JAPAN CORPORATE TAX

Japanese corporate tax refers to the tax imposed on companies operating in Japan. Companies are taxed on their taxable income, which is calculated based on their business activities within Japan. 

In addition to the standard corporate tax, companies operating in Japan may also be subject to other taxes such as local taxes, consumption taxes, and taxes on specific business activities, such as real estate transactions.

It is important for companies operating in Japan to have a clear understanding of their tax obligations and to comply with all relevant tax laws and regulations. Failure to do so can result in penalties, fines, and other consequences. Companies can seek assistance from professional consultants to ensure compliance and minimise their tax liability.

JAPAN CORPORATE TAX RATE 2023

The effective Japan corporate tax rates is 23.2% (30% -34% inclusive of local taxes). Generally, a domestic corporation in Japan will be taxed for all its local and internationally sourced income. The corporation will be also liable to pay tax on its foreign branch income.

A company deemed as a foreign corporation in Japan will only be taxed on its local (Japan) sourced income. If a foreign corporation is deemed to have a permanent establishment (PE) in Japan, the PE will be taxed on income attributable to the PE.

In 2020, the Japanese government introduced a tax reform and implemented certain changes to several corporation tax systems. The tax reform was mainly issued as a special measure for small to medium size enterprises (SMEs) and to accommodate the gap in the economies after the global pandemic of COVID-19.

NATIONAL LOCAL CORPORATE TAX

Japan corporate taxpayers in Japan are required to comply with the revised regulations for the national local corporate tax. Under the new rules, these taxpayers are obligated to file and pay the tax at a fixed rate of 10.3% on their corporate tax liabilities. Prior to this change, the national local corporate tax rate was 4.4%. 

This increase in the tax rate aims to provide additional funding for local government services and infrastructure projects. It is important for businesses operating in Japan to understand these tax regulations and plan accordingly to ensure compliance with the new requirements.

STANDARD ENTERPRISE TAX (AND LOCAL CORPORATE SPECIAL TAX)

The Standard Enterprise Tax, also known as the “Local Corporate Special Tax,” is a tax imposed on businesses in Japan. This tax is based on a company’s profits and is levied by prefectural and municipal governments. The rate of the Standard Enterprise Tax varies depending on the location and size of the business, but is typically around 20% to 30% of the business’s taxable income.

The revenue generated from the Standard Enterprise Tax is used by local governments to finance various public services and infrastructure projects. It is important for businesses operating in Japan to understand the tax regulations and to plan accordingly to ensure they are in compliance with the requirements for the Standard Enterprise Tax.

Comparison of Corporate Tax, National Local Tax and Standard Enterprise Tax

INHABITANT’S TAX

Inhabitant’s Tax is a tax imposed on corporations in Japan that is based on the income allocated to each prefecture and city. The allocation of the tax is generally determined based on the number of employees, similar to the calculation of Enterprise Tax.

The standard rate for the prefectural portion of the tax is 3.2%, while the standard rate for the municipal portion is 9.7%. However, local governments have the discretion to increase the tax rate to 4.2% for the prefectural portion and 12.1% for the municipal portion. Effective October 1st, 2019, the tax rate has been increased to reflect the growing demands for government services and infrastructure projects.

It is important for corporations operating in Japan to stay informed about changes to the tax regulations and to plan accordingly to ensure compliance with the requirements for the Inhabitants Tax.

OTHER TAXES IN JAPAN

Value Added Tax Japan (VAT)

Value-Added Tax (VAT), also known as Consumption Tax (CT) in Japan, is a tax imposed on the value added at each stage of production and distribution of goods and services. The VAT system in Japan was introduced in January 1989 and is similar to the Value-Added Tax system used in the European Union.

Corporations are required to accurately calculate their VAT obligations and make timely payments to the tax authorities. Companies with annual sales exceeding 10 million yen must register and comply with the Consumption Tax Act.

The standard rate for VAT in Japan is currently 10%. However, there may be specific exemptions and reductions available for certain types of goods and services. It is important for corporations operating in Japan to have a thorough understanding of the VAT regulations and to ensure compliance with the requirements for timely payment of VAT obligations.

10% on  Standard Rated Supplies	GST is charged on most local sales and services as it will fall under this category.
8% on Food Related Supplies	This rate is applicable to sales of food/beverages (excluding alcoholic items) and selected newspaper subscriptions.
0% on Exempted Supplies	Zero-rated supplies includes items such as exported supplies and selected export-related activities such as international transportation. Non-taxable (exempt) rates are also applicable to sale or lease of land and certain sales of securities or similar instruments. Various monetary transactions are also excluded from VAT.

Withholding Tax Japan

According to the Japan National Tax Agency on the Withholding Tax Guide, the withholding tax system in Japan is as follows:

According to the Japan National Tax Agency, the Withholding Tax system in Japan applies to certain types of income, such as salary, interest, dividends, and fees paid to tax accountants. The system operates by having the payer withhold a portion of the income payment to cover the amount of income tax owed by the recipient.

The purpose of the Withholding Tax system is to simplify the process of collecting income tax by having the tax obligation met directly from the source of income. This ensures that the recipient of the income does not have to make separate tax payments, as the tax has already been deducted at the time of receipt.

You can refer to the withholding tax guide for additional information. 

Business Premises Tax

The Business Premise Tax is a tax levied on the use of commercial and industrial properties in Japan. The tax is calculated based on the assessed value of the property, which is determined by the local government.

The purpose of the Business Premise Tax is to fund various public services and infrastructure projects in the local area. The tax is imposed on the owner of the property, but in some cases, the tax obligation may be passed on to the tenant or user of the property.

The tax rate for the Business Premise Tax varies depending on the local government, but it typically ranges from 1% to 2% of the assessed value of the property. It is important for businesses operating in Japan to be aware of the Business Premise Tax and to ensure that they are compliant with the requirements for payment and reporting.

At Relin Consultants, we have extensive experience in helping our clients optimise their tax planning and structure in Japan. Our team of experts has successfully assisted multiple clients in this area, providing customised solutions to meet their specific needs.

If you’re looking to establish a company in Japan, our team can provide you with valuable insight and support to ensure that you meet all the necessary requirements. We can also help you navigate the complex tax system in Japan, so that you can minimise your tax liabilities and maximise your profitability.