas (so if your Japanese subsidiary also sells in South Korea, Taiwan etc. it will pay taxes in Japan on those revenues),
- all royalties (but not payments for physical products) paid by a Japanese customer to a non-resident foreign company (including royalties paid by a Japanese company to its foreign parent or foreign affiliate) will incur a 20% withholding tax which must be deducted by the Japanese customer from the value of the invoice (for software, media, patent or license rights etc.) issued by the non-resident company and the tax paid by the customer directly to the Japanese national tax office (this withholding tax on royalties will be deleted for US parents in the new US-Japan tax treaty),
- all dividends paid by a kabushiki kaisha from its post-tax profits to non-resident foreign stockholders will incur a 20% withholding tax which must be deducted by the kabushiki kaisha and paid direct to the Japanese national tax office (this withholding tax will be deleted for US parents in the new US-Japan tax treaty),
- Japan has tax treaties with most nations which effectively reduce the required withholding taxes by up to 50%, so for royalties or dividends paid to US companies, the withholding tax to be deducted and paid in Japan is presently reduced to 10% (the rate of 'relief' varies for different countries and as noted above will anyway soon be deleted for US parents),
- bonuses (including performance bonuses and sales commissions) paid to directors of a kabushiki kaisha are considered to be paid from pre-tax profits even if the kabushiki kaisha makes no trading profits (so if you pay the President of your Japanese kabushiki kaisha 'customer liaison office' a bonus it will cost you an additional 42% in corporate tax charges),
- a kabushiki kaisha or yugen kaisha which has no revenue other than funds transferred from its non-resident parent (i.e. is a cost center) will incur a corporate tax charge based on a notional profit (the profit is calculated as 5% of the kabushiki kaisha's total expenses) plus the tax charge made on any directors' bonuses paid,
- the Japanese branch-office (or a 'dependent' 3rd-party agent) of a non-resident company effectively creates a resident persona or 'permanent establishment' of the parent in Japan and will be charged corporate taxes on all revenues earned in Japan by both it and its parent irrespective of whether the branch office is designated as a customer liaison office or a distributor,
- all domestic purchases and imports are subject to consumption tax (equivalent to US sales tax and European VAT) of 5% which companies can reclaim,
- a Japanese resident importing certain products, especially agricultural produce and foodstuffs, will be charged tariffs on those imports (including imports from its foreign parent or sibling),
- if a Japanese resident is classed as a 'dependent agent' of a foreign company and imports products from that foreign company but is deemed by the tax authorities to have paid an inflated price (the "transfer price") for those products then 'transfer price taxation' may be applied to the difference between the contracted transfer price and what the tax authorities consider a fair 'arms-length' transfer price.
Note that in addition to the above income taxes, there are other property, asset and capital gains taxes that may also be applicable to your Japanese business situation. What becomes clear though is that at least as far as Japanese income taxes are concerned:
- Japan charges income taxes on resident Japanese company profits,
- Japan withholds tax from royalties paid by Japanese residents for intellectual property licensed from foreign companies,
- Japan withholds tax from dividends and other corporate income distributions made to foreign parents.
Income taxes and withholding taxes are the two fundamental categories of tax we will consider because they are the bulk of the tax burden of most foreign companies doing business in Japan.
So now lets look at a couple of the 'traditional' structures used by foreign companies to reduce their taxes when doing business in Japan and examine how those structures cope with the challenges of a Japanese tax audit
4. surviving Japanese business tax audits >>