Japan Corporate Tax Guide for Foreign Business Owners

Overview: Effective Tax Rate

The effective corporate tax rate in Japan is approximately 30% to 34% for most companies, depending on the company's size, location, and profitability. This figure combines national corporate tax, local corporate tax, enterprise tax, and inhabitant tax. While the headline national corporate tax rate of 23.2% is competitive internationally, the additional local taxes bring the total burden to a higher effective rate.

Small and medium enterprises (SMEs) with stated capital of ¥100 million or less benefit from reduced rates on the first ¥8 million of annual taxable income, which can bring the effective rate down to approximately 21–25% on that portion of income.

National Corporate Tax (法人税)

The national corporate tax (法人税, Hojinzei) is the primary income tax on corporate profits, administered by the National Tax Agency.

The reduced 15% rate for SMEs applies to the first ¥8 million of taxable income per fiscal year. Income above that threshold is taxed at the standard 23.2% rate. This benefit is one of the primary tax advantages of maintaining SME status.

Local Corporate Tax (地方法人税)

The local corporate tax (地方法人税, Chiho Hojinzei) is a surtax levied on the national corporate tax amount. Despite its name, it is administered by the National Tax Agency and filed as part of the national corporate tax return. The rate is 10.3% of the national corporate tax liability.

For example, if a company's national corporate tax is ¥2,320,000 (23.2% of ¥10 million in income), the local corporate tax would be ¥238,960 (10.3% of ¥2,320,000).

Enterprise Tax & Special Enterprise Tax

Enterprise Tax (事業税)

The enterprise tax (事業税, Jigyozei) is levied by the prefectural government on corporate income. Rates vary by prefecture and by the size of the company. For most SMEs, the standard enterprise tax rate ranges from approximately 3.5% to 7% of taxable income, depending on the income bracket and prefecture.

A notable feature of the enterprise tax is that it is deductible as an expense for national corporate tax purposes. This means the enterprise tax paid in one fiscal year reduces the taxable income in the following year, partially offsetting its impact.

Special Enterprise Tax (特別法人事業税)

The special enterprise tax is a national tax calculated as a percentage of the standard enterprise tax. The rate is 37% of the standard enterprise tax amount for most regular corporations. This tax was introduced to address revenue disparities between prefectures and is collected by the prefectural government but distributed nationally.

Inhabitant Tax (住民税)

The corporate inhabitant tax (法人住民税, Hojin Juminzei) is levied by both the prefectural and municipal governments. It consists of two components:

Per-Capita Portion (均等割)

A fixed annual amount based on the company's stated capital and number of employees. This portion is payable regardless of whether the company is profitable. For a small company with capital of ¥10 million or less and fewer than 50 employees, the combined prefectural and municipal per-capita inhabitant tax is typically ¥70,000 to ¥80,000 per year.

Income-Based Portion (法人税割)

Calculated as a percentage of the national corporate tax liability. The combined prefectural and municipal rate is typically around 7% to 10% of the national corporate tax amount, varying by jurisdiction.

Consumption Tax (消費税)

Japan's consumption tax (消費税, Shouhizei) is a value-added tax (VAT) currently set at 10% (with a reduced rate of 8% for certain food and beverage items). While it is ultimately borne by the consumer, businesses are responsible for collecting, reporting, and remitting it.

Invoice System (インボイス制度)

Since October 2023, Japan has operated a Qualified Invoice System. Businesses must be registered as Qualified Invoice Issuers to allow their business customers to claim input tax credits on purchases. Non-registered businesses cannot issue qualified invoices, which may put them at a competitive disadvantage in B2B transactions.

Exemption Thresholds

• Companies with taxable sales of ¥10 million or less in the base period (2 years prior) are exempt from consumption tax filing
• Newly incorporated companies with stated capital below ¥10 million are generally exempt for their first two fiscal years
• However, companies that register as Qualified Invoice Issuers become consumption tax taxpayers regardless of the exemption threshold

Filing and Payment

Consumption tax returns are filed within 2 months after the fiscal year end, together with the corporate tax returns. Interim payments are required for companies with annual consumption tax liability exceeding ¥480,000, with payment frequency increasing based on the liability amount.

Tax Incentives for SMEs

Japanese tax law provides several incentives specifically for small and medium enterprises (generally defined as companies with stated capital of ¥100 million or less):

• Reduced corporate tax rate: 15% on the first ¥8 million of taxable income (vs. 23.2% standard rate)
• Reduced enterprise tax rates: Lower brackets apply for SMEs with income below certain thresholds
• Accelerated depreciation: SMEs can claim immediate expensing of certain assets up to ¥3 million per item (limit of ¥3 million total per year for the smallest companies)
• Bad debt reserve: SMEs can deduct a statutory reserve for bad debts based on a percentage of accounts receivable
• R&D tax credits: Enhanced R&D tax credits are available for SMEs, with a credit rate of up to 12% of qualifying R&D expenditure (vs. a maximum of 10% for large companies)
• Loss carryforward: All companies can carry forward tax losses for 10 years, but SMEs can offset 100% of current-year income with prior losses (large companies are limited to 50%)

Transfer Pricing for Foreign-Owned Companies

Companies with foreign-related parties must ensure that transactions between the Japanese company and its related entities abroad are conducted at arm's-length prices. Japan's transfer pricing rules (移転価格税制) are aligned with OECD guidelines and are actively enforced by the National Tax Agency.

Key Requirements

• Arm's-length principle: Prices for goods, services, and intangible assets transferred between related parties must reflect what would be charged between unrelated parties in comparable circumstances
• Documentation: Companies must prepare and maintain transfer pricing documentation. Since 2016, Japan requires Country-by-Country Reporting (CbCR), a Master File, and a Local File for companies meeting certain thresholds
• Methods: Acceptable methods include Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin Method (TNMM), and Profit Split Method
• Penalties: If the tax authorities determine that transfer prices are not at arm's length, they can adjust the taxable income and assess additional tax, plus penalties and interest

Common Risk Areas for Foreign-Owned Companies

• Management fees charged by the foreign parent company
• Royalties and licensing fees for intellectual property
• Intercompany loans and interest rates
• Cost-sharing arrangements for group services
• Purchases of goods from related manufacturing entities

Filing Requirements & Deadlines