Japan: Tax system

Tax Rate For Foreign Companies

Resident companies are taxed on their worldwide income whereas non-resident companies are taxed only on Japanese-source income at standard corporate rates. A foreign corporation with a permanent establishment in Japan is liable for corporate income taxes only on the income attributable to such permanent establishment.
Branch profits are subject to taxation similar to corporate profits. However, the family corporation tax does not apply to branches of foreign corporations. Moreover, there is no withholding tax levied on the repatriation of branch profits to the home office.

Capital Gains Taxation

Capital gains and losses are treated as ordinary income and losses, respectively.
Gains from the sale of stock are taxed at a total rate of 20.315%, comprising 15.315% for national taxes and 5% for local taxes. Gains from the sale of real property are taxed at a total rate of up to 39.63%, which includes 30.63% for national taxes and 9% for local taxes, depending on various factors.
In specific situations, such as qualified reinvestments or property exchanges, the taxes typically imposed on capital gains can be deferred, known as rollover relief, provided certain conditions are satisfied. Special relief is available when real property is expropriated by the national or local government. Additionally, the recognition of capital gains or losses from transferring certain assets between group companies is deferred until the asset is transferred to a company outside the group.

Main Allowable Deductions and Tax Credits

In order to file for tax privileges - including deductions for business expenditure, tax loss carryforwards and accelerated depreciation - companies must apply for a "blue form" tax return at the beginning of a fiscal year.
Reserves for doubtful receivables and returns of goods not sold are deductible for corporate tax purposes. Deductions are also available for charitable contributions (up to certain limits). Start-up expenses are allowed to be amortised on a voluntary basis. Interest expenses are generally deductible in the calculation of taxable income but interest payments to related parties within the corporate group may be disallowed in certain cases..
Generally, entertainment expenses are not deductible for tax purposes. However, SMEs, defined as companies with paid-in capital of JPY 100 million or less (excluding those wholly owned by a company with paid-in capital of JPY 500 million or more), can take a tax deduction up to the lesser of the actual entertainment expense or JPY 8 million. Additionally, expenses for eating and drinking are deductible as long as they do not exceed JPY 5,000 per person (excluding expenditures for internal purposes), since these do not classify as entertainment expenses for tax purposes.
The remuneration paid to directors is deductible only in specific cases. Enterprise tax and business premises tax are deductible in the calculation of the taxable income.
Only 50% of a company’s taxable income may be offset by net operating losses (NOLs). SMEs with share capital of no more than JPY 100 million are exempt from this NOL restriction, unless they are owned by a large company. NOL carryforwards may face further restrictions in certain situations, such as a change in ownership of more than 50% in connection with the discontinuance of an old business and the commencement of a new one. The NOL carryforward period is 10 years for losses incurred during fiscal years starting on or after 1 April 2018. SMEs are allowed to carry back losses for one year.
95% of dividends received by a company from a foreign company in which it has held at least one-fourth of the outstanding shares for an uninterrupted period of at least six months can be excluded from the company’s taxable income.
Various tax credits are available, including a research and development (R&D) credit and a carbon neutral credit. Tax incentives are also offered for increasing wages and salaries for fiscal years starting between 1 April 2022 and 31 March 2024. However, the R&D credit and certain other tax incentives are not available to large companies that do not meet specific conditions for fiscal years starting between 1 April 2018 and 31 March 2024.

For further information on tax incentives, consult the website of JETRO (Japanese External Trade Organization).

Other Corporate Taxes

Stamp duty ranging from JPY 200 to JPY 600,000 is imposed on the execution of taxable documents.

An annual fixed assets tax is levied by local tax authorities on real property and depreciable fixed assets used for business purposes. Real property is taxed at 1.7% of its value, as appraised by the local tax authorities. The tax on depreciable fixed assets is assessed at 1.4% of the cost after statutory depreciation. For certain fixed assets acquired by 31 March 2025 under an accredited plan, the taxable basis for small and medium-sized enterprises will be reduced by one-half or one-third.

A prefectural real estate acquisitions tax of 3% to 4% (generally reduced to 1.5% to 2% through 31 March 2024) is applied to the assessed value when land or buildings are acquired. Additionally, a real estate registration tax is imposed on the assessed value of real property at rates ranging from 0.4% to 2%, depending on the type of transfer.

Registration and license tax is levied where certain property is registered, at a rate from 0.1% to 2% of the taxable basis or at a fixed amount. A share registration tax is assessed at 0.7% on the registration of new or additional share capital.

Business premises tax is levied and designated by certain cities in Japan, including Tokyo, Osaka, Nagoya, Fukuoka, and other cities with populations exceeding 300,000. Corporations using business premises larger than 1,000 square meters and/or employing more than 100 people in a designated city are required to pay this tax. The tax is based on the physical footprint of the business (JPY 600 per square meter) and the gross payroll (0.25% of gross payroll).

Social security contributions paid by the employer amount to a maximum of 16.23%.

If an individual shareholder, along with family members, holds over 50% of a Japanese corporation's total issued shares or voting rights, whether directly or indirectly, the corporation is categorized as a family corporation, except for those with paid-in capital of JPY 100 million or less, and is subject to both corporation tax and family corporation tax. The family corporation tax is applied to the corporation's undistributed current earnings exceeding specified limits, calculated by deducting 40% of income, JPY 20 million, or 25% of the year-end capital amount minus capital reserves, from the undistributed current earnings. The tax rates are 10% for the first JPY 30 million of undistributed earnings annually, 15% for the next JPY 70 million, and 20% for amounts exceeding JPY 100 million annually.

Other Domestic Resources

National Tax Agency

Country Comparison For Corporate Taxation

Source: The World Bank - Doing Business, Latest data available.

Accounting System

Accounting Standards

Domestic and foreign companies may choose one of the four accepted financial reporting frameworks : IFRS Standards, Japanese GAAP, Japan’s Modified International Standards (JMIS) (locally modified version of IFRS Standards) and US GAAP. SMEs usually use Japanese GAAP as the accounting framework.

Accounting Regulation Bodies

BAC, Business Accounting Council
ASBJ, Accounting Standard Boards of Japan
JICPA, Japanese Institute of Certified Accountants

Accounting Law

The legal system is made of three laws that are firmly interrelated in their accounting objectives and often referred to as the Triangular Legal System:
-Commercial Code;
-Securities and Exchange Law;
-Corporate Income Tax Law.

Difference Between National and International Standards (IAS/IFRS)

Accounting Standards Board of Japan (ASBJ) (a private entity whose standards are subject to endorsement by the Financial Services Agency) has been cooperating with the International Accounting Standards Board to fully adopt IFRS Standards. For the time being, companies are permitted to choose one of the four financial reporting frameworks. The adoption of the IFRS for SMEs Standard is not under consideration.

Accounting Practices

Tax Year

A Japanese corporation selects its fiscal year when it begins operations in Japan—the tax year may be the calendar year or another period not exceeding 12 months. A branch generally must adopt the same tax year used by its head office.

Accounting Reports

The Commercial Code lists the requirements for a Limited Liability Company (Kabushiki Kaisha) to prepare an annual report and appendix. The annual report must be submitted to the general assembly of shareholders and must include the balance sheet and the income statement.

Publication Requirements

Only companies listed on the stock exchange must publish their accounts. According to the Law of Transferable Securities and the Law of Exchange, registrants must file annual and biannual statement reports to the Ministry of Finance and file a copy in the foreign exchange markets where transferable securities are registered.

Accountancy Profession

Accountants

Certified public accountants and tax accountants are specialists providing accounting and tax support to companies operating in Japan. Certified public accountants enjoy a monopoly on the performance of audits under the Certified Public Accountant Law, while tax accountants have a monopoly on tax agent services, preparation of tax documentation and tax consultations.
The accountancy profession in Japan is practised with the title of “Certified Public Accountant” (CPA) under the Certified Public Accountants Law of 1948.
The Certified Public Accountants Law provides key matters relating to the accountancy profession such as examinations, qualifications, registrations, duties, responsibilities and penalties.

Professional Accountancy Bodies

JICPA, The Japanese Institute of Certified Public Accountants
Tokyo Certified Public Tax Accountants’ Association, In Japanese

Member of the International Federation of Accountants (IFAC)

The Japanese Institute of Certified Public Accountants (JICPA) is member of the International Federation of Accountants (IFAC).

Member of Other Federation of Accountants

JICPA is member of the Confederation of Asian and Pacific Accountants (CAPA)

Audit Bodies

Companies are required to seek a statutory auditor to conduct an annual audit of the financial health of their organisation.
Companies with more than JPY 500 million of share capital or JPY 20 billion or more of liabilities are required to appoint an external auditor (a public certified accountant) or an auditing firm, and must be subject to an audit based on the Company Law, as must a company listed on the Japanese stock markets.

You can contact the Board of Audit of Japan, the Japan Corporate Auditors Association (JCAA) and the Certified Public Accountants and Auditing Oversight Board.

Allowable Deductions and Tax Credits

Deductions include: personal allowances with additional allowances for dependents, casualty losses, medical expenses and contributions to government authorities.
Charitable contributions approved by Japan's Ministry of Finance are eligible for tax deductions, with specific restrictions (typically limited to charities within Japan). Qualified contributions or donations totaling over JPY 2,000 are deductible for national tax purposes, capped at 40% of income, minus JPY 2,000. However, the criteria for qualifying contributions are highly stringent. Life insurance (or private pension) premiums paid to a Japanese agency in local currency are deductible to a limited extent in computing national and local taxes. Earthquake insurance premiums are also deductible for the purpose of both national and local taxes to a limited extent.
Employees can claim an earned income deduction according to their level of income (capped at JPY 1.95 million; minimum JPY 550,000 or gross employment income, whichever is lower).
Personal exemptions are allowed for the individual (up to JPY 480,000 for the national tax and JPY 430,000 for local inhabitant tax, for an income below JPY 24 million), a non-dependent spouse (but only by individuals with an income below JPY 10 million), and children aged 16 or older (provided that their income does not exceed JPY 480,000/year). 
A self-employed taxpayer is allowed to claim business expenses against income if he can prove that the expenses were necessary.

Special Expatriate Tax Regime

Resident individuals are taxed on their worldwide income. Non-permanent residents are taxed on their Japanese-source income and on foreign-source income paid in or remitted into Japan. Non-residents are taxed on their Japanese-source income.
A rate of 20.42% applies to non-residents' employment income, which includes the 2.1% surtax. A non-resident taxpayer may be subject to the local inhabitant’s tax (10%) if they are registered as a resident as of 1 January of the relevant year.

Foreign tax credits are provided for resident taxpayers on foreign-source income, though generally limited to the lesser of foreign income tax paid or the Japanese tax payable on the income base.

Capital Tax Rate

Social security contributions paid by the employee generally amount to 14.75% of his/her salary (maximum 15.27%).
Japan does not apply a wealth tax. Other taxes on individuals include a fixed assets tax (levied by the local tax authorities on real property at a rate of 1.7%, including city planning tax), a real estate acquisition tax (reduced temporarily to 1.5%-2%, from 3%-4%), and a real estate registration tax (rates ranging from 0.4% to 2% of the assessed value of the real property).
The transfer of certain assets is subject to stamp duty.
For inheritance and gift tax, recipients are liable for inheritance and gift tax at incremental rates ranging from 10% to 55% beyond the basic allowance (JPY 30 million for inheritance and JPY 1.1 million for gifts). The applicability of inheritance and gift tax is contingent upon various factors, including the domicile of the deceased or donor, the domicile and nationality of the recipient, and the location of the assets. Recipients domiciled in Japan at the time of the deceased's death, regardless of nationality, are subject to inheritance tax on all inherited assets worldwide, with some exceptions.
Capital gains are typically combined with other income following deductions for necessary expenses and a statutory deduction of up to JPY 500,000. If assets were held for over five years, resulting gains are considered long-term and the taxable amount is halved. Regarding real property sales, gains from properties held for more than five years are taxed separately at a flat rate of 20.315%, while those held for five years or less incur a 39.63% tax. Similarly, gains from certain securities are taxed independently at 20.315%. Listed shares and government bonds are included in this category, whereas unlisted shares are not. Notably, capital gains or losses from the sale of listed shares cannot be used to offset those from non-listed shares.