Japan Tax

Overview of corporate income taxes (corporate tax, corporate inhabitant tax, enterprise tax)

Corporate income taxes and tax rates
The taxes levied in Japan on income generated by the activities of a corporation include:

• Corporate tax (national tax)
• Corporate inhabitant tax (local tax)
• Enterprise tax (local tax) (hereinafter collectively referred to as "corporate taxes").

Except in instances requiring exceptional treatment, the scope of income subject to corporate inhabitant tax and enterprise tax is determined, and the taxable income calculated, in accordance with the provisions for corporate tax. Corporate inhabitant taxes are levied not only on income but also on a per capita basis using the corporation's capital and the number of its employees as the tax base. Corporations having paid-in capital of more than 100 million yen are subject to corporate enterprise tax on a pro forma basis.
The income calculated for each taxable year is used as the tax base for determining these corporate taxes to be levied on a corporation's income. Other corporate taxes include corporate taxes on liquidation income and corporate taxes on reserves for retirement pensions, etc.
The tax rates for corporate tax, corporate inhabitant tax and enterprise tax on income (tax burden on corporate income) and per capita levy on corporate inhabitant tax for each taxable year are shown below (a small company in Tokyo is used as an example). The rates for local taxes may vary somewhat depending on the scale of the business and the local government under whose jurisdiction it is located.
Table 3-1 Tax burden on corporate income

Brackets of taxable income	Up to 4 million yen	4 million yen to 8 million yen	Over 8 million yen
Corporate tax Inhabitant taxes (1) Prefectural (2) Municipal Enterprise tax	22.00% 1.10% 2.70% 5.00%	22.00% 1.10% 2.70% 7.30%	30.00% 1.50% 3.69% 9.60%
Total tax rate	30.80%	33.10%	44.79%
Effective tax rate	29.33%	30.85%	40.87%

(Note) The rates for corporate inhabitant tax and corporate enterprise tax are shown using Tokyo as an example. The following conditions apply:

• The capital of the corporation is 100 million yen or less.
• Corporate tax amount is 10,000,000 yen or less and taxable income is 25,000,000 yen or less.
• Offices or factories located in two prefectures or less.

Table 3-2 Per capital levy on corporate inhabitant tax

Capital Amounts		Employee number	Per capital levy
Over 5,000,000,000 yen	-	Over 50	3,800,000 yen
Over 1,000,000,000 yen	Or under 5,000,000,000 yen	Over 50	2,290,000 yen
Over 5,000,000,000 yen	-	Or under 50	1,210,000 yen
Over 1,000,000,000 yen	Or under 5,000,000,000 yen	Or under 50	950,000 yen
Over 100,000,000 yen	Or under 1,000,000,000 yen	Over 50	530,000 yen
Over 100,000,000 yen	Or under 1,000,000,000 yen	Or under 50	290,000 yen
Over 10,000,000 yen	Or under 100,000,000 yen	Over 50	200,000 yen
Over 10,000,000 yen	Or under 100,000,000 yen	Or under 50	180,000 yen
-	Or under 10,000,000 yen	Over 50	140,000 yen
-	Or under 10,000,000 yen	Or under 50	70,000 yen

3.3.2 Establishment of corporations/branches in Japan and tax notification
When a Japanese corporation or a branch office is newly established in Japan in accordance with Japanese law, tax notification pertaining to start-up must be submitted to tax authorities within a prescribed period after establishment. Tax notification must also be submitted when a foreign corporation generates income subject to corporate tax in Japan without establishing a branch office or when carrying out business activities through locations or parties meeting the conditions below instead of opening a branch office.

<Cases where a foreign corporation carrying out activities without establishing a branch office is required to submit tax notification :>

• When construction, installation, assembly or other works, or control and supervision of such works extends for a period of more than one year, the location of this construction, installation, etc.
• Certain agents, as described below:
  • Parties having and frequently exercising the authority to conclude business agreements on behalf of that foreign corporation.
  • Parties storing assets on behalf of that foreign corporation in a volume/quantity corresponding to the ordinary requirements of customers and delivering those assets in response to customers' requests.
  • Parties who regularly carry out an important portion of the work required for order acquisition, consultation and other activities aimed at the conclusion of business agreements solely or primarily on behalf of a foreign corporation.

3.3.3 Representative offices
The income derived from the activities of a "representative office" through which a foreign corporation engages in business in Japan is not considered taxable as long as the representative office is used only for functions that serve an auxiliary role in publicity/advertising, information provision, market surveys, basic research and other business activities of that corporation.
The income derived from the activities of an office or other place of business in Japan used by the foreign corporation only for the purchasing or the storage of assets is also not considered taxable.
3.3.4 Scope of income subject to corporate tax
Corporations established in Japan are subject to taxes in Japan on their worldwide income, whether earned in Japan or other countries. Corporations established in foreign countries are grouped into one of the following three tax classifications, and the aforementioned domestic-sourced income of these corporations is subject to corporate tax, corporate inhabitant tax and enterprise tax in Japan corresponding to their classifications. (Note, however, that corporations under category 3) are not subject to inhabitant tax and enterprise tax.)

<Relationship between a foreign corporation's mode of activity in Japan and its taxable income :>

• Foreign corporations having a certain fixed place of business, such as a branch, sub-branch, business establishment, office, or factory in Japan.
  • All domestic-sourced income.
    Representative offices described in 3.3.3 above that serve in an auxiliary capacity in corporations' business activities are not included among these locations.

• Foreign corporations conducting business through the locations or parties stipulated in 3.3.2. 1) and 2) above.
  • Business income, the domestic-sourced income described in 3.2. 4), 8), 15) and 17) above and other domestic-sourced income derived from business in Japan. Foreign corporations not corresponding to either 1) or 2) above.

• The domestic-sourced income described in 3.2. 4), 8), 15) and 17) above.

*Locations, sites, agents, and so on falling under (1) and (2) above are called "permanent establishments."
3.3.5 Calculation of income subject to corporate tax
The amount of income used as the tax base for corporate taxes on income for each taxable year is determined by making the necessary tax adjustments to corporate profits calculated using accounting standards generally accepted as fair and appropriate. Costs and expenses incurred in earning profits are deductible, except in certain exceptional instances (examples provided below).
Foreign corporations face no restrictions on the locations in which costs and expenses deductible from Japan-sourced taxable income may be incurred. However, detailed statements of costs and expenses incurred overseas and deducted from income in Japan must be prepared, and these costs and expenses allocated fairly in accordance with the arm's-length principle.

<Examples of items for which there are limits on deductible costs and expenses :>

• Corporate taxes and penalties
• Nondeductible amount for donations
• Nondeductible entertainment expenses
• Amount of allowance reserves transferred
• Amount exceeding depreciable limit of depreciable and deferred assets
• Write-down of assets
• Bonuses or retirement benefits for directors

3.3.6 Remittances to home country
Remittances made by a branch of a foreign corporation to its head office are in principle free from taxation. In other words, the payer branch cannot as a general rule treat such remittances as expenses, and consequently these same remittances may not be treated as income by the recipient head office.
On the other hand, remittances made by subsidiary companies to their parent company are generally regarded as payments of costs/expenses, distributions of profits or loans (or repayments of loans). Certain of these remittances may be deducted as expenses by the payer subsidiary companies, while others may be regarded as income by the recipient parent company. Some of the payments regarded as income by the parent company (e.g., payments of interest, dividends or usage fees) require withholding of income tax at the source at the time of payment.
3.3.7 Taxation of retained earnings of family corporations
A Japanese corporation that is a family corporation and meets certain conditions is subject to taxation of retained earnings as well as corporate tax on ordinary income. Taxation of retained earnings is calculating by multiplying the taxable amount of retained earnings (obtained by subtracting the retained earnings deductible from the amount of retained earnings in each business year) by the special tax rate. The special tax rate varies according to the taxable earnings. If annual the taxable earnings does not exceed 30 million yen, it is subject to a tax rate of 10%. However, if the taxable earnings exceed this amount, a rate of 15% is charged on the amount in excess of 30 million yen and up to 100 million yen, and any amount in excess of 100 million yen is taxed at a rate of 20%.
3.3.8 Treatment of losses
Net losses under income in each business year are carried forward for the next seven years. Losses may only be carried forward in this way if a blue form tax return is filed in the business year in which the loss arose, and a final tax return is then filed every subsequent year. Corporations that file a blue return are also allowed to carry back a loss to the business year commencing not more than one year prior to the date of commencement of the business year in which the loss arose, and receive a full or partial refund of the amount of corporate tax in the business year in which the loss was carried back. However, this system of carrying back is presently suspended except under certain conditions, such as five years of losses of small and medium enterprises starting from the business year after the business year of establishment.
3.3.9 Corporate reorganization tax system
If a corporation transfers assets as a result of a split, merger, or investment in kind ("reorganization"), gain or loss from the transferred assets is as a rule subject to taxation. However, reorganizations meeting certain conditions, such as those within the same business group or those undertaken for the purpose of a joint venture, are treated as "qualified reorganizations," and qualify for deferment of taxation of gain or loss on the transferred assets.
3.3.10 Filing of tax return and payment of corporate taxes

• Final tax return and tax payment
  Corporations must file a final tax return for corporate tax, corporate inhabitant tax and enterprise tax on their income within two months from the day following the last day of each taxable year. An extension of the deadline for filing a final tax return may be requested, with approval from the director of the taxation office, when a corporation is unable to file a final tax return because the accounting auditor has not completed the audit or because accounts remain unsettled for other unavoidable reasons. The income and tax amounts to be entered in the final tax return must be calculated in accordance with the statement of accounts approved by the general meeting of stockholders.
  The calculated tax must also be paid within this period. The payment deadline will not be extended even if the deadline for filing of a final tax return is extended as described above. Any interim payment made in advance on the amount of tax owed shall be deducted from the total amount to be paid.
• Interim tax return and tax payment
  Corporations whose taxable years exceed six months must file an interim return, within two months from the day marking the end of the first six months of the taxable year, an interim tax return for the period starting on the first day of that taxable year and ending on the day six months thence, and must pay the interim amount of tax owed.
• Blue form returns
  Tax return forms for corporations come in two formats: white forms and blue forms. A corporation may file a blue form tax return with approval from the appropriate national tax office. Corporations filing blue form tax returns enjoy a variety of tax benefits. To receive approval from the tax office to file a blue form tax return, a corporation must submit an application for approval prepared in the prescribed format no later than the day prior to the starting day of the taxable year. Newly established subsidiary companies and foreign corporations establishing new branch offices in Japan must submit the application for approval no later than the day prior to either the day marking three months since the establishment of the corporation/branch or the last day of the corporation's/branch's initial taxable year after establishment, whichever comes first.

3.3.11 Imposition of corporate enterprise tax on a pro forma basis
Corporations whose capital or investment exceeds 100 million yen are taxed on a pro forma basis using income, added value, and capital as the taxable base. The standard tax rates for income, added value and capital are as follows
Table 3-3

Income rate	Up to 4 million yen per year	3.8%
	Over 4 million yen and up to 8 million yen per year	5.5%
	Over 8 million yen per year	7.2%
Added value rate		0.48%
Capital rate		0.20%

(Note) For companies with offices and factories located in more than two prefectures, a uniform standard income tax rate of 7.2% is applied.