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:
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
8 million yen
|Total tax rate||
|Effective tax rate||
(Note) The rates for corporate inhabitant tax and corporate enterprise tax are shown using Tokyo as an example. The following conditions apply:
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 :>
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 :>
*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 :>
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
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
Up to 4 million yen per year
Over 4 million yen and up to 8 million yen per year
Over 8 million yen per year
Added value rate