Investing in Japan
How to Set Up Business in JapanSection 3. Taxes in Japan
3.1 Overview of Japanese corporate tax system for investment in Japan
3.1.1 Neutrality of tax system with respect to mode of business presence (branch or subsidiary)
Corporations engaged in economic activities in Japan are subject to taxes in Japan on the profits generated by those economic activities. Steps have been taken, however, to ensure that the tax system does not impose unfair burdens on multinational corporations engaged in economic activities in Japan on the basis of the mode of their business presence in Japan.
Income of corporations established in Japan is, as a rule and with the exception of certain non-taxable and tax-exempt income, subject to taxation, regardless of where it was generated (i.e., the source country of income), but when that income includes profits earned in foreign countries that are taxed in the source countries of that income, foreign tax credits are available whereby taxes paid in a foreign country may be credited within certain bounds against Japanese taxes owed for the purpose of eliminating double taxation between the source country of income and Japan.
Regarding Japanese branches of foreign corporations, measures such as only certain income is subject to taxation in Japan, have been implemented to avoid international double taxation in Japan. The scope of taxable income of Japanese branches of foreign corporations has changed significantly from the business year commencing on or after April 1, 2016. Under the new regulation applicable from the business year commencing on or after April 1, 2016, and Japanese branches, head office, etc. shall be respectively deemed to be an independent corporation and subject to taxation. Due to this, the income of a Japanese branch subject to taxation will be the income attributable to the Japanese branch (permanent establishment) which is the income earned by the Japanese branch on the basis that if the branch is deemed to be a company which is separated/independent from the head office, etc. as well as other prescribed income. When calculating the income attributable to the Japanese branch (permanent establishment), the profits/losses from the internal transactions between the branch and head office, etc. are to be recognized based on the presumption that transactions are conducted with the arm's length prices. With the change in the scope of taxable income of Japanese branches (permanent establishment), new foreign tax credits have also become available to foreign corporations. When the income that the Japanese branch (permanent establishment) has earned in a third country which is attributable to the Japanese branch (permanent establishment) is taxable in the third country, foreign tax credits are available whereby taxes paid in the third country may be credited within certain bounds against Japanese taxes owed to avoid international double taxation.
3.1.2 Withholding at source and self-assessment/payment
Multinational corporations engaged in activities in Japan that earn income subject to taxation in Japan calculate and pay the taxes owed through withholding procedures or self-assessed income tax procedures according to their form of corporation and type of income.
Section3: Table of Contents
- 3.1 Overview of Japanese corporate tax system for investment in Japan
- 3.2 Domestic-sourced income
- 3.3 Overview of corporate income taxes (corporate tax, corporate inhabitant tax, enterprise tax)
- 3.4 Overview of withholding income tax
- 3.5 Tax treaties
- 3.6 Overview of consumption tax
- 3.7 Overview of individual tax system