Japan legal and accounting and tax considerations in 2023
Since 2003, Healy Consultants Group PLC assists our Clients with timely compliance of their annual legal, accounting and tax obligations in Japan.
Corporate income tax
- For companies with a paid-up capital of over 100 million yen, a corporation tax of is 23.3% is applicable for fiscal years beginning on or after 1 April 2018. For companies with a paid-up capital of 100 million yen or less, corporation tax is 15% on the first 8 million yen per annum, and 23.2% on any further income.
- Resident corporations in Japan are taxed on worldwide income. Foreign corporations are taxed only on Japan-sourced income. A company is considered resident if it has its principal or main office in Japan. It does not need to have Japanese management.
- Corporate taxpayers are also required to i) file and pay local corporate tax at a fixed rate of 10.3% of their corporate tax liabilities ii) enterprise tax of 1.18% iii) special corporate business tax of 2.6% (will vary case by case) and iv) inhabitants tax of 10.3%.
- The effective corporate tax rate for companies in Japan, inclusive of all national and local taxes, is approximately 30%.
Withholding taxes/capital gains tax
- Withholding taxes on dividends are normally levied at 20% for both residents and non residents. For dividends paid to nonresidents by a listed company the rate is 15%.
- Withholding taxes on interest payments is also generally imposed at 20% for both residents and non-residents. Interest paid to non-resident companies on deposits, bonds and certain financial instruments are subject to a rate of 15%.
- Royalties paid are also subject to a 20% withholding tax for both residents and non-residents. However, a progressive scale will be applied for resident individuals royalties (15%-20%).
- The rate of all withholding taxes imposed may be reduced under certain tax treaties.
- A surtax of 2.1% is applied on Japanese-source income, increasing the effective rate of withholding taxes.
- Capital gains are taxed as ordinary income, whilst capital loses are generally deductible.
- Up to 50% of taxable income can be offset (for a carryover period of 10 years) by net operating losses. SMEs are exempt from this limitation.
- Both enterprise tax and business premises tax are deductible when calculating taxable income on a cash basis.
- Foreign income taxes can also be deductibe if the corporation elects to not claim foreign tax credit.
- Depreciation and amortisation is deductible when calculating taxable income.
- Start-up expenses and opening costs can be deferred assets and amortised.
- Interest expenses on company borrowing can be deductible when calculating taxable income. However, this may be disallowed in some cases, such as payments to related parties in a corporate group.
- Remuneration for directors can be deductible (when deemed reasonable by the tax authority) if i) paid in fixed monthly installments ii) fixed payments of cash or stock options with an advance notice to the tax office iii) performance bonus paid in proportion to the company’s performance and iv) retirement compensation.
- For domestic Japanese companies, 95% of dividends received from a foreign company in which there is a 25% or more holding (for over six months) are eligible for exemption from the company’s taxable income.
Social security tax
- The employer must withhold the employee’s contribution and make its own contributions to social security tax. The highest combined employer contribution is approximately 16.63%. The highest combined employee’s contribution is approximately 15.69%.
- There are four types of insurance system in Japan that corporations employing workers are liable to contribute towards. These are i) workers’ accident compensation insurance, which is borne entirely by the employer and ii) employment insurance iii) health insurance/nursing care insurance and iv) employees’ pension insurance which are borne by both employer and employee.
Value Added Tax (VAT)
- Japanese consumption tax (similar to VAT) is levied on the supply or import of most goods and services in Japan.
- The standard Japanese consumption tax is 10%.
- A lower consumption tax rate of 8% is placed on some services, such as food supply services and newspapers.
- Certain services to non-residents, as well as exports, are taxed at 0%.
- The municipal fixed assets levy is assessed at an annual rate of 1.4%.
- A prefectural real estate acquisition tax of 3% to 4% of the assessed value applies when properties are acquired.
- A real estate registration tax is imposed on the assessed value of real property at rates ranging from 0.4% to 2%, depending on the type of transfer.
- Gains arising from the sale of property are taxed at a total rate of up to 39.63% (30.63% for national tax purposes and 9% local tax) depending on various factors, such as the value of the property and local municipality.
Tax reporting, accounting and auditing considerations
- The National Tax Agency (NTA) is the official tax collecting authority in Japan.
- During incorporation filing in Japan, a company selects its fiscal year and accounting period (not exceeding 12 months). A foreign branch in Japan is required to use the same accounting period as the corporation in its home country.
- Corporations that keep requested accounting books and meet certain tax authority conditions will be eligible for a ‘blue form’ tax return filing. This provides a number of privileges and benefits, including loss carryforwards and an incentive tax application.
- Generally, corporate tax auditing is done in cycles of three to five years. However, companies may be required to an annual statuary audit. Prior infringements will often increase the frequency of a tax audit.
- Domestic companies and subsidiaries, which are wholly owned by other domestic companies, can file consolidated tax returns with their parent company.
- Corporations are required to file and pay their final tax return within two months after the end of its annual accounting period. With some exceptions, corporations can apply for a filing extension of one month, if unable to meet their due date for a specific reason.
- Companies with a capital amount that exceeds JPY 10 million at the beginning of the tax year, as well as certain types of business activity, are required to file tax returns in electronic bookkeeping.
Penalties for late/non-filing of tax returns
- Late filing of corporate income tax returns incurs penalties of 15% to 20% of the tax balance due.
- Under-payments are penalised at 10% to 15% of additional tax due. If amended timely and voluntarily, the penalty may be lowered to 5% to 10% (in some cases it can be expunged).
Healy Consultants Group PLC’s fees for accounting and tax support
Japan accounting & tax task US$ VAT registration 950 Annual tax and accounting fees (active trading company) 2,300 Annual tax and accounting fees (dormant company) 950
- For an active trading company, Healy Consultants Group PLC’s fees to efficiently and effectively discharge our Client’s annual company accounting, auditing and tax obligations are US$2,300. Following receipt of a set of draft accounting figures from our Client’s company, Healy Consultants Group PLC will more accurately advise accounting and tax fees. For a dormant company, our fee is US$950.
Monthly bookkeeping service
Healy Consultants Group PLC will be happy to provide a monthly bookkeeping service for your Japanese company. Typically, our Accounting & Tax Department (ATD) team will receive a Dropbox of data from our Client and will immediately thereafter timely supply our Client with i) a general ledger, ii) trial balance, iii) monthly and quarterly management accounts and iv) monthly and quarterly government reporting, including sales tax and payroll.
For further details of our bookkeeping service and our fees, visit this page.
- Healy Consultants Group PLC’s Compliance Department will also assist our Clients to i) document and implement accounting procedures, ii) implement financial accounting software, iii) prepare of financial accounting records and iv) prepare forecasts, budgets and sensitivity analysis.
Legal and compliance
Japan’s company law is complex and so starting a business in Japan can be time consuming. Furthermore, most documents related to Japan incorporation are written in Japanese, therefore non-Japanese speaking foreign investors face translation costs and waiting times.
Business set up regulations
- In accordance with Japan Companies Act, the minimum share capital of a Japanese GK company is one Japanese yen. However, to employ a foreigner and smooth the incorporation process, it is recommended to have a minimum capital of US$50,000. To optimize engagement efficiency and minimize delays, Healy Consultants is happy to deposit these funds on behalf of our clients;
- Since March 16, 2015, Japanese limited companies do not require appointment of ordinarily residents in Japan as local resident director. However, if our Client is interested to appoint a local nominee resident director, Healy Consultants will provide a passive nominee resident director for an annual fee of US$6,750 per nominee;
- All companies in japan need to register with the Japanese Ministry of Justice, and all non-Japanese foreign nationals living in Japan must register with the Japanese government;
- The Japanese government emphasizes that leases cannot be prematurely terminated without having just a reason. Therefore, it is difficult to relocate after signing a lease agreement;
- All business activities conducted in Japan receive government approvals, permits and licenses. There is an obligation to register specific products with the government, including food, pharmaceuticals, medical devices, and medicine;
- For a de-registration of resident Japanese companies, Healy Consultants will fulfil all the Government requirements, which will take a minimum of 6 months. Our fee for offering this services is US$1,450. Also, during this period, our Client will need to maintain the resident company secretary and the resident office.
- In Japan, an employer is required to contribute i) 5% of the employee’s annual salary for their health insurance, ii) 9% towards the employee’s pension fund and iii) 1% for unemployment contribution;
- The Japanese government encourages a “life time employment” policy. Therefore, it may be difficult to employ Japanese staff if you do not adopt this policy.
- Companies can set their fiscal year when it begins its operations in Japan and must submit their accounting reports within two months of the end of its fiscal year. Monthly and quarterly financial statements must be submitted to the local authorities;
- There are two type of tax return forms, blue and white. The blue tax return form requires approval from the tax office and gives companies several tax benefits. To be eligible for the blue form, a company must request an approval prior to the starting day of the taxable year;
- It is important to notice that when setting up a joint stock company, an internal auditor must be appointed;
- Cash remittances of more than US$30,000 must be reported to the ministry of finance by multinational firms.
ConclusionClients should be aware of their personal and corporate tax obligations in their country of residence and domicile. They must fulfil these obligations annually. Let us know if you need Healy Consultants Group PLC’s help to clarify your annual reporting obligations.