Japanese taxes consist of national and local taxes.
Tax on income and profits
- – Individual income tax
- – Corporate tax
Tax on consumption
- – Consumption tax
- – Other taxes (Liquor tax, Gasoline tax and Local road tax etc.)
Tax on inheritance and gifts
- – Inheritance tax
- – Gift tax
Taxes on property
- – Motor vehicle tonnage tax
Tax on transactions
- – Stamp tax, Registration and license tax, Customs duty etc.
Tax on income and profits
- – Prefectural inhabitant tax
- – Enterprise tax
- – Municipal inhabitant tax
Tax on consumption
- – Special local consumption tax
- – Other taxes (Tabaco tax, Golf course tax, Bathing tax, etc.)
Taxes on property
- – Fixed assets tax
- – Business office tax
- – Other taxes (Automobile tax, Special land holding tax, etc.)
- – Real property acquisition tax, Automobile acquisition tax, etc.
Tax Administration System
National taxes are levied and collected by the National Tax Agency (NTA), which is a semi-independent organization under the Ministry of Finance. NTA consists of the headquarters office, 11 regional taxation bureaus and 524 tax offices.
Local governments have their own tax offices, separate from national tax offices to levy and collect local taxes.
Scope of Taxable Income for Corporation
Japanese Company (subsidiary)
A Japanese company is a corporation having its head office in Japan, such as a Japanese subsidiary of a foreign company. While worldwide income (domestic and foreign source income) is subject to a Japanese corporate tax, a foreign tax credit is allowed for the Japanese companies.
Foreign Company (branch office)
Only domestic source income of a foreign company is subject to Japanese corporate tax. No foreign tax credit is allowed for a foreign company.
Foreign companies, companies which head office in not located in Japan, are classified into the following four types for tax purposes.
- Foreign company carrying on business through a branch office, factory, or other fixed place of business (permanent establishment) situated in Japan
– Subject to tax on all domestic source income and must file a tax return.
- Foreign company carrying business not through permanent establishments but through undertaking construction, installation or assembly activities in Japan for longer than one year or supervising such activities undertaken in Japan for longer than one year or an agent in Japan who habitually exercises the authority to conclude contracts for or on behalf of a foreign company
– Subject to tax on income derived from such business in Japan and on certain other domestic source income and must file a tax return.
- Foreign company having no permanent establishment and not carrying on business as stated above but having certain domestic source income such as income from providing personal service in Japan, income from rent for the use of real estate and similar property in Japan, income from sale of real property in Japan, income from sale of stock of a Japanese company, etc.
– Subject to tax levied on such income and must file a tax return. However, this may be subject to a different rule under a tax treaty.
- For a foreign company other than above
– Certain income such as dividends and royalties are subject to Japanese withholding income tax. However, this may be subject to a different rule under a tax treaty.
A representative office of a foreign company engaged in advertising, providing information, conducting market survey and performing other supplementary activities in Japan for its head office is not subject to Japanese corporate tax.
Taxation on Corporation
Tax on corporate income consists of corporate tax (national tax), corporate inhabitant tax and corporate enterprise tax (local tax).
The tax on ordinary income is the tax levied on net income accruing to a company in a business year. The business year for tax purposes usually means the accounting period of a corporation.
The tax base for ordinary income tax is the corporation’s net income for each business year. Net income is the excess of “gross income” over “total costs” for each business year. Gross income and total expenses are calculated according to the Japanese generally accepted accounting principles, such as accrual basis of accounting. There are some items which are not deductible without being recorded as expenses (depreciation costs, provision for certain allowances and reserves, etc.) and other items on which deduction is limited or restricted (entertainment expenses, donation expenses, certain taxes, etc.).
- Dividends received
Dividends received by domestic corporations from other domestic corporations, less the interest chargeable to the shares on which those dividends were paid, are fully excluded from gross income in computing the amount of ordinary income. However, there are limitations if a domestic corporation owns less than 25% of the shares of another domestic corporation which pays dividends. The amount not included in profits will be reduced for stocks with a shareholding ratio of 25% to 1/3 and shares with a shareholding ratio of 5% or less.
- Ordinary sales
Revenue from ordinary sales of merchandise is included in the amount of gross income of the business year in which delivery was made.
- Long term contract
Net profit accruing from a contract is, in principle, reported in the business year in which the contract is fulfillled, despite the fact that it may cover more than one business year. This rule may be referred to as the completed contract rule. However, in the case of a large-scale construction whose contract amount is one billion or more, the percentage of completion rule must be applied if the term of construction is one year or more and certain conditions are met.
As the general principle, cost of sales, cost of completed construction, selling expense, general and administrative expense and other expenses and losses are deductible from gross income of the business year.
- Taxes paid
Taxes such as enterprise tax, taxes on property or transactions, etc. are deductible for corporate tax calculation. Other taxes such as corporate tax, inhabitant tax, delinquency tax or penalty etc. are not deductible.
- Salaries, wages and bonuses
Salaries, wages and bonuses paid to employees of a corporation are deductible expenses in principle. However, unreasonably high salary paid to directors and bonuses paid to directors and similar highly ranked persons are not deductible.
- Entertainment expenses
In principle, entertainment expenses are not deductible for tax purposes, even though such expenses are necessary for carrying out a business. However, small-medium sized enterprises (SME) whose paid in capital is JPY100million or less are allowed to deduct entertainment expenses up to JPY8 million or 50% of its eating and drinking expenses for tax purposes. This is except for SMEs which are wholly owned by a company that has paid-in capital of JPY 500 million or more after the group taxation regime is effective.
- Donation expenses
Contributions to the national and local government and other designed contributions for public purposes are fully deductible. Other contributions to designated organizations are deductible up to a certain amount with limitations.
- Bad debt loss
Receivables to be written off which are determined as part of a reconstruction plan or composition admissible under legal procedures or as agreed in a creditors meeting and receivables which are totally uncollectible due to the financial position of the debtor are allowed to be deductible as a bad debt loss.
- Depreciation cost
Corporate tax law permits the deduction of a reasonable allowance for the exhaustion or wear and tear of depreciable assets, tangible or intangible, within the limits allowed as expenses for accounting purposes.
A corporation may choose one depreciation method for each group of its depreciable assets or for each office, shop factory, etc. from among the depreciation methods such as reducing balance method, straight line method, unit of production method and so on.
The depreciation method which should be applicable, in principle, when a corporation has not notified a tax office of its choice is as follows:
|Tangible assets (excluding buildings)
||Declining balance method
||Straight line method
||Straight line method
Depreciable assets whose acquisition cost per unit is less than JPY200,000 may be deductible each business year in equal amount over three years. The minor assets whose acquisition cost per unit is less than JPY100,000 may be immediately deducted as expenses in the business year of acquisition.
Credit for Foreign Tax
In order to eliminate international double taxation on income, foreign tax levied on a Japanese domestic corporation, in the ordinary course of its business, may be credited against Japanese corporation tax within certain limitations. This is referred to as foreign tax credit. Furthermore, in order to treat investment abroad through a foreign subsidiary in the same manner as investment abroad through a branch, foreign taxes levied on a foreign subsidiary of a Japanese domestic corporation may be credited against Japanese corporation tax levied on the Japanese parent corporation. This is called an indirect foreign tax credit. The credit for foreign taxes is granted unilaterally.
Place for Tax Payment
A corporation is required to file returns, pay tax and supply details of the computation of taxable income to the tax office having jurisdiction over the place where the corporation is required to pay tax.
The place of tax payment of a domestic company (subsidiary of a foreign company) is the place where its head office is located. In the case of a foreign corporation (branch office of a foreign company), the place of tax payment is the location of the corporation’s main permanent establishment.
A corporation may file a blue tax return with the approval of the tax office. A corporation filing a blue return must keep a journal, a general ledger and other necessary books, and record all transactions affecting assets, liabilities and capital in the books clearly and in good order according to the principles of double entry bookkeeping to be able to calculate its taxable income accurately. Furthermore, the corporation must settle accounts based on its records, prepare balance sheets, profit and loss statements and other statements, and maintain its financial statements, accounting books, and related documents for at least 7 years (10 years for fiscal years in which tax losses are incurred).
Main privileges granted to corporations filing a blue return in the calculation of income include: ten year carry forward of net loss for future deduction and allowance of reserves, special depreciation and tax credits stipulated in the Special Taxation Measures Law.
A corporation is required to apply for approval to file a blue return by the day before the first day of commencement of the business year.
With respect to the first business year of a new corporation, the application for approval must be made by the day within three months from the date of incorporation or by the last day of the first business year, whichever is earlier.
Return and Payment of Corporate Tax
- Interim return and tax prepayment
A corporation, except if it applies to certain conditions, whose business year is longer than six months should file an interim return covering the first six months of its business year. The return should be filed, and the tax amount should be paid to the tax office within two months after the end of the first six months.
- Final return and final payment or refund
A corporation is required to file a final tax return within two months after the end of its business year, whether or not it has a positive income for that business year. Corporate tax on ordinary income for a business year, minus the amount of prepayment, must be paid to the tax office within two months after the end of the business year. Refund from the overpayment of the prepayment, tax credits, etc. will be made on request after a final return has been filed.
Corporate Inhabitant Tax
Corporate inhabitant tax is a local tax levied on a Japanese company and a foreign company with a permanent establishment in Japan. Corporate inhabitant tax includes a per capital levy which amounts are fixed based on the capital amount and the number of the employees, and a corporate tax levy of certain tax rates of the corporate tax amount.
Corporate Enterprise Tax
Corporate enterprise tax is a local tax levied on a Japanese company and a foreign company having a permanent establishment in Japan and conducting business activities continuously in Japan. Corporate enterprise tax is basically levied on the taxable income in each business year as per Corporation Tax Law with some exceptions. However, the size-based taxation is applied to large corporations with a capital of over JPY100 million. For such large corporations, enterprise tax consists of the traditional enterprise tax levied based on the taxable income and based on the capital, etc. and value added (wages, interest and rental expenses).
Scope of Taxable Income for Individuals
Resident Status of Foreigners
- Non-permanent resident
A resident is an individual who has a domicile (center of living) in Japan or has had a residence (the individual’s presence in Japan) in Japan for one year or longer.
A resident who has no Japanese citizenship and has no intention to reside permanently in Japan but has a domicile or residence consistently in Japan for less than 5 years within the period of 10 years is a non-permanent resident.
- Permanent resident
A resident, other than non-permanent resident is a permanent resident.
An individual other than resident is a non-resident.
Taxation on individuals
The scope of taxable income of individuals is as follows:
A resident taxpayer including a non-permanent resident is subject to assessment income tax by filing a tax return. Withholding tax income tax levied on certain types of income is creditable against assessment income tax. A non-resident’s tax liability is generally settled by the withholding income tax, except on real estate income or capital gains from land transfer, etc.
Individual Income Tax
Type of Income and Taxation of a Resident
- Business income
Business income is income derived from activities of wholesale, retail, manufacturing and income of attorneys and certified public accountants, etc.
Generally accepted accounting principles are applicable to the computation of business income, with a few exceptions. The following descriptions indicate some rules applicable to individuals, some of which are different from the rules applicable to corporations:
- – Payments to taxpayer’s family members are deductible only within certain limits, whatever their nature might be (salaries, rent, interest, etc.).
- – Entertainment expenses for carrying on business and those directly related to the business are deductible, and not subject to restrictions as in the case of the corporation tax
- – If the taxpayer is a blue return taxpayer and keeps an accounting book in compliance with the principles of orderly bookkeeping, the blue return special deduction of a certain amount is allowed.
- Employment income
Employment income is the total salary and bonus after deducting certain employment income deduction. An employer making salary payments is required to withhold a certain tax amount from the salary and bonus when a payment is made and to remit the tax withheld to the tax office by the 10th of the following month. For small businesses with less than 10 persons on the payroll, a special measure is provided which allows them to pay withholding income tax in six-month instalments twice a year (by July 10 and by January 20).
An employer making salary payments must make a year-end adjustment for an employee whose annual salary is not more than JPY20 million.
- Real estate income
Real estate income is income derived from rental of real estate (land, building), ships, aircraft, etc. A taxpayer may deduct depreciation cost, interest expense, fixed asset tax, etc. from the real estate income.
Other than items mentioned above, the following are the other types of income:
- Interest income
- Dividend income
- Retirement income
- Capital gain from sale of shares/sale of land and buildings etc.
- Occasional income (gift from corporation, rewards, etc.)
- Timber income
- Miscellaneous income (income which is not classified in any other income)
Primary Income Deductions for Income Tax Purposes
Some deductions may be made from the amount of ordinary income. Here are the main income deductions:
- Deduction for medical expenses
- Deduction for social insurance premiums
- Deduction for life insurance premiums
- Deduction for certain donations
- Exemption for spouses
- Exemption for dependents
- Basic exemption
Final tax return
A resident taxpayer must file a final tax return for income of a calendar year between February 16 and March 15 of the following year, unless the income is below the amount of total income deductions, or unless the resident has only the employment income of JPY20 million or less which was subject to withholding taxation. If a taxpayer is required to file a final tax return, the excess of the annual tax liability over the total of prepayments of assessment income tax and withholding income tax should be paid on or before March 15 in the year following the taxable year. In principle, if a taxpayer is no longer a resident of Japan, the taxpayer must file the final tax return with the tax office and pay income tax before leaving Japan.
Individual Inhabitant Tax
Individual inhabitant tax consists of prefectural inhabitant tax and municipal inhabitant tax levied on a resident who has a domicile in Japan as of January 1 in each year. Unlike the income tax, inhabitant tax is levied on the income derived in the previous year. Taxable income is calculated in accordance with rules in the income tax law unless particularly specified under the local tax law.
Inhabitant tax return is not required to be filed in principle if an income tax return has been filed. A taxpayer receives an inhabitant tax bill from the local tax office. The tax levied on the income of the previous year must be paid in four installments in June, August, October and January of the following year. However, inhabitant tax on employment income is withheld by an employer over 12 months starting from June to May of the following year.
Consumption Tax and Special Local Consumption Tax
Consumption tax is categorized as a value added tax applied to almost every domestic transaction and every import transaction except for financial transactions, capital transactions, medical services, welfare services and educational services.
Basic formula for calculating the tax due is as follows:
Tax due = total amount of consumption tax on sales
-total amount of consumption tax on purchases
- Domestic transactions
Domestic transactions in which consideration is paid for the transfer or lease of assets or the provision of services for business purposes will be subject to taxation.
- Import transactions
Foreign goods received or retrieved from a bonded zone will be subject to taxation.
- Transfers and leases of land
- Transfers of securities and payments prescribed in the foreign exchange and trade law
- Leases of assets with interest
- Transfers of postage stamps and merchandise coupons
- Services rendered by the government, local governments, public corporations, and public interest corporations
- International postal services and foreign exchange services
- Medical service under social medical system and sale of assets by a social welfare organization
- School tuition, entrance fees and textbooks
- Rent of residential houses
Tax Exemption for Export Transactions
Export of goods, international communication and overseas transportation conducted by an enterprise are tax-exempt.
Export sales are not subject to consumption tax. The consumption tax component included in the purchase cost is creditable against the taxpayer’s consumption tax liability, so that all export activities are tax-free. On the other hand, in a non-taxable transaction, the consumption tax component of the purchase cost cannot be credited.
A taxpayer for a domestic transaction is an enterprise (including a non-resident and a foreign company) which sells taxable assets and performs other taxable transactions. A company or an individual removing imported goods from a bonded area is also classified as a taxpayer for consumption tax purposes.
Tax-exemption for small-scale enterprise
Where the amount of taxable sales of an enterprise in its base period (the calendar year two years prior to the current year for an individual; the business year two business years prior to the current business year for a company) is not more than JPY10 million, the enterprise will be exempt from tax on the transfer of taxable assets, etc. during the taxable period. In the case of a newly established company, sales in the first and second business year are exempt from consumption tax. However, newly established company whose capital amount is JPY10 million or more is subject to consumption tax in the first two years.
Return and Payment of Consumption Tax
- Interim return and tax prepayment
A taxable enterprise, whose final tax amount of the previous tax period is more than a certain amount must file an interim return and pay the relevant prepaid tax.
- Final return and final payment or refund
A taxable enterprise is required to file a final tax return within two months after the end of its tax period. Consumption tax liability, minus the amount of prepayment, must be paid to the tax office within two months after the end of its taxation period. When the consumption tax on the tax base is less than the consumption tax on purchase, or where the consumption tax after crediting the consumption tax on purchase is less than the interim consumption tax prepayment, the short amount can be refunded upon the filing of a final tax return.
Withholding Tax on Payments to Non-residents
A non-resident or a foreign company is subject to withholding tax at the rate of 20.42% on the payment of various Japanese source income. However, if a tax treaty specifies definition of income, a reduced tax rate or no tax, the tax treaty has priority over the domestic law.
Japan has conducted tax treaties within 135 countries (as of December 1, 2019). The purposes of tax treaties are to avoid international double taxation on the same income and to prevent tax avoidance. In general, tax treaties include the following rules:
- Definition of a resident, non-discrimination rule, source of income rule
- Permanent establishment and taxation of business income, income from international transportation
- Definition and taxation rule for dividend, interest, royalty, real estate income and capital gain
- Independent professional income, employment income and tax-exemption on short stay, professors, students, government officers, diplomats
- Mutual consultation by competent authorities, exchange of information