FAQ
1. How do Japan tax authorities define whether or not a foreign corporation has a permanent establishment in Japan?
Permanent establishment is: a fixed place of business such as an office, branch, factory, warehouse, mine, or quarry or place of natural resources; activities in construction, installation, or assembly, or personal services overseeing such for over a year; or a person who concludes or negotiates contracts on behalf of a foreign corporation. A corporation with permanent establishment is subject to Japan corporate income taxes. A corporation without a fixed place of business is subject to the withholding income tax rate of 20% for Japan sourced income (15% for specified interest). Any of the above may have exceptions if an international tax treaty rate applies.
2. What kinds of income are considered Japan sourced income of a foreign corporation (unless provided for in a tax treaty)?
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3. What kind of taxation are individuals in Japan subject to?
(1) Nonresidents, or individuals with no domicile in Japan at all or for over a year, are subject to income tax on Japan source income. Most tax treaties provide for an exemption on employment income if not present in Japan for less than 184 days in a year, with conditions. Nonresidents are not subject to local inhabitants tax on income.
(2) Non-permanent Residents are classified such for the first 60 months of residency. They are subject to Japan income tax on Japan source income plus non-Japan source income paid into Japan, as well as inhabitants tax.
(3) Permanent Residents are subject to Japan income tax on his or her worldwide income.
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4. What kinds of local taxes on income are there in Japan?
For businesses, it is key to remember that total Japan effective tax rate is 30% to 41% depending on income level, which includes these local taxes:
(1) Local Inhabitants Tax is based on income level and levied on companies and residents, as nonresidents are not subject. For companies, Inhabitants Tax is levied at 2.7 to 3.7% by municipalities or wards and 1% to 1.5% by prefectures or metropolises. Certain capital gains and retirement income are subject. For individuals, Inhabitants Tax is 10% for residents as of January 1 of the year following target year.
(2) Local Per Capita Levy Inhabitants Tax is based on capitalization level and staff level and assessed for companies and proprietors. Rates vary for locale. Companies pay annually at ¥70,000 and up. Proprietors pay annually at ¥2,000 to ¥3,000 for municipalities and ¥1,000 for prefectures.
(3) Enterprise Tax is based on income and levied on most businesses and proprietors by prefectures. The tax ranges from 5% to 10% and is applied to net business income after proprietor deduction of ¥2.9 million. Larger Japan corporations are assessed on a pro forma basis. The tax is deductible from taxable business income for the year paid. Nonresidents doing business through a permanent establishment are also subject.
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5. What expenses and losses are deductible under Japan corporate law?
Deductible expenses include all those for cost of goods sold, sales and administrative expenses, and other non-capital transaction expenses. In general, all costs, expenses and losses during an accounting period are deductible. In principle, there are no limitations on deductions for such payments if made at arm's-length prices, unless otherwise stipulated by tax law. Deductible expenses generally match financial statement expenses with a few exceptions to maintain fairness of taxation.
Partly deductible (p) and nondeductible (n) expenses are: (p) depreciation, reserves and allowances, deferred assets, entertainment, donations, and director remuneration and retirement compensation; (p/n) asset write-downs, allowance reserves transfers; (n) director bonuses, capital expenditures, penalties and fines, and corporate and resident tax.
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6. To what degree are entertainment and donations deductible?
Deductibility of entertainment expenses for corporations:
- with paid-in capital of over ¥100 million all entertainment expenses are non-deductible.
- with paid-in capital of ¥100 million or less is the lower of ¥3.6 million or 90% of actual disbursement.
Branch office paid-in capital for this purpose is calculated as the foreign corporation paid-in capital multiplied by the ratio of total assets of the Japan branch to those of the foreign corporation. Not classified as entertainment are donations, welfare, publication, and salary expenses.
Donations: deductibility is generally limited to 1.25% of taxable income before donation deduction, plus 0.125% of paid-in capital and capital surplus of the corporation. Donations are deducted in the period made and are: corporate payments to public welfare organizations, corporations, or organizations not returning benefit to donor; money or goods given for free; write-off of collectible receivables; or excessive interest paid to related Japan corporations.
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7. How is directors' remuneration treated under Japan corporate law?
Of many restrictions, remuneration for directors with employee status consists of both director and employee compensation. A Japan branch representative in a foreign corporation is normally regarded an employee rather than a director, unless also a board member of the foreign corporation. Japan board members are by law directors, and there are those without employee status and those with employee status. A third classification is employees of family corporations holding a specified large share of equity, who thereby are deemed directors.
Director regular salary - a director's regular salary is tax deductible unless exceeding a reasonable level as deemed by tax authorities. It must be fixed and paid periodically, lest considered a bonus. Amounts in excess of that authorized in the articles of incorporation or general shareholders' meeting resolution, if applicable, are not deductible. Director bonus - this is not deductible unless holding employee status and concurrently paid along with other employees. Deductibility is limited to that of a comparable employee. Economic benefits passed to directors are regarded as either salary or bonus. Fixed economic benefits paid monthly are fully deductible as salary, unless deemed excessive. Economic benefits include transfers of assets to directors on advantageous terms, free provision of company houses, interest-free loans, assumption of liabilities, and etc.
Director retirement allowance - this is deductible as deemed reasonable by a formula: director's retirement allowance = last month salary x years of employment x achievement rate. These expenses must be timely deducted, lest disallowed. This is allowed deductible at day of payment, which is typically decided at general meeting of shareholders or by the board of directors.
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8. How is the Japan taxation system structured?
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TAX |
National Tax |
Corporation tax, individual income tax, inheritance tax, etc. | |
| Consumption tax, liquor tax, registration & license tax, stamp duty, etc. | |||
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Local Tax |
Inhabitants Tax |
Local prefecture tax, Tokyo inhabitants tax | |
| Local prefecture tax, local non-Tokyo inhabitants tax, local city or town tax | |||
| Enterprise tax, real estate tax, etc. | |||
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9. What taxes are imposed on Japanese Corporations?
Japan Corporation Tax Law differs from the Income Tax Law applying to individuals, while both are direct and national tax. Domestic corporations are taxed on all income, while foreign branches are taxed only on domestic sourced income. Corporate tax liability is computed via tax return and paid upon filing. A 20% withholding tax is levied at the source on dividends and interest paid to corporations on bank deposits, which is deductible on a final return. The National Tax Procedures Law details handling of income tax related returns, payments, collection, arrears and correction. The Special Provisions for Corporation Tax Law under the Special Taxation Measures Law details handling of special depreciation, reserves, social expenses, and special tax rates. Corporate tax rates are as follows when corporate capital is at ¥100 million or less, corporate tax amount is at ¥10 million or less, and taxable income is at ¥25 million or less:
| Brackets of taxable income | Up to ¥4 million | ¥4 million to ¥8 million | Over ¥8 million |
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National tax: Corporate tax Local taxes: Inhabitants tax* - Prefectural - Municipal Enterprise tax** Special local corporate tax** |
22.00% 1.10% 2.70% 2.70% 2.30% |
22.00% 1.10% 2.70% 4.00% 3.30% |
30.00% 1.50% 3.69% 5.30% 4.30% |
| Total tax rate | 30.80% | 33.10% | 44.87% |
| Effective tax rate | 29.33% | 30.85% | 40.87% |
*The counterpart to Inhabitants Tax on income, local Per Capita Levy Inhabitants Tax is imposed based on capitalization and staff levels. Rates vary for locale. Companies pay annually at ¥70,000 and up.
**For corporations with paid-in capital of over ¥100 million, Enterprise Tax is on a pro forma basis ranging from 1.5% to 2.9% plus Special Local Corporate Tax at 148% of income levy.
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10. What is the individual income tax system in Japan?
The Japan Income Tax Law has a withholding tax system applicable to salaries and wages, dividends, and other payments to workers in Japan. Residents are taxed on all source income and nonresidents on domestic source income. When entering Japan to reside for one year or more, an individual becomes a resident at entry while treated as a non-permanent resident for five years. Non-permanent residents are taxed only on domestic-source income and foreign-source income from abroad or paid in Japan.
| Resident | Permanent Resident |
With a domicile in Japan or having resided continuously in Japan for over one year and not a non-permanent resident. |
Non-permanent Resident |
No intention of residing permanently in Japan and with a domicile in Japan continuously for five years or less. | |
| Nonresident | One who is not a resident. | |
There are ten categories for individual income: interest, dividend, rental (real property), business, employment, retirement, forestry, capital gains, occasional, and miscellaneous income. Income tax is calculated on aggregation and paid on total. Residents are permitted deductions: basic, ¥380,000; spouse, ¥380,000; dependent, ¥480,000; social insurance; and scale deduction on salary. Individual income tax rates are:
Individual Income Tax Brackets |
Income Tax Rates |
|
- |
under ¥1,950,000 |
5% |
over ¥1,950,000 |
or under ¥3,300,000 |
10% |
over ¥3,300,000 |
or under ¥6,950,000 |
20% |
over ¥6,950,000 |
or under ¥9,000,000 |
23% |
over ¥9,000,000 |
or under ¥18,000,000 |
33% |
over 18,000,000 |
- |
40% |
Earners might file a self-assessment tax return from February 16 to March 15 of a following year. Filing is not required as single-source income is withheld monthly by an employer as well as yearend adjustment made for annual income of up to ¥20 million. When over ¥20 million, or inclusive of other income, medical expense deductions, or foreign taxes, then an annual tax return must be filed. Thereby, adjustments of withholdings, taxes on other income, medical expense refunds, and deductions for withheld taxes on interest or dividends are made.
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11. What is the structure of the consumption tax system in Japan?
The consumption tax rate is a uniform 5%, or 4% plus local consumption tax 1%. The tax period is the corporate fiscal year, or for individuals the calendar year. Consumers pay the tax as commodities and services are levied. Manufacturers, wholesalers, retailers, and service businesses do pay the tax, however, with the tax levied at each level of sales thereof. Yet businesses can deduct the tax paid for purchases at cost from the tax levied upon sales, so the tax is not levied two- or three-fold at production and distribution levels.
To minimize record-keeping costs for businesses whose taxable sales do not exceed ¥200 million, a simplified tax system is availed. Those whose taxable sales do not exceed ¥30 million are exempted. Newly established corporations with share capital of ¥10 million or more must pay consumption tax even for the first two fiscal years (years having no corresponding base period). Yet, the simplified system is availed to new corporations from the first year with proper notifications to authorities.
Filing and payment of consumption tax is due by two months after the tax period. Interim filing and payment is due by two months following the end of each quarter, but those paying over ¥480,000 up to ¥4 million in the previous period can file and pay semi-annually. Those paying less than ¥480,000 need not file on interim.
Items not applicable for consumption tax include land sales and rental, residential buildings rental, securities sales, interest received, government service fees, foreign exchange business, medical care, welfare, some education outlays, and export trade.
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12. What are tax return procedures under Japan corporation tax law?
Corporations are required to calculate income and tax amounts, and file within two months after each fiscal yearend. There are two filing types: “shiroiro shinkoku” or white tax return, and “aoiro shinkoku” or blue tax return. Most companies in Japan elect blue return status, as there are significant benefits such as special depreciations providing various reserves as well as five years carry-over of deficit under provisions of Special Taxation Measures Law. If a newly established corporation or branch, such deficit carry-over benefits can be very meaningful.
The blue return system prescribes declaration based upon accurate accounting records. All taxpayer types including foreign corporations and individuals may apply to use it. To qualify, a corporation must meet requirements such as lawfully maintaining accounting books and recording and retaining records for seven years. Blue tax returns include a final return and an interim return, filed within two months after the end of each (typically) six-month interval. In the case of the first fiscal year, an application should be filed within three months of establishment or the last day of the fiscal year in which establishment occurs, whichever is earlier, or in the case of ordinary years by the day before the beginning of the fiscal year.
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13. What tax filings are required in the first year of operations for a corporation or a foreign branch?
Domestic corporations must file the following documents with applicable tax offices by two months from establishment date:
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14. What are the tax liability differences between a Japanese corporation and a foreign corporation branch office?
Corporation tax rates are uniform in Japan for domestic corporations and foreign corporation branch offices, and the national corporate tax rate is 30%. Corporation inhabitants and enterprise tax payable to prefectures and municipalities are also non-discriminatory.
Non-resident withholding tax of 20% is imposed for domestic corporations distributing profits to foreign parent companies, unless in a nation under tax treaty with Japan whereas the rate may be 10% to 15%. For branch offices remitting profits to foreign head offices, no tax is imposed upon profit after corporation tax.
A withholding tax system is applied for certain types of income paid to foreign corporations or non-residents, including interest income, dividends, and real estate rents. For foreign corporations with a permanent establishment in Japan (e.g. a branch or factory) or for non-residents receiving such income, certain of these can be exempted from the withholding requirement with the obtaining of a certificate by the tax office. This certificate enables the comprehensive settling of such taxes with yearend tax filing.
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15. How is a representative office set up in Japan? What are the requirements?
A representative office can be established by a foreign corporation in Japan without obtaining any approvals or permits by authorities or the Legal Affairs Bureau, and may immediately start activities by securing a representative and place of contact. A representative office must limit its activities, however, to purchasing or holding assets, advertising, supplying information, conducting market or basic research, and such other activities of ancillary nature on behalf of the foreign parent, and the office may not have a permanent establishment such as a factory or warehouse in Japan. Transfer of funds needed for establishing and operating a representative office, e.g. salaries and administration expenses, are not subject to foreign exchange restriction. Cost accrued is deductible from parent corporation income in the home country, as tax deductible on the parent side.
If intending to conduct business activities in Japan, a foreign corporation must establish a branch or corporation office, which must be registered under the Commercial Code of Japan. Thus, certain procedures under Foreign Exchange Law must be followed.
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16. What are the pros and cons of a corporation vs. a branch office in Japan?
The primary benefit of establishing a subsidiary (Kabushiki Kaisha or “K.K.” corporate subsidiary) vs. a branch office is the appearance of stability and commitment that it gives prospective customers, employees, and distributors. Ninety-nine percent of all Japanese companies – even “Mom & Pop” enterprises – are K.K. entities.
A foreign corporation branch office is set up in Japan as conducting business through permanent establishment, i.e. a fixed place of business through which the activities of an enterprise are wholly or partly run. Japan follows OECD model convention, and examples of permanent establishments are: management office, branch, office, factory, workshop, mine, oil field, et al.
Either a corporation or a branch office may enter into business activities under its own name as an entity. Tax rates are fundamentally the same for either. Following are the K.K. and the branch office juxtaposed:
| Kabushiki Kaisha (K.K.) | Branch Office | |
| a. Appearance of stability and credibility | High: shows commitment, confidence - simplifies hiring employees, selling to customers, contracting distributors, opening bank accounts, renting office or company house, et al | Low: perceived as foreign company by nationals |
| b. Set-up and timetable | 4-8 weeks | Operational once office secured, representative selected, registration completed |
| c. Capitalization | No requirement – but ¥10 million is traditional and best for company image, thin capitalization taxation could be applicable | No requirement |
| d. Official registration fees (not including any legal service setup costs) | From ¥250,000 (with legal service fees, total cost likely ¥450,000 over that of branch) | From ¥100,000 |
| e. Corporate income tax (see FAQ #9) |
30-45% of profit | 30-45% of profit |
| f. Liability | Liability of shareholders limited to amount of equity participation | Parent company wholly liable to creditors |
| g. Directors and Statutory Auditors | At least one director (depending on size and whether entity goes public), no statutory auditor(s) unless multiple directors | None |
| h. Representatives residing in Japan | At least one | At least one |
| i. Transfer pricing issues | Lower risk - transfer pricing taxation may be applicable | Higher risk |
| j. Expenses | Except by “leasing” equipment or staff, head office cannot pass G&A expenses to K.K. to offset K.K. corporate taxes | Expenses incurred by head office for branch or common expenses may be allocated to branch |
| k. Dividends - withholding tax | Dividends paid to foreign shareholders subject to 20% withholding tax (may reduce if country under tax treaty) | After-tax profits to head office not subject to withholding tax |
| l. Interest and royalties | As paid by K.K. to overseas parent, deductible for K.K. unless excessive - subject to 20% withholding tax (may reduce if country under tax treaty) | Payments to head office non-deductible, parent payments to branch maybe deductible - subject to 20% withholding tax (may reduce if country under tax treaty) |
| m. Reporting losses | Losses not included on parent company's income statement | Losses offset head office profit - income tax can be saved |
| n. Lawsuits | Limited to Japan K.K. liability | Reach may extend to head office |
| o. Liquidation | Involved and somewhat costly | Not quite as involved as K.K. but somewhat costly (a branch cannot be transformed into K.K., but assets can be transferred) |
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17. What are the requirements for setting up a subsidiary corporation in Japan?
Subsidiary companies must be registered with the Legal Affairs Bureau. The application date for registration will be the date of establishment, which is the date the company may begin conducting business. Documents required for establishment include the foreign parent company’s articles of incorporation, establishment certificate, registration certificate and/or other official documents, a notarized affidavit, certifications of the representative authority of the foreign company’s representative, a contract from the parent company designating its representative in Japan, and certification(s) of signature authentication. These documents may also be required when opening a subsidiary bank account in Japan.
A Kabushiki Kaisha (or K.K.) must:
- be registered with the Legal Affairs Bureau of the Japanese Ministry of Justice
- have a trade name (secured by a search for similar names)
- have at least one registered director, who is the representative director and is a resident in Japan
- have articles of incorporation, generally including
- trade name
- total shares issued and classification
- amount of paid-in capital
- name of representative director (and any other directors)
- business objectives in detail
- location of head office
- method of public notice
- have a registered office in Japan
- have a representative seal with certification (registered “company” seal, or jitsu-in)
- file notification with national, prefectural, and local (city) tax offices, including the relevant office dealing with payroll (and file application for approval of blue tax returns with the prefectural tax office)
- file notification to the Labor Standards Inspection Office (for Workmen's Accident Compensation Insurance and labor safety and health standards purposes)
- file notification to the Social Insurance Agency (for Social Health Insurance and Public Welfare Pension purposes)
- file notification to the Public Employment Security Office (for Employment Insurance purposes)
- be registered with the Legal Affairs Bureau of the Japanese Ministry of Justice
- have a trade name (secured by a search for similar names)
- have at least one representative member (or executive officer) with residence in Japan
- have articles of incorporation, generally including:
- trade name
- names and addresses of members
- purposes and value of members’ contributions
- business objectives in detail
- location of head office
- have a registered office in Japan
- have a representative member seal with certification (jitsu-in)
- file notification with national, prefectural, and local (city) tax offices, including the relevant office dealing with payroll (and file application for approval of blue tax returns with the prefectural tax office)
- file notification to the Labor Standards Inspection Office (for Workmen's Accident Compensation Insurance and labor safety and health standards purposes)
- file notification to the Social Insurance Agency (for Social Health Insurance and Public Welfare Pension purposes)
- file notification to the Public Employment Security Office (for Employment Insurance purposes)
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18. What are the requirements for setting up a branch office in Japan?
A foreign corporation setting up a branch office in Japan must register the branch under the Commercial Code, file notifications under the Foreign Exchange and Foreign Trade Law (Foreign Exchange Law), and file applications and notifications to appropriate tax offices. The foreign corporation must appoint a branch representative with residence in Japan, and register its place of business and representative at the applicable Legal Affairs Bureau registry office. The required application is normally prepared by a judicial scrivener, whereas a power of attorney is also needed, and the representative should appear at the registry office and follow the necessary procedures.
The “Application for Registration of the Establishment of a Business Office of a Foreign Company” must be submitted with the applicant’s registered seal impression or certified signature. Matters to be registered depend on the type of company as outlined under the Limited Liability Company Law of Japan. Documents required with the application include: those evidencing the existence of the corporation’s head office, such as its home country register or certificates of competent authorities; documents certifying the incumbency of the Japan representative, such as a letter of appointment issued by the applicant or contracts; and the corporation’s articles of incorporation or documents outlining the applicant’s business objectives.
Required documents must be attested to by the competent authorities in the applicant’s home country or by the competent local agencies of the national government of the applicant’s home country residing in Japan, including the consul resident in Japan. An affidavit made by the company’s Japan representative before the home country’s consul in Japan will usually suffice for this purpose. Japanese translations must be attached to all documents written in a foreign language.
A foreign corporation is required under the Foreign Exchange Law to file a subsequent report, or in certain cases a prior notification, covering direct inward investment through the Bank of Japan to the Minister of Finance and the ministers over the industry involved. Establishment of a branch engaging in certain industries, such as banking, insurance, securities, gas, and electricity, e.g., are subject to the Japan business laws for the respective industry and must obtain approvals, permits, et al. A branch office is subject to taxation for Japan source income just as Japanese corporations, and must file various notifications and applications with national and local tax offices upon establishment.
A foreign corporation branch office must:
- be registered with the Legal Affairs Bureau of the Japanese Ministry of Justice
- have a trade name (secured by a search for similar names)
- have a representative with residence in Japan
- have a registered office in Japan
- have a representative member seal with certification (jitsu-in)
- file notification with the national, prefectural, and local (city) tax offices, including the relevant office dealing with payroll (and file application for approval of blue tax returns with the prefectural tax office)
- file notification to the Labor Standards Inspection Office (for Workmen's Accident Compensation Insurance and labor safety and health standards purposes)
- file notification to the Social Insurance Agency (for Social Health Insurance and Public Welfare Pension purposes)
- file notification to the Public Employment Security Office (for Employment Insurance purposes)
19. What types of visa and eligibility are available to foreign investors and employees in Japan?
Visas for the respective eligibility are obtainable at Japanese diplomatic establishments abroad. Once an applicant has obtained a Certificate of Eligibility together with a visa application as issued through approval by the Immigration Bureau in Japan, visas can be obtained in a short period. Specialists in Japan immigration procedures, or gyosei shoshi, are commonly consulted for expediting visa process. The documentation needed when applying for a Certificate of Eligibility may include (depending on status of residence sought):
- application for Certificate of Eligibility
- passport style photo (3 cm x 4 cm)
- return-mail envelope with ¥430 postage affixed
- academic qualifications documents
- resumé or curriculum vitae
- certified copy of the company register of a Japanese established branch or company
- company brochure of a Japanese established branch or company
- financial statements or business plan of a Japanese established branch or company
- copy of employment agreement
- certificate of employment
- foreign company business brochure
- business license(s)
- other
Investor/Business Manager - (a) one investing in, commencing, and operating a business in Japan; (b) the chief executive officer or representative director responsible for a business in Japan on behalf of the foreign entities investing in and commencing that business; (c) one engaged in the management of a business in Japan on behalf of the foreign entities investing in and commencing that business, e.g. a director or department manager employed in management under the CEO or representative director.
Legal/Accounting Services - a foreign attorney, a foreign certified public accountant, or one with other legal qualifications engaging in legal or accounting business activities.
Engineer - one engaging in services under contract in Japan that require technology and/or knowledge in physical science, engineering, or other natural science fields.
Specialist in Humanities/International Services - one engaging in services under contract in Japan that require knowledge in sociology, economics, jurisprudence, other human science fields, or experience with foreign culture.
Intra-company Transferee – one engaging in activities described under Engineer or Specialist in Humanities/International Services who is transferred to business offices in Japan for a limited time period, and from business offices established in foreign countries by public or private organizations which have head offices, branch offices, or other business offices in Japan.
Skilled Labor - one engaging in services under contract in Japan that require industrial techniques or skills within special fields.
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20. What kinds of specialists involving with incorporation and statutory filings are there in Japan?
Upon opening a business office in Japan, foreign investors typically face difficulties with the preparation of relevant documents in Japanese. In most cases, they entrust the procedures of incorporation and statutory filings with resident professionals, including:
Attorneys at law (or bengoshi) - handle all legal matters and advisory.
Judicial scriveners (or shiho-shoshi) - qualified to give legal advice and handle registration procedures on behalf of clients.
Administrative scriveners (or gyosei-shoshi) - qualified to give legal advice and prepare documents for filing with authorities on behalf of clients; qualified for consultation on expediting visa process.
Licensed certified public accountants (tax specialists or zeirishi, accountants or kōninkaikeishi) – qualified to give legal advice and handle filings of notifications or applications to pertinent tax and administrative authorities upon commencement of business.
A foreign investor who establishes and intends to acquire the stocks of a Japanese subsidiary must file notification of acquisition of stock or equity through the Bank of Japan. A similar notification to the Bank of Japan is required with the establishment of a branch office. Such notification must be filed by a Japan resident or a proxy who is resident in Japan. As such, a resident professional is commonly entrusted with such matters.
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21. What kinds of mandatory social insurance must companies provide for employees in Japan?
There are four programs constituting the universal social security system in Japan. In principle, every resident must enroll whereas all are entitled to receive medical care, employment coverage, and retirement pension. Expatriate employees are treated the same as Japanese employees, yet not covered will be only an expatriate who is paid by an overseas office and not by a Japanese office. If an expatriate is insured from overseas, it will prove best to avoid overlaps of coverage with Japan public insurance.
A newly established joint-stock company (or, not a sole proprietorship with fewer than five employees) which is hiring employees must file applications with the relevant offices for the four programs. For limited liability entities established since August 2005, public insurance is applied treating partners as sole proprietors (or employer), with those employed by such companies treated as employees.
Social Insurance
(Social Insurance covers both employers and employees, as well as all residents.)
(1) Health Insurance, with Nursing Care Insurance for employees between the ages of 40-64 (Social Insurance Agency) - covering medical and nursing care expenses incurred by employees. Employees and family members receive medical treatment at a copayment of 30% to actual costs. Companies must register, in practice, before or upon hiring employees. Thereafter, each hired employee must be registered individually. Company applications submitted later than 5 days after establishment may be retroactively effective from time of establishment.
Premiums are shared equally by the employer and the employee, and total 8.2% of salary (to a maximum of ¥1.21 million) or standard bonus (to a maximum of ¥5.4 million per year). For Nursing Care Insurance, premiums are 1.13% shared by employer and employee equally. Those not eligible as employers or employees must enter the scheme, within 5 days of determining such ineligibility, through local municipal government offices or through a spouse or family member’s employer.
(2) Employees’ Welfare Pension Insurance (Social Insurance Agency) - providing for benefits to employees after retirement or if becoming disabled, or to survivors in the case of death. Companies must register, in practice, before or upon hiring employees. Thereafter, each hired employee must be registered individually. Company applications submitted later than 5 days after establishment may be retroactively effective from time of establishment.
Premiums are shared equally by the employer and the employee, and are 15.35% of salary (to a maximum of ¥620,000) or standard bonus (to a maximum of ¥1.5 million). Currently, premiums are being staged for increases and will be 18.3% by 2017. Those not eligible as employers or employees must enter the scheme, within 14 days of determining such ineligibility, through local municipal government offices or through a spouse’s employer. Exclusions exist with proper notifications on the basis of international social security agreements with the United Kingdom, United States, France, Canada, Germany, Australia, The Netherlands, Belgium, South Korea, and Czech Republic (soon Spain, and later Italy, Ireland, and Hungary).
Labor Insurance
(Labor Insurance covers working persons. However, it does not cover employers and representatives of offices, and such eligibility is determined case-by-case.)
(3) Employment Insurance (Public Employment Security Office) - providing for workers that become unemployed and helping to maintain stable employment by providing support, financial aid, and subsidies through companies. Companies must register, in practice, before or upon hiring employees. Thereafter, each hired employee must be registered individually. Company applications submitted later than 10 days after establishment may be retroactively effective from time of establishment.
Premiums of 1.5% of salary are shared at rates of 0.9% for the employer and 0.6% for the employee, excepting a few types of work. Employees dispatched from an overseas company head office can be exempted from this insurance.
(4) Workmen’s Accident Compensation Insurance (Labor Standards Inspection Office) - covering any illnesses, accidents, or death incurred by employees as a result of work activities or during job commutation. Companies must register, in practice, before or upon hiring employees. Thereafter, each hired employee must be registered individually. Company applications submitted later than 10 days after establishment may be retroactively effective from time of establishment.
The employer must pay the premiums, which start from 0.45% of salary for clerical work (plus 0.005% for asbestos disease fund). Principals of small and medium businesses may be specially approved for coverage.
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22. Under what status does a foreign corporation have to pay Japan income taxes?
A company incorporated in Japan is a domestic corporation (Japanese corporation), and the nationality of its shareholders is not pertinent. A domestic corporation is subject to Japanese corporate income taxes on its worldwide income, unless the income is specifically exempt under tax law (e.g. inter-company dividend). Foreign source net income is exempt from Japan enterprise tax if earned through a fixed place of business abroad. A corporation that is not a domestic corporation is a foreign corporation. Only Japan source income of a foreign corporation is subject to Japan corporate income taxes.
There are five categories of organizations in Japan, and organizations are classified according to their missions and aims. Corporate income taxes apply to all corporations except those specifically exempted. Classifications of organizations, examples, and (table below) respective taxation policies are:
- General Corporations - joint stock companies, limited liability companies, unlimited partnerships, limited partnerships, et al
- Public Interest Corporations - religious corporations, educational foundations, welfare foundations, et al
- Public Corporations - local public associations, NHK (Japan Broadcasting Corporation), et al
- Cooperative Associations - agricultural cooperative associations, unions, co-op, et al
- Non-Judicial Organizations - PTA, school alumni associations, clubs, et al
| Type of Entity | Non-taxable | Taxable |
| General Corporations | - |
all activities |
| Public Interest Corporations | public interest business | profit-making activities |
| Public Corporations | all activities | - |
| Cooperative Associations | - |
all activities |
| Non-judicial Organizations | primary business | profit-making activities |
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23. When and where should a Japan corporation tax return be filed? Are there any penalties for delayed filing?
The taxation system in Japan is a self-assessment system:
When to file - national corporate tax returns (one month filing extension contingencies), national consumption tax returns, and local final enterprise and inhabitants tax returns (one month filing extension contingencies) are all due within two months after fiscal year-end (fiscal year can be selected freely). Local depreciable assets tax returns are due each January 31. Tax payment must be made by the due date of the relative tax return. If the due date falls on a Saturday, Sunday, or legal holiday, the day following such becomes the effective due date.
In practice, and for domestic corporations in higher tax brackets with a fiscal year period over six months in duration, interim returns are required at the semiannual juncture. As such for those companies, an interim tax return and payment is due within eight months following fiscal year start.
Where to file - completed Japan corporate tax return forms must be filed with the competent tax authorities over the corporation, comprising: National Tax Agency, prefectural tax office, and (if outside Tokyo Prefecture) city tax office.
Tax payments must be made at tax office locations inside the district where the corporation principle or head office is located in Japan, and such payments are typically made through a Japan bank account. In case such principle corporate offices are relocated to another tax district after the end of a fiscal year, the tax return must be filed with the tax office within the district of the new office location, provided that the registration of the relocation of the office has been completed.
Delayed filings - if a tax payment is made after due date without approved extension, delinquency tax in the form of interest will be imposed in addition to the original tax amount. Any interest paid is deductible for tax purposes. Any delinquency tax is calculated by the number of days following due date up to the date of payment. With certain approval based on unavoidable circumstances (such as official audit) a corporation may be allowed to file a tax return one month later than due date, although the payment deadline will not be extended even with filing extension approval.
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24. What are the procedures for paying employees in Japan?
Employees in Japan are customarily paid on a monthly basis. Remuneration typically comprises a base salary plus allowances including transportation and perhaps position, professional, housing, family, and meals. Also, Japanese workers have traditionally been paid summer and winter bonuses, which comprise a relatively high proportion of annual salary (many foreign companies now determine monthly salary by dividing annual salary by 14 or 16, thereby reserving two to four months’ salary for semi-annual bonuses). Particularly foreign companies may be known to pay discretionary bonuses based on performance in addition to fixed seasonal bonuses. Income tax for employees is levied on total monthly salary, allowances, and any bonus payments.
A withholding system for payroll is applied to corporations in Japan. Employers are required to calculate withholding tax, except in cases of two or less salaried household employees, according to specified rates on withholding tax tables provided by the tax office, and depending on the classification of income (contingencies are for factors such as age, number of dependents, et al). Employers are required to withhold the income taxes from the payroll of employees and remit those taxes to the National Tax Agency by the 10th day of the following month.
An employer, once deemed as “one responsible for withholding taxes,” is required to submit the Registration of the Establishment of Salary Payment Office to the National Tax Agency office where the Statement of Corporation Establishment or the Statement of Foreign Corporation Branch Establishment has been filed. The tax office next delivers to the employer an income tax withholding ledger for salaries, retirement allowances, bonuses, other allowances, etc. The employer is then assigned various duties, such as monthly tax withholding and remittance, year-end adjustments, and submission of records of payment.
The process for handling payroll with regard to withholding tax is as follows:
| (1) | An employer shall annually oversee receipt of a Salary Earner’s Dependent Deduction Report from each employee, which is submitted to the tax office at least one day before payroll is first paid each year. |
| (2) | The employer monthly calculates the amount of withholding income tax for each employee, taken from the Salary Earners’ Withholding Tax Table (provided by the National Tax Agency) in accordance with salary, bonuses, and allowances payable after deduction of social insurance premiums and number of dependents claimed. |
| (3) | The calculations are recorded by the employer for each employee in an income tax withholding ledger (provided by the National Tax Agency). |
| (4) | The employer must pay the aggregate amount of taxes withheld at a Japan bank (which will perform as agent for the Bank of Japan) by the 10th day of the following month, while submitting a calculation sheet outlining the withheld taxes attributable to salary, bonus, retirement allowance, etc. |
| (5) | If the number of employees in a company remains at less than ten, and an Application for Approval of Special Measures for Withheld Tax Payment Terms has been accepted by the tax office, then withheld tax may be paid through a Japan bank semiannually (by the 10th day of January and July respectively in the following year). |
| (6) | For employees whose annual income is not exceeding ¥20 million, along with payroll for each December the employer calculates the total amount of income tax to be imposed for the current year. This total is compared to the amount withheld to date in the current year, and the balance is adjusted – hence, the year-end adjustment for payroll. (For any employee whose annual income exceeds ¥20 million, a self-assessed income tax return must be filed individually.) |
| (7) | The employer prepares yearend withholding tax certificates for each employee, and makes two copies of each: one for each employee and one per each employee submitted to the tax office as a record of payment. |
The material contained on this website is in the nature of general information and comment only. The information neither purports nor is intended to be advice on any particular matter. Readers should not act or rely upon any matter or information contained in or implied on this website without obtaining appropriate professional advice.
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