AKJ Partners prepares various tax returns in Japan, including corporation tax, consumption tax, depreciable asset tax,etc.
We also handle tax consultations arising from international transactions such as tax treaty notification procedures at the time of remittance, foreign tax credits, transfer pricing taxation and risk assessment of PE (Permanent Establishment) taxation.
The nominal rate of corporation tax in 23.2% (15% for up to the first eight million yen for small and medium-sized companies),and the current effective corporation tax rate (national and local combined) is 31.7% for large enterprises.
- Taxation in Japan is based on the self-assessment system, under which taxpayers calculate their own tax amounts and file tax returns.
- A fiscal year is a financial year, which normally has the 12 month period or possibly shorter, but not be longer than 12 months.
A taxpayer is required to file its final tax return and pay tax due within 2 months (an extension of the deadline for filing a final tax return may be requested) after the end of the taxable period.
- A domestic corporation in Japan is taxed on its worldwide income. In principle, capital gains are also taxable, which should be included in business income to calculate taxable income for the corporation.
Regarding foreign income taxes imposed on income from sources abroad in accordance with foreign laws and ordinances, “foreign tax credit”can be applied up to a certain credit limit, except for some dividends.
- Corporation tax is levied on the taxable income of the corporation. Corporation tax is calculated by multiplying the taxable income which is calculated as the excess of gross revenue over the total cost and business expenses including depreciation and losses, etc.by the corporate tax rate. Note that, capital losses can be deducted from business income.
- Dividends received from domestic companies are exempt from tax according to the percentage of the share of the corporation.
Dividends received from overseas subsidiaries, etc. with an equity interest of 25% or more and a holding period of 6 months or more are exempt from tax on 95% of the dividend amount. (The percentage of ownership may be stipulated separately under the tax treaties.)
- For certain cost items such as donations, executive remuneration, and entertainment expenses, there is a limit for deductions,or these cost items may not be tax deductible for income tax purposes.
Tax credit and incentives
- Foreign income taxes levied outside Japan are subject to “foreign tax credit” under certain requirements. Inaddition, “deemed foreign tax credit” may be applicable under the application of tax treaties for some cases.
Note that, “foreign tax credit” is not applicable to overseas dividends which are subject to “exclusion of dividends received and the like from revenue, etc.”
- Special credit for corporation tax in case of conducting in experiment and research.
- Other special tax treatment may be applicable.
Net operating loss
- A corporation can carry forward net losses for 10 years following the loss year or carry back net losses for one year preceding the loss year.
(Corporations which can apply carry back of net losses are limited.)
Net losses can be used to offset only up to 50% of the taxable income (No limitation for small and medium corporations.)
- In Japan, currently, the group taxation regime is automatically applied to corporations having a 100% shareholding relationship.
These corporations are subject to certain restrictions on the calculation of the taxable income.
Furthermore, 100% group corporations can apply to be a tax consolidated group by an election, under which profits generated or losses incurred in each corporation are offset.
Goods and services subject to consumption tax and obligation to file a tax return
- Consumption tax is imposed on the sale and lease of goods and services (“Asset Transfers”) in Japan, unless they are tax-exempt transactions.
- When importing taxable goods, consumption tax imposed on such goods should be paid at customs clearance in principle.
- As the consumption tax burden is to be borne by final consumers, the consumption tax liability to be remitted from suppliers to the government is generally calculated based on the net of consumption tax received on domestic taxable sales transactions (output tax) minus consumption tax suffered on domestic taxable purchase transactions and import taxable transactions (input tax),but to the extent of the creditable amount. When creditable input tax exceeds the output tax, a refund of the difference will be made.
- Taxpayers, who are defined as enterprises and those who receive foreign goods from bonded areas, must file a consumption tax return and pay taxes (incl. local consumption tax) due, if any, within two months of the day following the last day of the fiscal year.
Note that, enterprises including individuals and corporations that meet certain requirements are exempt from the duty to file a consumption tax return and pay taxes (incl. local consumption tax) due.
- In a case where a foreign corporation which does not have a PE in Japan is involved in Asset Transfers in Japan,the corporation is obliged to pay consumption tax in Japan.
Note that, tax liability is exempted if the corporation meets certain requirements.
0%: Export transactions
8%: Food/beverages (excl. alcoholic beverages) and certain newspapers under subscription contracts
Tax-exempt: Sales and leasing of land, sales of securities and means of payment, money lending and other financial transactions,registration and licensing fees by the national government and local public bodies, etc.
From 1 October, 2015, new consumption tax rules were introduced to cross-border digital services provided by foreign corporations to Japanese market.
Services provided via the internet such as e-books, music, and advertisements are treated as “provision of electronic services”.
Provision of electronic services are classified as either “provision of B2B (Business-to-Business) electronic services” or others.
As for provision of B2B electronic services among all electronic services, “reverse charge mechanism” has been introduced,where a Japanese business files and pays tax who receives electronic services from a foreign corporation.
While, when a foreign corporation provides B2C (Business-to-Consumer) electronic services, the corporation is liable to file and pay consumption tax when it is a taxable person.
For B2C electronic services provided by a foreign corporation, the Japanese business receiving the services will not,for the time being being, be eligible for a purchase tax credit. However, a purchase tax credit can be applicable if a foreign corporation who provides these service is a “registered foreign business”.
Withholding Tax, Tax Treaty
- The withholding tax rate on the payment for non-residents who do not have a PE in Japan depends on the type of income earned.
- Where the country of residence of a non-resident or a foreign corporation has an income tax convention with Japan,income tax on the domestic source income received by the non-resident or the foreign corporation may be relieved in accordance with the provisions of the convention. To apply for this relief for income tax, it is necessary to submit “Application form for income tax convention”to the district director of the competent tax office through the payer of domestic source income by the day before the payment date.
Please refer to the following link for Japan’s tax convention network.