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 |
Over 8 million yen |
Corporate tax Inhabitant taxes (1) Prefectural (2) Municipal Enterprise tax |
22.00% |
22.00% |
30.00% |
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:
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
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% |