Taxation outline

Definition of SME under Japanese law

The Japanese Small and Medium Enterprise Basic Act (Chushokigyōkihonhō) does not have one comprehensive definition for SMEs. It discerns a four of types of SMEs depending on their business activities. However, the Corporation Tax Act overrides any other legal definition and is used on these pages as it is the only one applicable for tax purposes. Under the Japanese Corporation Tax Act, a company is considered as a SME when its capital does not exceed JPY 100 million (≈ EUR 714,000, 2023 JP Government rates), regardless its business (JETRO, See 3.3.2 note 3)

Source: SME Agency (In Japanese)

The definition of an SME adopted by the European Commission in the recommendation 2003/361/CE, i.e. fewer than 250 employees and up to EUR 50 million annual turnover (or an annual balance sheet total not exceeding EUR 43 million), therefore differs from the one used in Japan.

Major taxes in Japan

The Tokyo Metropolitan Bureau of Taxation offers a comprehensive guide in English explaining the various taxes applied in Japan at the national, prefectural and local levels. (2022 edition)

European SMEs are subjected to different taxes when doing business in Japan:

• Corporate tax,
• Withholding tax system and
• Consumption tax (i.e. VAT).

The National Tax Agency (NTA) administers the business taxation system on a nationwide scale for both corporate entities and individuals running a business.

The basic principle of the business taxation system in Japan, is based upon a self-assessment method with an external accounting office or internal auditor/board of auditors for bigger companies, which need to be filed within 2 months, at the local taxation bureau of the registered corporate address, after the closing of the financial year.

The taxation system is a neutral system for all domestic corporations engaged in economic activities. 
Important to bear in mind is that tax evasion and late payment are subject to steep fines in Japan, sometimes amounting up to 50% of additional taxation.

Another important point is that the actual payment of the business tax and the consumption tax to the National Tax Agency is due within 2 months after the closing of the financial year.

Compared to other Asian developed economic nations, Japan’s business taxation percentage has always been on the higher side, as approximately 40% burden on profits has been the norm for a long time. In recent years however, there have been government efforts to lower the corporate tax burden and attract more foreign companies.

As many Japanese SMEs have been financially struggling there have been a number of fiscal measures in place to alleviate their tax burden. Smaller business therefore are enjoying a lower tax burden than larger companies. Although many of these measures are deemed temporarily, they are usually extended and have become semi-permanent.

Blue form tax return system

The corporate taxpayer can select between the blue or white form tax return systems. The blue form tax return system is intended to encourage better, uniform and systematic record keeping and reporting by corporate taxpayers by offering certain benefits and preferential tax treatment to approved blue form taxpayers. The blue form tax return is not only limited to corporate taxpayers but can also be used by individual taxpayers. Important to bear in mind that a blue tax form return status is a privileged status, approved by the head of the local tax office, and hence can also be revoked at any time. JETRO, 3.3.10 point 3