Japan: Tax system

Corporate Taxes

Tax Base For Resident and Foreign Companies: A company that has its head office in Japan is considered a domestic corporation, regardless of the place of central management or the nationality of its shareholders.

Tax Rate

Corporate tax (for companies with share capital exceeding JPY 100 million)	23.2%
Local taxes	2.390% (corporate taxpayers are required to file and pay the national local corporate tax at a fixed rate of 10.3% of their corporate tax liabilities - 23.2% x 10.3%)
Standard enterprise tax (including local corporate special tax)	3.5% for the yearly tax base up to JPY 4 million 5.3% for the tax base up to JPY 8 million 7% for the tax base over JPY 8 million
Inhabitant’s tax (imposed on a corporation’s income allocated to each prefecture and city)	determined by the local government by the factors of paid-in capital and the number of employees
Effective tax rate (after deducting the enterprise tax, including local corporate special tax or special corporate business tax)	30.62% (based on the maximum rates applicable in Tokyo to a company whose paid-in capital is over JPY 100 million)

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.

Capital Gains Taxation

Capital gains are taxed as ordinary income at the standard corporate tax rate, with capital losses generally available as a full tax deduction. Capital duty is included in the local inhabitant tax and local enterprise tax.

The recognition of capital gains or losses from the transfer of certain assets between group companies is to be deferred until the asset is transferred to another group company or a non-group company.

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). Corporations can deduct 50% of the entertainment expenses for food and drink; while expenses for entertainment are only deductible for SMEs (paid-in capital of up to JPY 100 million), up to the smaller of JPY 8 million or the actual disbursement for the entertainment expense. Start-up expenses are allowed to be amortised on a voluntary basis. Interest expenses are generally deductible in the calculation of taxable income.
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.
Net operating losses can only be used to offset up to 50% of a company's taxable income. However, small or medium-sized enterprises (SMEs) with a share capital of no more than JPY 100 million are exempt from this restriction, unless they are owned by a large company. There are certain situations in which net operating losses carryforwards may be even more limited, such as when a company undergoes a change of ownership exceeding 50% due to discontinuing an old business and starting a new one.
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.

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

Other Corporate Taxes

Other taxes include: stamp duty (JPY 200 to 600,000), municipal fixed assets tax (levied at 1.4%), a real estate acquisitions tax levied at 3%-4% (reduced temporarily to 1.5%-2% until 31 March 2024) and inheritance tax (progressive rates from 10% to 55%).

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.

A business premises tax is levied in some cities, including Tokyo, Osaka, Nagoya, Fukuoka, etc. Companies with more than 100 employees in a designated city and/or with business premises in excess of 1,000 square metres are subject to the tax based on the usage of the business (JPY 600 per square metre) and gross payroll (0.25% of gross payroll).

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

Family corporations are liable for an additional tax on their undistributed current earnings in excess of specified limits, with rates as follows: first JPY 30 million 10%; next JPY 70 million 15%; over JPY 100 million 20%.

Other Domestic Resources

National Tax Agency

Country Comparison For Corporate Taxation

	Japan	OECD	United States	Germany
Number of Payments of Taxes per Year	19.0	10.1	10.6	9.0
Time Taken For Administrative Formalities (Hours)	128.5	163.6	175.0	218.0
Total Share of Taxes (% of Profit)	46.7	41.6	36.6	48.8

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

Accounting Rules

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.

Consumption Taxes

Nature of the Tax: Shouhizei (Consumption Tax)
Standard Rate: 10% (7.8% national tax and 2.2% local tax)
Reduced Tax Rate: A reduced rate of 8% (6.24% national tax and 1.76% local tax) applies to supplies of food and drinks (excluding alcoholic beverages and dining out) and subscriptions to newspapers (limited to newspapers that are issued at least twice a week and feature information on general topics such as politics, economics, society and culture).
Exclusion From Taxation: Exempt supplies include bank interest; insurance; educational services; sales and leases of land; social welfare services.
Supplies exempt-with-credit include exports of goods and services; international transportation of passengers and cargo; sales in export shops; supplies to foreign embassies and legations situated in Japan. These supplies are not taxed but do give rise to a right of input tax deduction.
Method of Calculation, Declaration and Settlement: Consumption tax applies when the transfer of ownership of goods and the provision of services take place or when foreign cargo is removed from bonded areas. The base period for each consumption tax reporting year is the enterprise's business year two years before the current business year. Consumption tax is calculated on the amount of taxable supplies or the amount of salary payments. "Small business" enterprises with taxable supplies under JPY 10 million in a given base period are exempt unless they are in the first two years of operation. Returns are filed monthly, quarterly, biannually or annually. Consumption tax rate-qualified invoices will be required from 1 October 2019 to 30 September 2023; afterwards, an EU VAT-type invoice will be required. Under the new system, the input consumption tax deduction would be available only if a taxpayer retains corresponding qualified invoices.
Other Consumption Taxes: Excise taxes were abolished by introduction of the consumption tax.
Customs duties are levied on imported goods.
Stamp duties of JPY 200 to JPY 600,000 are imposed on the execution of taxable documents.
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.

Individual Taxes

Tax Base For Residents and Non-Residents: An individual is considered resident for tax purposes if he/she is resident in Japan or if he/she has maintained a temporary place of abode (“kyosho”) in Japan for a period of one year or more. A resident taxpayer who is not a Japanese national and who has an aggregate stay in Japan of 60 months within the preceding 120 months is considered a non-permanent resident taxpayer. If a resident taxpayer is a Japanese national or a foreign national with an aggregate stay in Japan of more than five years within the preceding ten years, he/she is considered a permanent resident for tax purposes.
For more information, consult the JETRO website.

Tax Rate

Taxable Income	Rate
Less than JPY 1.95 million	5%
From JPY 1.95 to 3.3 million	10% + JPY 97,500
From JPY 3.3 to 6.95 million	20% + JPY 232,500
From JPY 6.95 to 9 million	23% + JPY 962,500
From JPY 9 to 18 million	33% + JPY 1,434,000
From JPY 18 to 40 million	40% + JPY 4,404,000
More than JPY 40 million	45% + JPY 13,204,000
Special Tax for Reconstruction Assistance will be applied from 2013 to 2037 (to help with Tohoku earthquake disaster recovery)	2.1% of income tax
Local Inhabitant’s Tax	10%, levied on a taxpayer’s prior year income. The standard annual amount is JPY 5,000.
Non-residents' Employment Income	Flat 20.42% national income tax on gross compensation (including the 2.1% surtax; no deductions available) plus 10% local inhabitant’s tax (if registered as a resident as of 1 January of the current year).

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 designated by the Ministry of Finance in Japan are tax-deductible (subject to limitations). 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 14.355% of his/her salary (maximum 15.27%).
Japan does not apply a wealth tax. Other taxes on individuals include inheritance and gift taxes (progressive rates from 10% to 55%), fixed assets tax (levied by the local tax authorities on real property at a rate of 1.7%, including city planning tax), real estate acquisition tax (reduced temporarily to 1.5%-2%, from 3%-4%), real estate registration tax (rates ranging from 0.4% to 2% of the assessed value of the real property), gains from shares.
The transfer of certain assets is subject to stamp duty.

Double Taxation Treaties

Withholding Taxes: Dividends: 15.315% (if paid by a listed company to a non-resident)/20.42% (paid to a resident or non-resident)
Interest: 0% (paid to a resident company)/15.315% (on deposits and bonds)/20.42% (paid to an individual or to a non-resident company)
Royalties: 0% (paid to a resident company)/10.21% (paid to a resident individual for amounts up to JPY 1 million; 20% for the part in excess)/20.42% (paid to a non-resident individual or corporation).
All of the above rates include a 2.1% surtax.
Rates may be lowered under a tax treaty.
Bilateral Agreement: The United Kingdom and Japan are bound by a double taxation treaty.

Sources of Fiscal Information

Tax Authorities: Overview of Japan's tax measures in response to Covid-19
National Tax Agency
Other Domestic Resources: National Tax Agency - Tax information
Country Guides: PwC Tax Guide - Japan

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