Japan

Tax residency – A company that has its main office in Japan is considered a resident for tax purposes

Tax rate – The national corporate tax standard rate is 23.2% for companies with paid-in capital over JPY 100M. Companies with paid-in capital of JPY 100M or less are subject to a 15% tax on the first JPY 8M per annum and 23.2% on the exceeding.

There is a national local corporate tax at a fixed rate of 10.3% of their corporate tax liabilities.

There is also a standard enterprise tax at progressive rates from 3.4% to 6.7% and a local corporate tax at 43.2% of the current enterprise tax, which is imposed on a corporation’s income allocated to each prefecture.

Considering the above, the effective tax rate is about 34.60% for SMEs and 30.62% for large corporations.

Capital gains – Capital gains are treated as ordinary income and subject to corporate taxes.

Dividends – Dividends are treated as ordinary income. However, there are applicable exclusions depending on the ownership percentage.

Dividends from local entities

Dividends received from wholly owned subsidiaries (100%) are excluded. Dividends from affiliate domestic corporations (More than 1/3 ownership) may be also excluded, if less than 1/3 ownership (but more than 5%) a 50% exclusion may apply. For exchange-traded funds and portfolio investments (less than 5%), a 20% exclusion may apply). Other dividends are taxed at standard rates.

Dividends from foreign entities

95% of dividends may be excluded, provided that the parent company holds at least 25% of the outstanding shares for at least 6 months. Percentage of ownership requirement may not be required if the paying company is incorporated in a country in which Japan has concluded a tax treaty.

Interests – Interests received is included in taxable income. If interest is subject to foreign withholding tax, a foreign tax credit may be available.

Royalties – Royalties received is included in taxable income. If royalties are subject to foreign withholding tax, a foreign tax credit may be available.

Withholding Taxes – Dividends paid to non-residents are subject to a 20% withholding tax (15% if paid by a listed company) unless a tax treaty provides a reduced rate. There is a domestic surtax of 2.1%, being the effective withholding tax rate of 20.42%.

Interests paid abroad are subject to a 20% withholding tax (15% on deposit and bonds), unless the rate is reduced under a tax treaty. There is a domestic surtax of 2.1%, being the effective withholding tax rate of 20.42%.

Royalties and technical fees paid to non-residents are also subject to a 20% withholding tax unless reduced due to a tax treaty. There is also domestic surtax of 2.1%, being the effective withholding tax rate of 20.42%.

Foreign-source income – Foreign-source income is generally subject to corporate income tax. Companies are allowed to claim a tax credit against corporate income and inhabitant’s taxes for foreign income taxes paid directly.

Losses – Only 50% of company taxable income may be offset by net operating losses, which may be carried forward 10 years. Losses may be carried back 1 year (Only SMEs)

Inventory – Companies are entitled to record the cost of inventory using actual the individual cost, first in first out (FIFO), weighted average, moving average, most recent retail, selling price reduction, and lower of cost or market.

Anti-avoidance rules – Transfer pricing legislation is applicable to all types of transactions between related persons, which must be conducted at arm’s length according to the OECD’s principles and supported by relevant documentation.  If the company fails to demonstrate that the pricing is reasonable, tax authorities may conduct adjustments at their own discretion.

Interest paid on debt to controlling foreign shareholders is disallowed to the extent the average balance of debt on which that interest is paid is more than three times the equity of controlling foreign shareholders.

Japan has Anti-tax haven rules, undistributed profits of a foreign subsidiary to which an applicable tax rate is 30% (in case of a shell company) or 20% are included in the Japanese company taxable income under certain conditions.

All income of a controlled foreign company is taxable to a Japanese shareholder if the main business of the subsidiary is passive and the foreign tax rate is lower than 20%: or, if the CFC fails certain substance tests and the foreign tax rate is lower than 30%; or if the CFC includes certain passive income categories and the foreign tax rate is lower than 20%.

Tax credits and incentives – There are available tax credits for Research & Development initiatives, tax incentives on Internet of Things (IoT) investments, special tax treatments for investments in certain areas, tax incentives for venture capital investments and for the revitalisation of local hubs.

Labor taxes – There are several social security insurance contributions which generally account for a total of 14.921% on employees gross salaries for both the employer and the employee.

Personal income tax – Tax residents are Japanese residents who have a “jusho” (permanent place of abode) or a “kyosho” (temporary place of abode) for at least one year. If an individual has been in Japan 5 years or less, continuously or not, during a 10-year period would not be considered as a tax resident.

Tax residents are subject to taxation on their worldwide income, while non-residents only on their income accrued in Japan.

Tax residents’ personal income is taxed at progressive rates up to 45% on income exceeding JPY 50,000,000. Non-residents are subject to a 20% income tax.

There is also a surtax of 2.1% and municipalities usually levy a local income tax at a 10% tax rate.

Dividends and interests derived from resident entities are taxed separately at a flat rate of 20.315% (including surtax and local income tax). Offshore dividends and interests taxed as ordinary income at progressive income tax rates.

Capital gains are taxed separately at 20.315% (including surtax and local income tax) on the sales of certain securities, 20.315% % on the sale of long-term gains of immovable properties (held more than five years) and 39% on short-term immovable property capital gains.

Other taxes – There is a Consumption tax levied on the sale or import of goods and the provision of services. The current rate is 8%. As of 1 October 2019, the rate will increase to 10%.

A company that uses business premises in excess of 1,000 square metres and/or has more than 100 employees in a designated city is subject to the Business premises tax based on the usage of the business (JPY 600 per square metre) and gross payroll (0.25% of gross payroll).

Municipalities levy real property (1.4% on the assessed value) and transfer of real property taxes (1.5%-4%) and a real estate registration tax (0.4%-2%).

Inheritances and gifts are taxed at progressive rates up to 55%. There are no taxes on net wealth.