How to Set Up Business in Japan Laws & Regulations on Setting Up Business in Japan

Section 3. Taxes in Japan

3.3 Overview of corporate income taxes (corporate tax, corporate inhabitant tax, enterprise tax)

3.3.1 Establishment of corporations/branches in Japan and tax notification

When a Japanese corporation or a branch office is newly established in Japan in accordance with Japanese law  tax notification pertaining to start-up must be submitted to tax authorities within a prescribed period after establishment. In the case of a branch office etc, different rule will apply depending on the timing of the commencement of business year as described below.

<Establishment of Japanese branches, etc. of foreign corporation and tax notification (business year commencing by March 31, 2016)>
When a Japanese branch office etc is newly established in Japan (i.e., where (1-A) of 3.3.4 Table 3-5 business year commencing by March 31, 2016 applies), tax notification pertaining to start-up must be submitted to tax authorities within a prescribed period after establishment. Tax notification must also be submitted when a foreign corporation generates income subject to corporate tax in Japan without establishing a branch office (i.e., where (2) of 3.3.4 Table 3-5 business year commencing by March 31, 2016 applies) or when carrying out business activities through locations or parties meeting the conditions below instead of opening a branch office (i.e., where (1-B) of 3.3.4 Table 3-5 business year commencing by March 31, 2016 applies).

Cases where a foreign corporation carrying out activities without establishing a branch office is required to submit tax notification:

  1. When construction, installation, assembly or other works, or control and supervision of such works extends for a period of more than one year.
  2. When engaging in business through certain agents, as described below:
  • -  Parties having and frequently exercising the authority to conclude business agreements on behalf of that foreign corporation.
  • -  Parties storing assets on behalf of that foreign corporation in a volume/quantity corresponding to the ordinary requirements of customers and delivering those assets in response to customers' requests.
  • -  Parties who regularly carry out an important portion of the work required for order acquisition, consultation and other activities aimed at the conclusion of business agreements solely or primarily on behalf of a foreign corporation.


<Establishment of Japanese branches, etc. of foreign corporation and tax notification (business year commencing on or after April 1, 2016)>
When a Japanese branch office etc is newly established in Japan (i.e., where 1. of 3.3.4 Table 3-5 business year commencing on or after April 1, 2016 applies), tax notification pertaining to start-up must be submitted to tax authorities within a prescribed period after establishment. Tax notification must also be submitted when a foreign corporation generates income subject to corporate tax in Japan without establishing a branch office (i.e., where 2. of 3.3.4 Table 3-5 business year commencing on or after April 1, 2016 applies).

3.3.2 Corporate income taxes and tax rates

The taxes levied in Japan on income generated by the activities of a corporation include corporate tax (national tax), local corporate tax (national tax), corporate inhabitant tax (local tax), enterprise tax (local tax), and special local corporate tax (a national tax, although filings and payments are made to local governments along with those for enterprise tax) (hereinafter collectively referred to as "corporate taxes"). Except in instances requiring exceptional treatment, the scope of income subject to corporate inhabitant tax and enterprise tax is (including special local corporate tax; the same applies below) determined, and the taxable income calculated, in accordance with the provisions for corporate tax. Corporate inhabitant taxes are levied not only on income but also on a per capita basis using the corporation's capital and the number of its employees as the tax base. Corporations having paid-in capital of more than 100 million yen are subject to enterprise tax on a pro forma basis (see 3.3.3).
The income calculated for each business year is used as the tax base for determining these corporate taxes to be levied on a corporation's income. Other corporate taxes include corporate taxes on reserves for retirement pensions, etc. (suspended in the case of business years commencing by March 31, 2017).
The tax rates for corporate tax, corporate inhabitant tax and enterprise tax on income (tax burden on corporate income) and per capita levy on corporate inhabitant tax for each taxable year are shown below. The rates for local taxes may vary somewhat depending on the scale of the business and the local government under whose jurisdiction it is located.
Please note that applicable tax rates will vary according to the timing.

Table 3-1 Effective tax rates (standard tax rates basis) (rounded to two decimal places)

Start date of a business yearbase period

Brackets Small and medium-sized enterprises*1 Enterprises*3 other than small and medium-sized enterprises*1
Taxable income
Up to 4 million yen Over 4 million yen to 8 million yen Over 8 million yen
April 1, 2015 to March 31, 2016 21.42% 23.20% 34.33% 32.11%
April 1, 2016 to March 31, 2017 21.42% 23.20% 33.80% 29.97%
April 1, 2017 to March 31, 2018 (Reference rate*2)
25.99%
(Reference rate*2)
27.57%
33.80% 29.97%
On or after April 1, 2018 (Reference rate*2)
25.99%
(Reference rate*2)
27.57%
33.59% 29.74%

*1 Small and medium-sized enterprises meeting the all three conditions below.
- Paid-in capital is 100 million yen or less. This does not apply to wholly-owned subsidiaries of large corporations with paid-in capital of 500 million yen or more.

- Corporate tax amount is 10 million yen or less per annum and taxable income is 25 million yen or less per annum.
- Offices or factories located in up to two prefectures.

*2  As the extension of the special measures of reduced tax rates for small and medium-sized enterprises has not been announced, the rates are
reference tax rates on the assumption that the special measures will be abolished on March 31, 2017.
*3  Enterprises other than small and medium-sized enterprises are the enterprises with the paid-in capital of over 100 million yen and offices or factories located in at least three prefectures. The effective tax rates for these enterprises are calculated using the standard tax rates.

Table 3-2 Tax burden on corporate income (rounded to two decimal places)
Business year commencing between April 1, 2015 and March 31, 2016
(applicable only to the small and medium-sized enterprises meeting the conditions specified in * 1 of Table 3-1)

Brackets of taxable income Up to 4 million yen 4 million yen
to 8 million yen
Over
8 million yen
Corporate tax
Local corporate tax
Corporate Inhabitant taxes
  1. Prefectural
  2. Municipal
Enterprise tax
Special local corporate tax
15.00%
0.66%

0.48%
1.46%
3.40%
1.47%
15.00%
0.66%

0.48%
1.46%
5.10%
2.20%
23.90%
1.05%

0.76%
2.32%
6.70%
2.89%
Total tax rate 22.46% 24.90% 37.63%

(Note) The rates for corporate inhabitant tax and enterprise tax are shown using Tokyo as an example.

(Sample calculation of tax where taxable income is 10 million yen : Total amount of tax is 2,647,200 yen)

Brackets of taxable income Up to 4 million yen Over 4 million yen
to 8 million yen
Over 8 million yen Total amount
Corporate tax

Local corporate tax
4,000,000 yen x 15%
= 600,000 yen
4,000,000 yen x 0.66%
= 26,400 yen
4,000,000 yen x 15%
= 600,000 yen
4,000,000 yen x 0.66%
= 26,400 yen

2,000,000 yen x 23.90%

= 478,000 yen
2,000,000 yen x 1.05%

= 21,000 yen

1,678,000 yen

73,800 yen

Corporate Inhabitant taxes
  1. Prefectural

  2. Municipal

4,000,000 yen x 0.48%

=19,200 yen
4,000,000 yen x 1.46%

= 58,400 yen

4,000,000 yen x 0.48%
= 19,200 yen
4,000,000 yen x 1.46%

= 58,400 yen

2,000,000 yen x 0.76%

= 15,200 yen
2,000,000 yen x 2.32%

= 46,400 yen

53,600 yen

163,200 yen

Enterprise tax 4,000,000 yen x 3.40%
= 136,000 yen
4,000,000 yen x 5.10%
= 204,000 yen
2,000,000 yen x 6.70%
= 134,000 yen

474,000 yen

Special local corporate tax 4,000,000 yen x 1.47%
= 58,800 yen
4,000,000 yen x 2.20%
= 88,000 yen
2,000,000 yen x 2.89%
= 57,800 yen

204,600 yen

Business year commencing between April 1, 2016 and March 31, 2017
(applicable only to the small and medium-sized enterprises meeting the conditions specified in * 1 of Table 3-1)

Brackets of taxable income Up to 4 million yen Over 4 million yen
to 8 million yen
Over 8 million yen

Corporate tax

Local corporation tax
Corporate Inhabitant taxes
  1. Prefectural
  2. Municipal
Enterprise tax
Special local corporate tax

15.00%
0.66%


0.48%
1.46%
3.40%

1.47%

15.00%

0.66%

0.48%
1.46%
5.10%
2.20%

23.40%
1.03%


0.75%
2.27%
6.70%

2.89%

Total tax rate 22.46% 24.90% 37.04%

Business year commencing between April 1, 2017 and March 31, 2018
(applicable only to the small and medium-sized enterprises meeting the conditions specified in * 1 of Table 3-1)

Brackets of taxable income Up to 4 million yen Over 4 million yen
to 8 million yen
Over 8 million yen

Corporate tax

Local corporation tax
Corporate Inhabitant taxes
  1. Prefectural
  2. Municipal
Enterprise tax
Special local corporate tax

(Reference rate) 19.00%*1
1.96%

0.19%
1.14%
5.00%
abolished

(Reference rate) 19.00%
1.96%

0.19%
1.14%
7.30%

abolished
23.40%
2.41%

0.23%
1.40%
9.60%

abolished

Total tax rate (Reference rate) 27.29% (Reference rate) 29.59% 37.05%

*1 As the extension of the special measures of reduced tax rates for small and medium-sized enterprises has not been announced, the rates are reference tax rates on the assumption that the special measures will be abolished on March 31, 2017.

Table 3-3 Per capita levy on corporate inhabitant tax

Capital amounts Employee number Per capita levy
Over 5,000,000,000 yen --- Over 50 3,800,000 yen
Over 5,000,000,000 yen --- Or under50 1,210,000 yen
Over 1,000,000,000 yen Or under 5,000,000,000 yen Over 50 2,290,000 yen
Over 1,000,000,000 yen Or under 5,000,000,000 yen Or under 50 950,000 yen
Over 100,000,000 yen Or under 1,000,000,000 yen Over 50 530,000 yen
Over 100,000,000 yen Or under 1,000,000,000 yen Or under 50 290,000 yen
Over 10,000,000 yen Or under 100,000,000 yen Over 50 200,000 yen
Over 10,000,000 yen Or under 100,000,000 yen Or under 50 180,000 yen
--- Or under 10,000,000 yen Over 50 140,000 yen
--- Or under 10,000,000 yen Or under 50 70,000 yen

3.3.3 Imposition of enterprise tax on a pro forma basis

Corporations whose capital or investment exceeds 100 million yen are taxed on a pro forma basis using income, added value, and capital as the taxable base. The standard tax rates for income, added value and capital are as follows

Table 3-4 Tax rates of enterprise tax on a pro forma basis
Business year commencing between April 1, 2015 and March 31, 2016

Example: Tokyo Standard tax rate
Income levy Up to 4 million yen per year 1.755% 1.6%
Over 4 million yen and up to 8 million yen per year 2.53% 2.3%
Over 8 million yen per year 3.4% 3.1%
Added value levy 0.756% 0.72%
Capital levy 0.315% 0.3%
Special local corporate tax 93.5% of income levy calculated by the standard tax rate

(Note) Tax rates may differ from the standard tax rate depending on the local government concerned.

Business year commencing between April 1, 2016 and March 31, 2017

Example: Tokyo Standard tax rate
Income levy Up to 4 million yen per year 0.395% 0.3%
Over 4 million yen and up to 8 million yen per year 0.635% 0.5%
Over 8 million yen per year 0.88% 0.7%
Added value levy 1.26% 1.2%
Capital levy 0.525% 0.5%
Special local corporate tax 414.2% of income levy calculated by the standard tax rate

(Note) Tax rates may differ from the standard tax rate depending on the local government concerned.

Business year commencing between April 1, 2017 and March 31, 2018

Example: Tokyo Standard tax rate
Income levy Up to 4 million yen per year 1.995% 1.9%
Over 4 million yen and up to 8 million yen per year 2.835% 2.7%
Over 8 million yen per year 3.78% 3.6%
Added value levy 1.26% 1.2%
Capital levy 0.525% 0.5%
Special local corporate tax to be abolished (to be reflected on the corporate enterprise tax)

(Note) Tax rates may differ from the standard tax rate depending on the local government concerned.

3.3.4 Scope of income subject to corporate tax

The income of corporations established in Japan is subject to taxation in Japan regardless of where it was sourced. Corporations established in foreign countries are grouped into one of the following tax classifications according to when the business year started, and the respective domestic-source income specified in 3.2.1 or 3.2.2 is subject to corporate tax, local corporate tax, corporate inhabitant tax and enterprise tax in Japan corresponding to their classifications. (Note, however, that foreign corporations without PE in (2) of Table 3-5 are not subject to corporate inhabitant tax and enterprise tax.)

Table 3-5 Overview of taxation of corporate tax and income tax on foreign corporations
Business year commencing by March 31, 2016

Classification

(1) Foreign corporations with PE (2) Foreign corporations without PE
Types of income (See 3.2.1)

(1-A) Corporations having a certain fixed place of business, such as a branch

(1-B) Corporations conducting construction works that take more than one year or having an agent satisfying certain requirements

Domestic-sourced income Income derived from business activities in Japan Corporate tax Corporate tax Exemption
Consideration for dispatch business such as engineers Corporate tax
Rent of real estate and other properties in Japan
Transfer of real estate in Japan
Management of assets in Japan
Interest on deposits and savings Corporate tax (attributable to domestic business) Withholding at source only (not attributable to domestic business) Withholding at source only
Dividends etc.
Interest on loans
Usage fees and other fees

(Note) Permanent Establishments (PE) are locations, sites, agents, etc. of the foreign corporations falling under the following:
Foreign corporations having a certain fixed place of business(*1), such as a branch, sub-branch, business establishment, office, or factory in Japan.

  • (*1) However, the following locations do not fall within the definition of a “certain fixed place of business”:
  • (a) A fixed location used by a foreign corporation solely for publicity/advertising, information provision, market surveys, basic study, and other activities auxiliary to the performance of its business (see 3.3.5).
  • (b) A fixed location used by a foreign corporation solely for the purchasing of its assets.
  • (c) A fixed location used by a foreign corporation solely for the storage of its assets.

Foreign corporations conducting business through the locations or parties stipulated in 3.3.1 1. or 2. above.

Business year commencing on or after April 1, 2016

Classification

(1) Foreign corporations with PE (2) Foreign corporations without PE
Types of income (See 3.2.2)

Income attributable to PE

Domestic-sourced income not attributable to PE

Domestic-sourced income Income from business activities Corporate tax
Management/holding of assets in Japan Corporate tax Corporate tax
Transfer of real estate in Japan
Consideration for dispatch business such as engineers
Rent of real estates and other properties in Japan
Other domestic-sourced income Withholding at source only Withholding at source only
Interest on deposits and savings (3.2.1 6.)
Dividends etc. (3.2.1 7.)
Interest on loans (3.2.1 8.)
Usage fees and other fees (3.2.1 9.)

3.3.5 Income of representative offices, etc.

Representative offices, etc., through which a foreign corporation engages in business in Japan are not supposed to derive any income subject to corporation tax from publicity/advertising, information provision, market surveys, basic study and other activities auxiliary to the performance of its business (see 3.3.4).

3.3.6 Calculation of income subject to corporate tax

The amount of income used as the tax base for corporate taxes on income for each taxable year is determined by making the necessary tax adjustments to corporate profits calculated using accounting standards generally accepted as fair and appropriate. Costs and expenses incurred in earning profits are deductible, except in certain exceptional instances (examples provided below).
Foreign corporations face no restrictions on the locations in which costs and expenses deductible from Japan-sourced taxable income may be incurred. However, detailed statements of costs and expenses incurred overseas and deducted from income in Japan must be prepared, and these costs and expenses must be allocated fairly in the prescribed manner.

Examples of items for which there are limits on deductible costs and expenses:

  • Corporate taxes and penalties
  • Nondeductible amount for donations
  • Nondeductible entertainment expenses
  • Amount of allowance reserves transferred
  • Amount exceeding depreciable limit of depreciable and deferred assets
  • Write-down of assets
  • Compensation or retirement benefits for directors

3.3.7 Taxation of retained earnings of family corporations

A Japanese corporation that is a family corporation and meets certain conditions is subject to taxation of retained earnings as well as corporate tax on ordinary income. Taxation of retained earnings is calculated by multiplying the taxable amount of retained earnings (obtained by subtracting the retained earnings deductible from the amount of retained earnings in each business year) by the special tax rate. The special tax rate varies according to the taxable earnings. If the annual taxable earnings does not exceed 30 million yen, it is subject to a tax rate of 10%. However, if the taxable earnings exceeds this amount, a rate of 15% is charged on the amount in excess of 30 million yen and up to 100 million yen, and any amount in excess of 100 million yen is taxed at a rate of 20%.

3.3.8 Treatment of losses

Net losses under income in each business year are carried forward for the next nine years (or ten years in the case of losses arising during the business years beginning on or after April 1, 2018). Losses may only be carried forward in this way if a blue form tax return is filed for the business year in which the loss arose, and a final tax return is then filed every subsequent year. Note that if a corporation has paid-in capital in excess of 100 million yen or is a wholly owned subsidiary of a large corporation with paid-in capital of at least 500 million yen (including foreign corporations), the amount of loss that may be deducted from income cannot exceed 80%* of income. Certain corporations, such as prescribed small and medium-sized enterprises that file a blue form return, are also allowed to carry back a loss to the business year commencing not more than one year prior to the date of commencement of the business year in which the loss arose, and are allowed to receive a full or partial refund of the amount of corporate tax in the business year in which the loss was carried back.

  • * The deductible percentage of 80% will be lowered in a phased manner as follows.
  • Business year commencing between April 1, 2015 and March 31, 2016     65%
    Business year commencing between April 1, 2016 and March 31, 2017     60%
    Business year commencing between April 1, 2017 and March 31, 2018     55%
    Business year commencing on or after April 1, 2018                                  50%
  • However the deductible percentage is 100% for a certain period if the corporation is an unlisted company, undergoing reconstruction, etc.

3.3.9 Corporate reorganization tax system

If a corporation transfers assets as a result of a split, merger, or investment in kind (”reorganization”), gain or loss from the transferred assets is subject to taxation in principle. However, reorganizations meeting certain conditions, such as certain reorganizations between corporations that are wholly owned/owning directly or indirectly in ownership or those between corporations that are owned/owning 50% directly or indirectly in ownership, undertaken for the purpose of a joint venture, are treated as ”qualified reorganizations,” and qualify for deferment of taxation of gain or loss on the transferred assets.

3.3.10 Filing of tax return and payment of corporate taxes

  1. Final tax return and tax payment
    Corporations must file a final tax return for corporate tax, local corporate tax, corporate inhabitant tax, enterprise tax, and special local corporate tax on their income within two months from the day following the last day of each taxable year. However, an extension of the deadline for filing a final tax return may be requested, with approval from the director of the taxation office, when a corporation is unable to file a final tax return because the accounting auditor has not completed the audit or because accounts remain unsettled for other unavoidable reasons. The income and tax amounts to be entered in the final tax return must be calculated in accordance with the statement of accounts approved by the general meeting of stockholders.
    The calculated tax must also be paid within this period. The payment deadline will not be extended even if the deadline for filing of a final tax return is extended as described above. Therefore, interest tax and overdue tax for the extended period are imposed (as deductible expenses) if the tax payment is made during the extended period.Any interim payment made in advance on the amount of tax owed shall be deducted from the total amount to be paid.
  2. Interim tax return and tax payment
    Corporations whose taxable years exceed six months must file an interim return, within two months from the day following the end of the first six months of the taxable year, an interim tax return for the period starting on the first day of that taxable year and ending on the day six months thence, and must pay the interim amount of tax owed (excluding instances where the amount of tax calculated using the prescribed formula does not exceed a certain amount).
  3. Blue form returns
    Tax return forms for corporations come in two formats: white forms and blue forms. A corporation may file a blue form tax return with approval from the appropriate national tax office. Corporations filing blue form tax returns enjoy a variety of tax benefits. To receive approval from the tax office to file a blue form tax return, a corporation must submit an application for approval prepared in the prescribed format no later than the day prior to the starting day of the taxable year. Newly established subsidiary companies and foreign corporations establishing new branch offices in Japan must submit the application for approval no later than the day prior to either the day following three months since and including the date of the establishment of the corporation/branch or the last day of the corporation's/branch's initial taxable year after establishment, whichever comes first, if intending to file a blue form tax return from the taxable year in which the date of establishment occurs.

3.3.11 Remittances to home country

Remittances made by subsidiary companies to their parent company arise from business-to-business transactions, and so are generally regarded as payments of costs/expenses, distributions of profits, loans (or repayments of loans), and so forth depending on the nature of the transaction concerned. Certain of these costs/expenses are deducted when calculating the income of the payer subsidiary companies. Some of the payments regarded as income of the parent company (e.g., payments of interest, dividends or usage fees) require withholding of income tax at the source at the time of payment (see 3.4.4). On the other hand, tax treatment on the remittances made by a branch of a foreign corporation to its head office varies depending on the business year. In case of the business year commencing by March 31, 2016, the remittances cannot as a general rule be treated as expenses by the payer branch when calculating the taxable income of the branch. In case of the business year commencing on or after April 1, 2016, as mentioned in 3.1.1, the profits/losses from the internal transactions are to be recognized based on the presumption that the Japanese branch is a corporation which is independent from the head office.


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