Although corporate and consumption taxation issues are those you will have to deal with in your daily business activities as an SME, there are also a number of other taxes and rules that might have effect on your business dealings. Some of these are introduced on this page.
Personal Tax
Resident / Non-Resident Status
There are two categories of personal taxes in Japan: self-assessed income tax and withholding income tax. Tax rates are determined by status of residency. In general, natural persons are categorized as either residents or non-residents of Japan. Individuals that are labeled as residents are sub-classified as being either permanent or non-permanent residents.
Individuals are classified into the following categories:
|
Period of Residence |
Status |
Taxable on |
|
Up to 12 months |
Non-resident |
Japan-sourced income. |
|
Has not resided in Japan for more than 5 years in last 10 years |
Non-permanent resident |
a) Japan-sourced income b) Income sourced outside Japan, paid within Japan or remitted in Japan |
|
a) Japanese national b) Present in Japan for at least 5 years within the past 10 years |
Permanent resident |
Worldwide income. |
Source: HSBC, Taxation in Japan
Definition of a non-resident status
- A non-resident is any individual who is not a resident in Japan but earning income from Japan. Non-residents are generally subject to a flat Japanese tax rate of 20.42% on their Japan based income.
For non-residents, visiting Japan on a short-term basis, Japan's double tax agreements (DTA) generally exempt such individuals to taxation in Japan. Whilst the provisions in each DTA are not identical, the following specific conditions are usually required in order to be exempted of taxation in Japan.
- The individual is in Japan for not more than 183 days in any calendar year, fiscal year or twelve-month period
- The individual’s salary is paid by a non-resident employer
- None of the individual’s salary is treated as a deductible expense by a permanent establishment in Japan
See also: NTA, Tax on the income of an individual as a non-resident in Japan for tax purposes
Type of income and taxation of a resident
Definition of business income:
- Business income is defined as individual earnings derived from activities like wholesale, retail and manufacturing but also includes income of attorneys and certified public accountants. In order to smooth the annual taxation of individual incomes, generally accepted accounting principles are applicable to the computation of business income.
Financial payments like salaries, rent or interest to family of taxpayers are deductible but only within certain limits. Typical entertainment expenses for carrying on business and those directly related to the business are deductible from a taxation perspective. They are not to restrictions as is the case of the corporation taxation system mentioned earlier.
Separately, if the individual taxpayer has a blue return status and if he keeps a systematic accounting book, a special deduction up to a certain amount is allowed.
Definition of real estate income:
- Real estate income is defined as any kind of income originating from rental earnings of real estate (land and/or building) in Japan. The taxpayer may deduct the depreciation costs of the real estate and the costs related to interests on the real estate related. The fixed asset tax can also be deducted from the taxable amount.
Definition of employment income:
- Employment income is the total annual salary and bonuses/incentives after deducting certain employment income deductions. A domestic employer making salary payments is required to withhold a certain tax mount from salary and bonus and pay that withholding tax to the local tax office by the 10th of each following month. An employer also has to file the annual year-end adjustment for each employee in the company, whose annual salary does not exceed the annual amount of 20 million yen.
Besides the aforesaid, earnings mentioned below should also be included for taxation purposes.
- Interest income
- Dividend income
- Retirement income
- Capital gain from sale of shares/sale of land and buildings
- Occasional income (corporate gifts, rewards...)
- Forestry income
- Miscellaneous income (income which is not classified in any other income mentioned above)
Source: Rob Van Nylen, Accounting and Taxes (EU-JapanCentre for Industrial Cooperation Report)
Withholding Income Tax
For residents, payments made in Japan from the following or other prescribed income to are subject to withholding at source:
- Interest (including profit on redemption on specified discount bonds)
- Dividends
- Salary, wages, bonuses and similar compensations
- Retirement allowances
- Certain compensation, fees, etc., to persons other than employees
For non-residents (and foreign corporations), payments made in Japan on income from the following categories, or payments made overseas by payers with a domicile or business office, etc. in Japan, will be subject to withholding income tax :
- Certain interest on public and corporate bonds, interest on savings and deposits derived from offices in Japan
- Distribution of profits in accordance with a silent partnership contract (Tokumei Kumiai contract)
- Distribution of profits pursuant to a partnership agreement provided for by Civil Lax, and other kindred partnership agreements
Payments of certain categories of income for non-residents and for foreign corporations to a non-resident are exempt from withholding taxation, provided that a certificate from the taxation office is presented to the payer attesting that the income will be attributed to that permanent establishment and will be added to business income subject to self-assessment tax purposes.
More information: JETRO, Taxes in Japan: Overview of Personal Tax System
Self-Assessed Income Tax
The tax rates for self-assessed income tax on individual income (in the case of residents and of aggregate taxation of non-residents) are as shown below:
|
Brackets of taxable income |
Tax rates |
|
|
|
Under 1,950,000 yen |
5% |
|
Over 1,950,000 yen |
Or under 3,300,000 yen |
10% |
|
Over 3,300,000 yen |
Or under 6,950,000 yen |
20% |
|
Over 6,950,000 yen |
Or under 9,000,000 yen |
23% |
|
Over 9,000,000 yen |
Or under 18,000,000 yen |
33% |
|
Over 18,000,000 yen |
Or under 40,000,000 yen |
40% |
|
Over 40,000,000 |
|
45% |
Employment income deduction:
|
Employment income |
Employment income deductions |
|
< 1,625,000 yen |
650,000 yen |
|
1,625,000 - 1,800,000 yen |
(employment income) x 40% |
|
1,800,000 - 3,600,000 yen |
(employment income) x 30% + 180,000 yen |
|
3,600,000 - 6,600,000 yen |
(employment income) x 20% + 540,000 yen |
|
6,600,000 - 10,000,000 yen |
(employment income) x 10% + 1,200,000 yen |
|
> 10,000,000 |
2,200,000 yen |
Source: JETRO, Taxes in Japan: Overview of Personal Tax System
Residents’ income is calculated using methods established within a number of income classifications. Tax is calculated by subtracting income deductions from the total income amount and then multiplying the difference, which is the amount of taxable income by the progressive tax rates above. It should be noted that any withholding income tax levied on the income beforehand will then be deducted from the calculated tax.
Non-residents are classified by their circumstances into:
- Non-residents having an office or business establishment etc. in Japan
- Non-residents continuously engaged in construction or assembly in Japan for one year or more, or doing business through a designated agent in Japan
- Other non-residents
Taxable income is calculated in terms of income established for each classification. The amount of self-assessed income tax levied on non-residents is ordinarily calculated in the same way as for residents (subject to certain limits such as non-application of applicable income deductions and foreign tax deductions). Non-residents who earn salary income paid for services provided in Japan, and which is not subject to withholding tax, should file a return and pay 20.42% tax on the total salary amount.
Non-residents must file and pay taxes in accordance with the same regulations as residents. Notably, non-residents leaving Japan without contracting the services of a tax agent and reporting this information to the director of the taxation office are expected to file an income tax return and pay the tax owed prior to leaving the country.
Residents are required to file an income tax return for the income earned each year and must pay the tax owed between February 16 and March 15 of the following year. A notable exception applies in cases when tax payment procedures have been completed through withholding at source. A return does not need to be filed for :
- Those whose total income does not exceed total deductions
- Those whose salary income is subject to withholding tax at source (year-end adjustment) from only one payer not exceeding ¥20 million in that year and who have no other income exceeding ¥200,000.
More information:
JETRO, Taxes in Japan: Overview of Personal Tax System
Restoration Income Surtax
A restoration income surtax of 2.1% was applied to corporations and individuals from 1st January 2013 and is due to continue until 31st December 2037. This relates to the amount of withholding tax on income self-assessed income tax. For example, as the tax rate under domestic law for withholding tax on interest paid to a foreign corporation is 20%, the restoration income surtax is added (20% x 2.1%) to give a total of 20.42% tax withheld at source. However, Restoration Income Surtax is not imposed when the withholding tax rate provided for under domestic law is reduced or eliminated by a tax treaty.
Source: JETRO, Taxes in Japan: Overview of Personal Tax System
Individual Inhabitant Taxes
Individual inhabitant taxes refer to both prefectural tax and municipal tax on individual income, which are due on the 1st of January each year. Individual inhabitant taxes are made up of an income-graded component and a flat-rate component. Assessment of the income-graded component is based on income from the preceding year and, ordinarily, taxable income is calculated according to the provisions for calculating income for income tax purposes. Inhabitant tax returns should be filed by 15th March; however, those submitting self-assessed income tax returns are not obliged to file again for individual inhabitant tax. The standard rates of individual inhabitant taxes for the income-graded component are as follows:
|
Standard rates of individual inhabitant tax (income-graded component) |
||
|
Prefectural tax rate |
Uniformity |
4% |
|
Municipal tax rate |
Uniformity |
6% |
Between 2014 and 2023, that the standard tax rate for the flat-rate component is 1,500 yen for prefectural inhabitant tax and 3,500 yen for municipal inhabitant tax; although this may differ according to local government.
Source: JETRO, Taxes in Japan: Overview of Personal Tax System
Foreign tax credit system
The Foreign Tax Credit system, following bilateral tax conventions of Japan with most major countries globally, allows an enterprise with registered address in Japan, to benefit from crediting foreign taxes levied on overseas earnings up to the creditable limit, to avoid double taxing on international income. This foreign tax credit system covers the following cases.
- tax credits on foreign taxes paid directly by a domestic corporation in Japan on income earned outside Japan (direct tax credits)
- tax credits on tax amounts that have been specially reduced or exempted in a country under the provisions of a tax convention by Japan with that specific country (tax-sparing credits)
- tax credits on foreign taxes in correspondence to the income of a qualifying overseas subsidiary combined with the earnings of a domestic enterprise, given the anti-tax haven taxation system available in Japan
See: KPMG, Taxation in Japan 2024
Foreign dividend exclusion system
The Foreign Dividend Exclusion system was specifically implemented to avoid international double taxations for domestic companies. This regulation allows domestic corporations to exclude from their taxable income a certain amount of dividend income obtained from qualifying foreign subsidiaries (eg firms that meet certain shareholding requirements and/or other qualifying conditions) or other entities.
See: KPMG, Taxation in Japan 2024
Transfer pricing taxation rule
In an attempt to prevent enterprises from fixing prices for transactions intra-company (e.g. between the parent company and the overseas affiliate) at a different amount from ordinary (aka arm's- length) prices in order to transfer the profits from overseas, such a transaction is treated as executed at the ordinary value and the taxable amount is calculated as if the income derived from the transaction differs from the arm's length price.
See: KPMG, Taxation in Japan 2024
Thin-capitalization taxation rule
When a foreign entity, affiliated with a Japanese corporation (this rule also applies similarly to a Japanese branch of a foreign corporation), is doing business in Japan and when it raises financing, that will be considered as an attempt to camouflage its own tax burden via borrowing from that foreign affiliate, while trying to deduct that interest instead of raising funds by equity investments. In this case, the interest paid to the foreign parent would be subject to the lower Japanese withholding tax percentage but would not be subject to the higher Japanese corporate tax percentage.
It is exactly to limit such decreases of its tax incomes that Japan has established Thin Capitalization Rules. If the annual average balance of debt to a foreign controlling shareholder (the foreign parent corporation) exceeds the tax statutory limitation, the excess interest expense paid or payable to the foreign parent corporation is not deductible anymore.
See: KPMG, Taxation in Japan 2024
Japanese earnings stripping rules
Japan’s earnings stripping regime was fundamentally amended under the 2019 tax reform. KPMG provides explanations of the changes in its Taxation in Japan 2019 Report.
See: KPMG, Taxation in Japan 2024
