This page outlines the main taxes that corporations will be responsible for paying in Japan. This information is provided for illustrative purposes only and should not be construed as tax advice. Consult with a licensed tax professional before making any decisions based on the information provided here.
The corporate tax is made up of 3 main taxes which are all based on the annual taxable income of the company:
The current effective corporate tax is around 35% with lower tax rates for small companies
The consumption tax is similar to European VAT. The current rate has been raised from 8% to 10% as of October 1st, 2019.
A tax of 10% is paid on most of the purchases made by a company and this consumption tax paid on purchases can be claimed to the tax office. In bookkeeping, it is often referred to and accounted for as prepaid consumption tax. On the other hand, a company collects an 10% consumption tax on all domestic sales. The amount received is registered in accounting in an account called received consumption tax.
Once a year, the company is required to pay the difference between consumption tax received and consumption tax paid. If a company has a lot of sales abroad on which consumption tax is not received, then it can be in a position to claim a tax refund for prepaid consumption tax.
Please note that from October 2023, a New Japan Consumption Tax System will be introduced that will require companies to register to make Japan qualified consumption tax invoices
During their first 2 fiscal years, companies with registered capital of less than 10 Million JPY are not required to pay consumption tax; however, they can apply to become a consumption taxpayer during this time. This can be advantageous in the case of a “cost-plus” company that invoices services to its parent company abroad. In that case, the Japanese company can claim a refund on expenses paid in Japan while it does not need to pay any consumption tax on services invoiced to the group company abroad.
If company sales and salary payments exceed 10 Million JPY in the first six months of one of the first two years, the company will be subject to consumption tax in the following fiscal year.
Companies established in Japan with a share capital of JPY 100 million or less are regarded as Small and Medium-sized Entities (SMEs) and are eligible for certain tax benefits including a reduced corporate tax rate, and partial deductibility of entertainment expenses, and more, under Japanese corporate tax law. Since the 2010 tax reform, a group company that would otherwise qualify as an SME on a stand-alone basis will not be eligible for the aforementioned benefits if the parent company of the group has a share capital of JPY 500 million or more.
Under the SME treatment, SMEs can deduct up to 90% of their entertainment expenses up to a limit of 6 million JPY. Please note that this limit changes regularly, so it is best to consult a tax professional in Japan to determine the most recent numbers.
A fixed asset tax is levied in Japan at the rate of 1.4% on the net value of fixed assets held by a company.
Exemptions do apply to small companies. Companies with fixed assets of less than 1.5 Million JPY are usually not taxable. Please note this limit may change. Please consult with your tax accountant to find out the most recent limit and whether or not your company will be required to pay it.
In Japan, companies calculate taxes on salaries and collect them from their employees by making deductions from payroll.
The 2 income taxes deducted from employee salaries every month are:
The withheld income tax is adjusted at the end of each year in December through a procedure known as the year-end adjustment, or “nenmatsu chosei” in Japanese. The rate is progressive and can be anywhere from 0% to 40%.
The resident tax is paid based on a resident tax payment slip sent by the tax office to the company. The tax office bases the calculation of resident tax to be paid on the employee’s taxable income from the previous year. The current rate is 10%.
Every company must withhold 10.21% on payments to professionals not registered as a corporation. This applies mainly to consultants, lawyers, and accountants. For payments over 1 million JPY, the withholding rate is 20.42%.
As a foreign business owner operating in Japan, staying in compliance with all local tax laws can be overwhelming. Corporate tax and consumption tax must be paid and the amount of withholding tax that needs to be taken from employee salaries requires some calculations and knowledge of the correct percentages. It is your responsibility to file all forms and make correct payments, and if you don’t, you could run afoul of the Japanese tax authorities. If you want to ensure that you comply with all tax laws in Japan, the best thing to do is outsource your taxes to a local expert. JMC’s network of experienced tax professionals, including certified public accountants and tax accountants, has spent years preparing tax returns and providing tax advice for foreign businesses in Japan.
If you need help determining how much consumption tax or corporate tax you will need to pay this year, we can help you. Get in touch with us today for assistance with your withholding tax or any other tax advice you may need. In addition to providing expert tax services, we can also help you with many other aspects of your operation, including payroll, accounting, office setup, and more. Put your overseas business operation in the best position to be successful by consulting with the experts at JMC.
Disclaimer: This information is provided for illustrative purposes only. JMC cannot be held liable for any decisions made based on this information. For any advice regarding taxes in Japan, a licensed tax accountant should be consulted.