Foreign companies operating in Japan are liable for corporate income taxes only for that income which is coming from sources within Japan. In contrast, Japanese corporations are liable for corporate tax both on their Japanese source income and their foreign source income.
Tax notification must be given by foreign corporations who have generated income subject to corporate tax in Japan even without establishing a branch office. Guidelines regarding the various notifications can be found at the NTA website. Your corporation will be subject to this, in the following cases:
- When construction/installation/assembly/other works, or supervision and control of works lasts for longer than one year.
- When using certain agents, such as:
- those who have been given the authority to conclude business agreements on your corporation’s behalf;
- those who store assets on your behalf in a volume/quantity in line with ordinary requirements of customers and deliver such assets to meet customer requests;
- those undertaking a significant amount of the work required for order acquisition, consultation and other activities in order to conclude business agreements solely or principally on behalf of your corporation.
The mode of a foreign corporation’s activity in Japan affects its taxable income. Those with a branch, sub-branch, office, factory or business establishment in Japan will find all income derived from activities in Japan to be taxable; however, exceptions exist for fixed locations used only for the purchase or storage of assets or those used only for publicity/advertising, market surveys, information provision and other secondary activities. Those doing business through the agents mentioned in the previous paragraph will be liable to pay taxes on Japan-sourced income.
The source of the income might have an effect on the taxable situation. Please refer to the following table to understand which kind of income is taxable depending of the physical presence (PE) or not of the company in Japan.
|
Foreign company with PE |
|
Foreign company without PE |
|
|
|
Income attributable to PE |
Domestic-source income not attributable to PE | |
|
Income from business activities |
Corporate tax |
Not covered |
Not covered |
|
Management/holding of assets in Japan |
Corporate tax |
Corporate tax |
Corporate tax |
|
Transfer of real estate and certain assets in Japan*2 |
Corporate tax |
Corporate tax |
Corporate tax |
|
Consideration for dispatch business such as engineers*2 |
Corporate tax |
Corporate tax |
Corporate tax |
|
Rent of real estates and other properties in Japan*2 |
Corporate tax |
Corporate tax |
Corporate tax |
|
Other domestic-sourced income |
Corporate tax |
Corporate tax |
Corporate tax |
|
Interest on deposits and savings |
Corporate tax |
Withholding at source only |
Withholding at source only |
|
Dividends etc. |
Corporate tax |
Withholding at source only |
Withholding at source only |
|
Interest on loans |
Corporate tax |
Withholding at source only |
Withholding at source only |
|
Usage fees and other fees |
Corporate tax |
Withholding at source only |
Withholding at source only |
Source: JETRO, Taxes in Japan: Overview of Japanese Corporate Tax System for Investment in Japan
The table shows that some foreign companies are required, under Japanese domestic law, to pay taxes on some sources of income even though the companies do not have any physical presence in Japan. In practice, such a company would have to appoint a Japanese tax accountant. The kind of income affected by a tax even when a company does not have a permanent establishment in Japan seems quite logical, as the considered matters are more directly connected to Japanese territory. Some taxes may be paid directly through a withholding system without any proactive action from the company.
Please note that this table is not exhaustive. It focuses only on the most common operations done by SMEs. Additional rules may apply for government bonds, lending of funds, pensions received from insurance contracts concluded in Japan or dividends received from partnerships.
Note also that a double taxation avoidance treaty may significantly modify the scope of this table. It is very important to check the treaty (if existing) that the country of residence of the company has signed with Japan.
