Japanese business taxes
In the previous section about reducing Japanese business taxes, we described seven general categories into which many foreign companies doing business in Japan tend to fall. Now we need to consider the taxes that companies are liable to pay when doing business in Japan:
Japan’s Corporation Tax Law states that all Japanese companies, whether KK kabushiki kaishas, GK godo gaishas, or Japanese branch-offices of foreign companies, regardless of domestic or foreign ownership, are liable to pay Japanese business income tax, withholding taxes and Japanese consumption tax (VAT or sales tax).
Japanese corporate income tax
Japanese corporate income tax comprises:
- National income tax.
- National local income tax.
- Standard enterprise tax and local corporate special tax for companies with paid-in capital of JPY100,000,000 or less.
- Size-based enterprise tax and local corporate special tax for companies with paid-in capital greater than JPY100,000,000, including Japanese branch-offices of foreign companies with paid-in capital greater than JPY100,000,000 and subsidiaries of companies with paid-in capital greater than JPY500,000,000.
- Inhabitant’s tax (local income tax).
The effective Japanese corporate income tax rate (the total of the taxes listed above) is presently 34.6% for companies with paid-in capital of JPY100,000,000 or less, or 30.62% for companies with paid-in capital greater than JPY100,000,000, including Japanese branch-offices of foreign companies with paid-in capital greater than JPY100,000,000 and subsidiaries of companies with paid-in capital greater than JPY500,000,000.
Be aware that:
- Japan’s Corporation Tax Law considers all companies with paid-in capital greater than JPY100,000,000, including branch-offices in Japan of foreign companies with paid-in capital greater than JPY100,000,000 and subsidiaries of a company with paid-in capital greater than JPY500,000,000, as “large enterprises” for certain of the corporate taxes above.
- All Japanese companies and branch-offices must pay a minimum annual inhabitant’s tax of JPY70,000 even if they make a loss.
- Large enterprises must pay a minimum inhabitant’s tax of up to JPY3,800,000 even if they make a loss.
A branch-office in Japan of a foreign company, or a third-party agent in Japan that is effectively controlled by or dependent on a foreign company, creates a permanent establishment of the foreign company in Japan, in which case:
- The Japanese branch-office or dependent agent, must report all income from all sales that it, or its foreign parent with its help, make to customers in Japan. This means that if the foreign head-office sells directly in Japan using other distributors or resellers, then it must either make sure that the branch-office is not involved in those sales or the branch-office must report those sales as if they are its direct income.
- The Japanese branch-office or dependent agent, must report Japanese consumption tax (sales tax) on all sales that it, or its foreign parent, make to customers in Japan. This includes all sales that its foreign head-office sells directly in Japan using other distributors or resellers.
- If the Japanese branch-office or dependent agent of a foreign company imports products from that foreign company, but the tax office decides the branch-office or dependent agent paid an inflated price (“transfer price”) for such products, then the tax office will apply transfer price taxation to the difference between the contracted transfer price and what the tax authorities consider a fair ‘arms-length’ transfer price.
Japan’s Corporation Tax Law treats bonuses paid to a kabushiki kaisha’s representative directors as paid from pre-tax profits, even if the kabushiki kaisha makes a loss. Thus, if you pay the President of your Japanese kabushiki kaisha a bonus, it will cost you an extra 30.62% or 34.6% (depending on your kabushiki kaisha’s paid-in capital) in corporate income tax.
A Japanese company structured as a cost-center, with no revenue other than funds transferred from its non-resident foreign parent, will be subject to a corporate income tax charge based on a notional profit calculated as 5% of its total expenses plus the tax charge on any directors’ bonuses.
A company or branch-office which files its notification of establishment to the National Tax Agency within sixty days of establishment receives ‘Blue Form’ status. Blue Form status entitles a company to:
- Extend the filing date for its annual tax-returns to sixty days after its financial yearend (it’s 30 days as standard).
- Accrue and pay certain withholding taxes at half-year intervals.
- Carry forward losses for up to 10 years to offset against future profits when calculating income taxes.
If a company makes a profit and pays income tax at the end of a financial year, then at the end of its next half-year it will receive an interim income tax invoice from the National Tax Agency. The invoice will be for an amount equal to 50% of the income tax paid at the previous yearend.
So next let’s look at the other two taxes all Japanese companies must pay: withholding tax and consumption tax (Japanese sales tax).