| Income tax rates in Japan Japan tax rates for an individual in 2009 is between 5% and 40%. The higher the income, the higher the rate of tax payable.
Japan Income Tax Rates 2009:
Under 1,950,000 yen: 5%
Over 1,950,000 yen Or under 3,300,000 yen: 10%
Over 3,300,000 yen Or under 6,950,000 yen: 20%
Over 6,950,000 yen Or under 9,000,000 yen: 23%
Over 9,000,000 yen Or under 18,000,000 yen: 33%
Over 18,000,000 yen: 40%
All individuals, regardless of nationality, are classified as either residents or non-residents. Individual income tax comprises self-assessed income tax and withholding income tax. Self-assessed income tax will be levied on the individual's income for the calendar year.
Concept of residence and taxable incomeResidents
Persons having a domicile in Japan and persons having a residence in Japan for one year or more are termed residents. The worldwide income of residents, regardless of the location of the source of income, is subject to income tax.
Domicile refers to the principal base and center of one's life. Residence refers to a location in which an individual continually resides for a certain time but which does not qualify as a base and center of his/her life.
Non-permanent residents
Residents having no Japanese citizenship and having a domicile or residence in Japan for less than five years within the period of ten years are non-permanent residents.
The scope of taxation for non-permanent residents corresponds to that for residents, but tax will not be assessed in Japan on income sourced outside Japan as long as that income is not paid within Japan or is not remitted to Japan.
Non-residents
Persons not qualifying as residents are termed non-residents. Japanese income tax for non-residents will be assessed on income sourced within Japan. As described in 3.4.4 above, the scope of taxable income for withholding tax on non-residents is covered under the provisions for domestic-sourced income, so, except in special cases, taxation for non-residents is often completed through withholding at source procedures.
Self-assessed income taxSelf-assessed income tax on residents
Income is calculated using methods established for each of a number of income classifications. The tax is calculated by subtracting the various income deductions from the total amount of income and then multiplying the difference, which is the amount of taxable income, by the progressive tax rates below. Any withholding income tax levied on the income beforehand will be deducted from the calculated tax.
Self-assessed income tax on non-residents
Non-residents are classified by their circumstances into (a) non-residents having an office, etc., in Japan, (b) non-residents continuously engaged in construction or assembly in Japan for one year or more, or doing business through a designated agent in Japan, or (c) other non-residents.
Taxable income is calculated within the scope of income established for each classification in 3.3.4 above. The amount of self-assessed income tax levied on non-residents is calculated in the same manner as for residents. Non-residents who earn salary income paid for services provided in Japan and not deemed subject to withholding tax in Japan must file a return and pay a 20% tax on the total amount of that salary.
Corporate taxes and tax rates in JapanThe taxes levied in Japan on income generated by the activities of a corporation include corporate tax (national tax), corporate inhabitant tax (local tax), and 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 business 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.
Tax burden on corporate income in Japan
Brackets of taxable income / Up to 4 million yen / 4 - 8 million yen / Over 8 million yen
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Corporate tax rate: 18% 18% 30%
Prefectural Inhabitant taxes: 0.90% 0.90% 1.50%
Municipal Inhabitant taxes: 2.21% 2.21% 3.69%
Enterprise tax: 2.70% 4.00% 5.30%
Special local corporate tax: 2.30% 3.30% 4.30%
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Total tax rate: 26.11% 28.41% 44.79%
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Effective tax rate: 24.87% 26.48% 40.87%
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(Note) The applicable period for the 18% corporate income tax rate is for business years ending between April 1, 2009 and March 31, 2011.
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 up to two prefectures.
The following tax rates will apply for business year ending on or after April 1, 2011. (Apply only to corporations meeting the above conditions.)
Brackets of taxable income / Up to 4 million yen / 4 - 8 million yen / Over 8 million yen
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Corporate tax rate: 22% 22% 30%
Prefectural Inhabitant taxes: 1.10% 1.10% 1.50%
Municipal Inhabitant taxes: 2.70% 2.70% 3.69%
Enterprise tax: 2.70% 4.00% 5.30%
Special local corporate tax: 2.30% 3.30% 4.30%
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Total tax rate: 30.80% 33.10% 44.79%
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Effective tax rate: 29.33% 30.85% 40.87%
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Scope of income subject to corporate taxCorporations 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.
Japan consumption taxThe consumption tax rate in Japan is 5%.
The following domestic and import transactions, except for certain transactions deemed non-taxable, are subject to consumption tax. The consumption tax rate is 5% (national consumption tax rate of 4% and local consumption tax rate of 1%).
1. Domestic transactions: the transfer/loan of assets or the provision of services as a business in Japan by a company for consideration.
2. Import transactions: cargo retrieved from a bonded zone.
Financial transactions, capital transactions, and certain transactions in the areas of medical care, welfare and education are deemed non-taxable. Export transactions and export-like transactions such as international communications and international transport are exempt from consumption tax.
Self-assessment and payment
Companies engaged in domestic transactions and parties engaged in import transactions must file and pay taxes on their respective set tax bases. To ensure that double taxation does not occur at the production and distribution stages, a scheme has been adopted allowing the deduction of consumption tax on purchasing from consumption tax on sales.
Taxes in Japan - Other principal taxesThere are a variety of other taxes levied on income, the acquisition/ownership of assets, consumption and other transactions in addition to those described above. Taxes levied on the ownership of assets to which many businesses are subject include the fixed asset tax (depreciable property tax) and the city planning tax. Land, structures and depreciable assets for business use are subject to a fixed asset tax (depreciable property tax) of 1.4%, payable by the owners of said property as of January 1 each year. The city planning tax is surtax on the fixed asset tax, and is levied at a rate of 0.3% on land and structures within city planning zones. Companies in major cities such as Tokyo and Osaka having facilities exceeding 1,000 square meters in floor space and/or having more than 100 employees are subject to business office taxes. The tax rates are 600 yen per square meter of floor space and 0.25% of the total amount of employee salaries.
Furthermore, there is a registration and license tax levied for the registration of real estate/companies and the issue of business licenses, as well as a stamp duty payable as a tax on stipulated documents. Gift tax, inheritance tax and other special-purpose taxes must also be borne in mind.
Withholding income taxIncome tax takes two forms: self-assessed income tax and withholding income tax. In contrast to self-assessed income tax, which is levied on the income of individuals, withholding income tax is assessed against payments of certain taxable income, whether made by an individual or a corporation. Income subject to withholding income tax is determined in accordance with the tax classification of the recipient of that income.
Withholding at source and payment procedures
Persons who pay income subject to withholding at source must pay the taxation office the amount of tax withheld at source no later than the 10th day of the month following that in which the income was paid. However, when a payer with a domicile or business office in Japan pays income to a non-resident or a foreign corporation in another country, the withholding income tax may be paid by the last day of the month following that in which the income was paid. Regarding withholding tax paid on residents' salaries, a special exemption is provided for small businesses with fewer than 10 persons on the payroll that allows them to elect to pay withholding income tax in six-month installments twice a year (up to July 10 and up to January 10, or January 20 if a business opts for the special exemption).
Withholding tax on residents
Payments made in Japan of the following income to residents are subject to withholding at source:
- Interest (including profit on redemption on specified discount bonds)
- Dividends
- Salary, wages, bonuses and similar compensation
- Retirement allowances
- Certain compensation, fees, etc., to persons other than employees
Withholding tax on domestic corporations
Payments made in Japan of the following income to domestic corporations are subject to withholding at source:
- Interest (including profit on redemption on specified discount bonds)
- Dividends
- Horse racing prizes received by horse owners
- Distribution of profits in accordance with a Tokumei Kumiai contract
Withholding tax on non-residents and foreign corporations
Payments made in Japan of the income and "Domestic-sourced income" to a non-resident or a foreign corporation, or such payments made overseas by payers with a domicile or business office, etc. in Japan, will be subject to withholding income tax. Of these payments, payments of certain categories of income as prescribed for non-residents and for foreign corporations to a non-resident or a foreign corporation with a permanent establishment within Japan are exempt from withholding taxation, provided that a certificate from the taxation office is presented to the payer attesting that the income will be attributed to that permanent establishment and will be added to and counted as business income subject to self-assessment for tax purposes.
Foreign tax credits
In order to avoid double taxation of income internationally, a domestic corporation is allowed to credit foreign taxes imposed on its business against Japanese tax up to the creditable limit, and to credit foreign taxes imposed on a foreign subsidiary against Japanese tax up to the creditable limit.
Transfer pricing taxation
In order to prevent corporations from setting the prices for transactions with a parent company or other overseas affiliate at a different amount from ordinary (i.e. arm's-length) prices so as to transfer profits overseas, a transaction is treated as having occurred at the arm's length price and the amount of tax calculated accordingly if the income derived from the transaction differs from the arm's length price.
Anti-tax haven taxation in Japan
In order to prevent domestic corporations from evading taxes by retaining income through a foreign subsidiary established in a so-called tax haven, a domestic corporation is taxed by including in its taxable income an amount corresponding to its interest in the retained earnings of that foreign subsidiary.
Thin-capitalization taxation
If a corporation's borrowing from an overseas controlling shareholder exceeds three times its equity (or an alternative reasonable ratio), interest on borrowing corresponding to the excess cannot be deducted from taxable income.
Neutrality of tax system with respect to mode of business presence (branch or subsidiary)
Corporations engaged in economic activities in Japan are subject to taxes in Japan on the profits generated by those economic activities. Steps have been taken, however, to ensure that the tax system does not impose unfair burdens on multinational corporations engaged in economic activities in Japan on the basis of the mode of their business presence in Japan. The worldwide income of corporations established in Japan is subject to taxation, but when that income includes profits earned in foreign countries that are taxed in the source countries of that income, foreign taxation deductions are available whereby taxes paid in a foreign country may within certain bounds be deducted from Japanese taxes owed for the purpose of eliminating double taxation between the source country of income and Japan. Measures have also been implemented to avoid double taxation internationally of Japanese branches of foreign corporations, among these being to make only certain income generated within Japan subject to taxation in Japan.
Domestic-sourced income
The scope of taxable income for corporate tax differs by the mode of activity of a foreign corporation in Japan, as will be described later. For the purpose of determining the income of non-residents and foreign corporations subject to withholding tax, domestic-sourced income is defined as follows: 1. Interest on public and corporate bonds, interest on savings and deposits derived from offices in Japan
2. Interest on loans for business operations in Japan
3. Dividends on shares or securities investment trusts of domestic corporations
4. Consideration for use of real estate or similar property in Japan; rental of ships or aircraft to residents or domestic corporations
5. Salaries, wages, bonuses and other compensation for the provision of services in Japan
6. Retirement allowances and pensions for services rendered by residents
7. Consideration for the services of freelance professionals in Japan
8. Consideration for personal services rendered by entertainers, freelance professionals, technicians, etc.
9. Usage fees or consideration for transfers of patent rights, know-how, copyrights, etc., in connection with services in Japan
10. Usage fees for machinery and equipment in connection with services in Japan
11. Prizes offered in Japan for publicity/advertising purposes
12. Pensions paid on the basis of agreements concluded in Japan
13. Profit on redemption of discount bonds issued in Japan
14. Income resembling fixed-interest income
15. Certain income from the transfer of real estate in Japan
16. Distribution of profits in accordance with a silent partnership contract (Tokumei Kumiai contract)
17. Certain income other than the above derived from the management, ownership, or transfer of assets in Japan
18. Business income
19. Distribution of profits pursuant to a partnership agreement provided for by Civil Law, and other kindred partnership agreements
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