Individual income tax rates in Japan are progressive, up to 40%. Note that adding municipal and other taxes, the total tax burden on Japan individuals is around 50%.
Taxable income (Yen) Tax Rate Deduction (Yen)
0 - 1,950,000 5%
1,950,000 - 3,300,000 10% 97,500
3,300,000 - 6,950,000 20% 427,500
6,950,000 - 9,000,000 23% 636,000
9,000,000 - 18,000,000 33% 1,536,000
Above 18,000,000 40% 2,796,000
Calculation: Taxable income × tax rate - deduction = national tax.
Retirement income, interest and timber income are each taxed separately from other income.
While similarities between the taxation of companies and individuals do exist in Japan, the above refers largely to companies. Accordingly, outlined below are the basic rules and rates applicable to individuals. Given the complexity of this area, it is necessary to stress the need to seek professional advice. Non-resident taxpayers are taxed only on their Japanese source income. Non-permanent resident taxpayers are taxed on both Japanese source income plus that part of non-Japan source income that is paid in and/or remitted to Japan. A permanent resident taxpayer is taxed on his worldwide income.
Individuals are generally classified on the following basis:
Period of Residence Classification
Up to 12 months Non-resident
12 months to 60 months Non-permanent resident
More than 60 months Permanent resident
Filing status - Joint filing of tax is not permitted. Additionally, the tax rates are uniform and are not dependent on marital or other status.
Taxable income - Most income, including employment income and investment income, is taxable. Specified deductions, allowances and credits are available to reduce tax.
Capital gains - Individuals are taxed on gains from the sale of shares at 20% (10% through December 2011). Long-term gains of individuals from the sale of land are taxed at 20% and short-term gains at 39%.
Deductions and allowances - Subject to certain restrictions, deductions are granted for social insurance premiums paid to the Japanese government, life insurance premiums, earthquake insurance premiums, charitable contributions, qualified medical expenses, etc. Personal deductions are allowed for the individual, a dependent spouse and children under the age of 23. Exemptions exist for the disabled and elderly.
Capital duty - No
Stamp duty - Stamp duty of JPY 200 to JPY 600,000 is imposed on the execution of taxable documents.
Capital acquisitions tax - See "Real property tax" below.
Real property tax - A municipal fixed assets levy is assessed at an annual rate of 1.4% to 2.1%. Additionally, a real estate acquisitions tax of 3%-4% of the assessed value applies at the time land or buildings are acquired and a real estate registration tax is imposed on the appraised value of real property at rates ranging from 0.4% to 2%, depending on the type of transfer.
Inheritance/estate tax - Progressive rates up to 70% apply.
Net wealth/net worth tax - No
Social security - Social security tax is comprised of several components. The employee's portion is currently 12.375%. The employer must withhold the employee's contribution.
Tax year - Calendar year
Tax Filing and tax payment - Employment income and investment income are generally withheld at source. Self-employment business income is calculated in a similar manner as for corporations and must be selfreported.
Penalties - Japan imposes various penalties on taxpayers who underreport their total tax due and who fail to timely submit tax payments and tax returns. Penalties are not deductible for Japanese tax purposes.
TOTAL EFFECTIVE TAX RATE IN JAPAN
By way of example of how the major taxes interrelate and accumulate, set out below is the effective tax rate calculation sample for a Japanese or foreign corporation having a paid-in capital in Y100 million or less.
A. Corporation Tax 30.0%
B. Inhabitant Tax (17.3% × A) 5.19%
C. Enterprise Tax 9.6%
D. Effective rate = (A + B + C) / (1 + C) 40.87%
Note: Enterprise tax is deductible for corporation tax purposes for the period in which it is paid.
Domestic corporations are those whose head or main office is located in Japan. Companies incorporated in Japan under the Corporate Law or under other special laws are required to locate their head office in Japan. Such domestic corporations are subject to tax on their worldwide income. Domestic corporations are also chargeable to tax on 'liquidation income' which is the income from transfers of residual assets and business income arising during the period in which a corporation is liquidated.
Foreign corporations are all corporations which are not domestic corporations. A corporation having its head or main office outside Japan is a foreign corporation even if its business operations are in Japan. Foreign corporations are subject to corporation tax on Japanese source income, including income relating to the exploration for oil in the continental shelf.
Foreign corporations are subject to either corporation tax or final withholding tax on Japanese source income, depending on the type of income and the extent of the foreign corporation's activities in Japan. Foreign corporations are not subject to tax on liquidation income.
The rate of national tax for Japanese corporations is 30% unless the paid-in capital of the corporation is Y100 million or less, in which case the first Y8 million of income is only taxed at 18%. The rate of tax on liquidation income on domestic corporations is 27.1%.
Tax is imposed on a current year basis. The tax year adopted is generally that specified in a company's constituent documents with the standard year being a calendar year. However, it should be noted that other periods are also allowed, including periods of 12 months or less. Japanese branches of foreign corporations are required to adopt the accounting period used by their foreign head office. Final tax is payable when lodging the final corporation tax return, usually required within two months of the end of the accounting period. Extensions of time to lodge can be sought although interest at 7.3% or less is payable where such an extension is obtained.
Interim tax returns and payments are required if a corporation has a fiscal period longer than six months. Ordinarily, provisional taxes are computed as one half of the tax liability of the previous year but a reduction is available where the interim tax returns are filed to reflect bi-annual results of operations for the current year.
BLUE RETURN FILERS
Preferential tax treatment is given to companies who file 'Blue Returns'. A company which undertakes to maintain specified bookkeeping records and documentation and gains approval from the Director of the District Tax Office can file a Blue Return, the associated benefits of which are as follows.
- Tax losses may be carried forward for seven years or carried back to the previous year (temporarily suspended except for companies with paid-in capital of Y100 million or less (except for a subsidiary of a large scale company).
- The revenue authorities cannot seek to adjust taxable income without physical review of the books and records of the company and must state the reason for such an adjustment.
- Allowance of reserves, special depreciation and tax credits as stipulated in the Special Taxation Measures Law.
Importantly, a new company must seek registration for Blue Form returns within the earlier of three months from incorporation or the end of the initial accounting period.
Inhabitants Taxes are local prefectural and municipal taxes. These taxes are computed as a percentage of the corporation tax before tax credits. Each prefecture and municipality may elect an inhabitants tax rate within the range shown below:
Prefecture 5.0% to 6.0%
Municipality 12.3% to 14.7%
Tokyo Metropolitan (combined) 17.3% to 20.7%
In addition to the above, local governments charge a per capita levy on inhabitants with standard rates that vary from Y70,000 to Y3,800,000 depending upon the amount of the paid-in capital and the number of employees.
Prefectures can elect to levy an Enterprise Tax. The tax base is business income and liquidation income as computed for corporation tax purposes, with certain adjustments such as the exclusion of income from a business carried on in a foreign country. Enterprise tax is deductible in computing taxable income for corporation and enterprise tax purposes.
Size-based taxation has been newly introduced and this taxation is applied only to large corporations with paid-in capital of more than Y100 million and for the business years beginning on or after 1 April 2004. For such large corporations, enterprise tax consists of the traditional enterprise tax levied based on the taxable income and the newly introduced enterprise tax levied based on the capital etc. (i.e. paid-in capital and capital surplus) and value added (i.e. wages, interest and rental expenses).
Tax rates vary depending on whether or not the corporation is a large corporation with paid-in capital of more than Y100 million and depending on the prefecture:
Taxable periods beginning after 1 October 2021
Standard Maximum Local Corporate Special Tax
(1) Company whose paid-in capital is Y100 million or less
First Y4,000,000 per annum 2.7% 2.95%
Next Y4,000,000 to Y8,000,000 per annum 4% 4.365% (Taxable Income* Tax rate)*81%
Above Y8,000,000 per annum 5.3% 5.78%
(2) Company whose paid-in capital is more than Y100 million
(a) Income base (taxable income):
First Y4,000,000 per annum 1.5% 1.69%
Next Y4,000,000 to Y8,000,000 per annum 2.2% 2.475% (Taxable Income* Tax rate)*148%
Above Y8, 000,000 per annum 2.9% 3.26%
(b) Added value base:
The sum of wages, net interest expense and net rental expense 0.48% 0.504% 0.504%
(c) Capital base:
The sum of paid-in capital and capital surplus 0.2% 0.21% 0.21%
FAMILY HOLDING COMPANY SURTAX
Family holding companies are liable for surtax on earnings not distributed in excess of specified limits at the following rates:
Excess Income Tax Rates
First Y30,000,000 per annum 10%
Next Y70,000,000 per annum 15%
Over Y100,000,000 per annum 20%
A Japanese company in which more than 50% of the shares are held by the first shareholders' group is a family holding company and is subject to the surtax. A family holding company with paid-in capital of Y100 million or less whose net equity is 50% or less of its total assets is not subject to this special corporate surtax for accounting periods which begin on or after 1 April 2022 but before 1 April 2006.
BUSINESS OFFICE TAX
Companies whose business premises exceed 1,000 square meters and or employ in excess of 100 employees in designated cities are subject to a tax on business activity based on space or gross payroll respectively. It is within the discretion of the city authorities whether or not to charge the tax. Additions can be made to the list of designated cities for the purpose of this tax but the city must have a population of at least 300,000. The tax is imposed on:
(a) construction or extension of business premises (a one-time payment due from the owner of the building)
(b) ongoing businesses.
The rate of tax is Y600 per square meter of floor space in business use plus 0.25% of the total remuneration paid to employees.
FIXED ASSETS TAX
Real property and tangible depreciable fixed assets are subject to a fixed assets tax at the standard rate of 1.4% with an upper limit of 2.1% (1.7% for real property in specified large cities).
Landholding tax is also levied at the national and municipal level.
DETERMINATION OF TAXABLE INCOME
Income is ordinarily determined in accordance with generally accepted accounting principles, with certain adjustments made to comply with the tax law. Income and expenses are recorded on an accruals basis, with deductions from gross income for all reasonable expenses, costs and losses. Restrictions apply to the deduction of entertainment expenses.
DEPRECIATION AND DEPLETION
Depreciation is allowed in respect of all tangible assets, other than land and specified intangible assets. Depreciation on tangible assets is calculated using the straight-line or declining-balance method at the option of the taxpayer. However, for buildings, only straight-line method may be used. Intangible assets are generally amortised on a straight-line basis. The legislation specifies the period over which assets are to be depreciated and the rates for both the straight-line and declining-balance methods.
Minor assets that cost Y100,000 or less are deductible as an expense. In addition to ordinary depreciation, special depreciation in the form of increased initial depreciation and accelerated depreciation is available in certain cases.
Inventory valuation methods acceptable for tax include an item's individual cost, FIFO, LIFO, weighted, moving or straight average, most recent purchase, retail and lower of cost or market. Importantly, the tax treatment must replicate that adopted for the statutory accounts.
Corporations filing a 'Blue Return' are eligible for loss carry-over treatment. In general, losses may be carried forward seven years or carried back one year. The carry-back provisions have been suspended for accounting periods ending after 1 April 1992. However, a Blue Return status corporation with paid-up capital of Y100 million or less (except for a subsidiary of a large scale company) can carry back a net loss incurred in the business year to the previous year. The loss is limited to the loss incurred for each business year within the five years after the initial business year.
FOREIGN SOURCE INCOME
Japanese corporations are taxable on their worldwide income when earned. However, corporations are generally entitled to claim tax credits against corporation and inhabitants tax for foreign income taxes paid (direct credit).
For subsidiaries in low or nil tax countries or jurisdictions whose profits are not distributed, such profits are taxed in the hands of the Japanese parent on an accruals basis, with any associated foreign tax credits being available.
Japanese corporations investing in certain companies involved with developing countries or in prospecting for or developing natural resources may be able to establish a tax deductible reserve of 30% or 100% of the amount invested. After the reserve has been maintained for five successive years, the amount of reserve multiplied by the number of month of the business year, divided by 60, must be restored to taxable income in succeeding years following the year of reserve accrual.
TAX CREDIT INCENTIVES - CAPITAL INVESTMENT
Corporate tax credits of 7% of the acquisition cost are available on designated energy efficient machinery and equipment acquired by small to medium sized corporations. The total tax credit available, however, is limited to 20% of the corporate tax. The tax credit was only applied to qualifying capital equipment acquired by 31 March 2010.
FOREIGN TAX RELIEF
Relief is available for foreign taxes on foreign source income and capital gains whether or not Japan has concluded a tax treaty with the foreign country. Where a tax treaty exists it will specify the method of relief. In the absence of a treaty the domestic Japanese tax legislation allows a tax credit or deduction from taxable income. Under Japanese domestic law, foreign taxes not eligible for foreign tax credit are deductible. Treaties following the OECD model normally provide relief in the form of either a credit or exemption from tax.
The Japanese consolidated tax regime (a part of the corporate tax reform act for the year 2002) was enacted on 1 August 2002. The revised Corporate Tax Law and the Corporate Tax Law Enforcement Order are applicable to consolidated years ending on or after 31 March 2003, with transitional rules in respect of consolidated years beginning between 1 April 2022 and 30 June 2003, and ending on or after 31 March 2003.
Under the consolidated tax regime, an affiliated group of companies (a 'Consolidated Group') can report and pay national corporate income tax as one unit. For these purposes, a Consolidated Group means a Japanese parent company and its 100% directly or indirectly owned Japanese subsidiaries. An application for consolidated filing is at the tax payers' choice but, if made, must include all of the parent's eligible subsidiaries. Once started, consolidated filing should in principle continue indefinitely, unless a specific event (such as change of ownership) causes the qualifying conditions for consolidated filing to be failed, or an application to discontinue is approved by the Commissioner of National Tax Administrative Agency.
The group's national corporate income tax liability will be computed on a consolidated basis by aggregating the separate taxable income or loss of the member companies, and then making various consolidation adjustments. The consolidated national corporate income tax liability will then be determined by applying the normal corporate income tax rate to the consolidated taxable income, adjusted for consolidated tax credits. The total liabilities will then be allocated among the members. The parent company will file the consolidated return and pay the national corporate income tax on behalf of the group, although the member companies remain jointly and severally liable for the Consolidated Group's national corporate income tax liability. Local corporate income taxes levied on member companies will continue to be paid on an individual basis although the amount payable will be affected by the existence of the consolidation.
The consolidation tax regime provides for certain benefits such as the deduction of losses of individual member companies from the total income of the Consolidated Group (for national corporate income tax purposes only); deferral of gains on intra-group transfer of certain assets; and non-taxability of the dividends received from other member companies (regardless of the interest expense attributable to the dividend income). On the other hand, some features of the consolidated tax regime may result in an unpredictable tax burden on the introduction of tax consolidation or when a company joins the Consolidated Group in future, thus putting some restrictions on future M&A (mergers and acquisitions) activity by the group. Therefore, understanding these issues will become very important for tax professionals and tax payers when considering an application for consolidation.
RELATED PARTY TRANSACTIONS
All transactions between related companies are required to be conducted on an arm's length basis with the meaning of 'arm's length price' depending upon the transaction. Any difference arising between the price of the actual transaction and that regarded as the arm's length price is taxable or not deductible as applicable. The transactions covered by the provisions include the purchase and sale of inventory, the provision of services and financial facilities such as the making of loans and guarantee facilities.
Domestic corporations are subject to 20% withholding tax on dividends and interest and certain other income. Foreign corporations are subject to withholding tax (generally at the rate of 20%) on dividends, interest, royalties, income from immovable property, rentals from industrial or commercial equipment, and certain other income. This tax may generally be taken as a credit against the ultimate tax liability of the recipient. It should be noted that where the foreign corporation has a permanent establishment in Japan, certain types of income (e.g. rent, royalties) are exempt from withholding tax if taxed together with income from Japanese business income. As indicated, the tax may generally be taken as a credit against the ultimate tax liability of the recipient. However, as noted in the 'Inter-company Dividends' section, no tax credit for income tax withheld on dividends is allowed in the case of foreign corporations.
Japanese consumption tax, similar to a European-style VAT, is levied on the supply of goods and services in Japan; the sale or lease of assets in Japan; and the import of goods.
The rate is 5% (combined national and local) for most taxable transactions and 0% in certain circumstances (e.g. export transactions).
Vendors are liable for a consumption tax (value added tax) of 4% of sales, including imports of goods and services. Only a limited number of goods and services are zero rated. Exemptions apply to leases of land, education and medical treatment. Exports and certain specific services invoiced to non-residents are zero rated. In addition, a new local consumption tax is also collected at the rate of 25% of the national consumption tax. The net result will be a 5% rate of consumption tax.
Registration - A company may elect to be a consumption taxpayer if taxable sales for consumption tax purposes do not exceed JPY 10 million in the base period (2 years before the current year). The election is binding for 2 taxable years. Other than the above election, no registration procedures exist.
Filing and payment - If taxable sales for consumption tax purposes exceed JPY 10 million in the base period, the company must file a consumption tax return and remit the applicable tax to the tax authorities.
Income Tax Rate
Corporate Tax Rate
Sales Tax / VAT Rate
Last Update: Nov 2010
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