This article has a selection of FAQs around basic Japanese corporate taxation together with links to more detailed articles for each topic discussed.
Please do not hesitate to add comments or further questions as these can form the basis of further FAQ items in due course.
Click on the below to take you to the relevant frequently asked question section.
Domestic corporate taxation
- What types of entity pay corporate taxes?
- What Japanese national taxes apply on corporate profits? At what rate?
- What is the tax rate for capital gains earned by Japanese corporations?
- What is the loss carry forward period?
- What is the loss carry back period?
- What is the statue of limitations for corporation taxes?
- Are reserves deductible? How about depreciation? Or goodwill?
- What are the important permanent items that you see in tax returns?
- How are dividends from domestic Japanese subsidiaries taxed for Japanese companies? Is there a dividends received deduction or similar
- Are there any Japanese withholding taxes on interest, dividends or similar paid to a Japanese company? What happens if a Japanese company suffers Japanese withholding taxes?
- Are there any special corporate reorganisation provisions?
- Are there any differences in taxation between small companies and large companies?
- Are there any special tax avoidance provisions or something like the step doctrine or business purpose doctrines similar ot the US?
- Is there anything else we should know about domestic Japanese taxes?
- How can I work out my deferred taxes in Japan?
- Can you set up deferred taxes under Japanese GAAP? How does that work – something like FAS109 in the US?
Value added taxes
Domestic corporate tax
Japanese tax law splits corporations into two categories – domestic corporations (kokunai houjin) and foreign corporations (gaikoku houjin). Domestic corporations can be broken down into a further five categories for tax purposes and each of these five categories can include a variety of types of different corporation formed under a range of different laws, although including of course companies formed under the Japanese corporate law.
koukyou houjin・公共法人 – public purpose corporations exempt from taxation, for example NHK, the Japanese national broadcaster
koueki houjin・公益法人 – public profit corporations such as corporations organised for religious (shuukyou houjin) or educational (gakkou houjin) purposes taxable at reduced rates on certain profit making activities
kyodou kumiai・共同組合 – fishing and agricultural co-operatives and similar, taxable at reduced rates
jinkaku no nai shadantou・人格のない社団等 – associations without legal personality such as Parent Teacher Associations, business associations and similar.
Futsu houjin普通法人 – ‘Ordinary Corporations’ which includes the most common corporate forms such as joint stock corporations (kabushiki kaisha・株式会社) and some rarer forms such as “goumei gaisha・合名会社” and “goushigaisha・合資会社” and “goudou kaisha・合同会社”
For Ordinary Corporations with capital of more than JPY100m the national tax rate is 30%. For those with capital less than this amount the rate is 22% for the first JPY8m and then 30%. This article includes a table that summarises rates in past years by type of corporation.
Special rates can apply in some circumstances, such as undistributed profits of certain defined “family companies” or in relation to concealed expenses, on liquidation or on corporations other than Ordinary Corporations.
Future posts will look at the base and scope of these taxes. Back to top
Different from many tax systems such as those of the UK or US, Japan does not classify corporate income into different categories such as “trading income”, “capital gains” and similar for domestic tax purposes in order to apply different tax rates or different sets of rules about loss set off, carry forward and similar.
In Japan a single tax adjusted profit figure is calculated for the corporation and taxes are then assessed on the final overall adjusted profit.
In past years higher tax rates were applied for gains from the short (+10%) or long (+5%) term holding of gains from land. At the time of writing these taxes have been suspended for a temporary period. Such suspension may be renewed, but care should always be taken to check the latest position. Back to top
Tax losses can be carried forward for up to seven years. Back to top
For large companies (capital greater than JPY100m) losses cannot be carried back under normal circumstances. In some cases, such a dissolution of the company or sale of all of the company’s business, a loss can be carried back for one year only but only for national tax purposes.
For certain small companies for financial years ended after 1 February 2009 losses can be carried back for one year provided certain conditions are met around timely tax filing, record keeping and similar.
For issues other than transfer pricing additional taxes can be assessed up to five years after the due date of the tax return concerned, for transfer pricing issues up to six years and in certain other cases (e.g. fraud, adjustment of loss given a seven year carry forward period). This article explains in more detail the Japanese tax statute of limitations including the assessment process. This article explains how penalties and interest may apply for under payment of corporate taxes. Back to top
Accounting expenses have to meet a standard of certainty around recognition of liability, timing and amount to be deductible for Japanese tax purposes so in general reserves or accrued expenses are not deductible. However certain prescribed reserves, for example against possible bad debts, can be deducted.
Depreciation of tangible and intangible fixed assets is in general allowed, although land cannot be depreciated. Tax criteria for the writedown and tax deduction of unrealised impairment losses are not identical to accounting criteria so care should be taken here.
Goodwill has a very important role in Japanese taxation. It can arise from purchases and sales of businesses, from revaluation of assets and liabilities on joining a consolidated tax group and from certain corporate reorganizations such as mergers. Goodwill’s importance comes from the fact that it can be amortised at the entity level as deductible for tax purposes and hence often allows the de facto tax deductibility of the purchase price of an entity for tax purposes at the operating level for the acquired entity. Back to top
Japan has remarkably few permanent items for tax purposes but a whole host of timing items. Some of the more important permanent items are below:
Donations – Donation taxation has an important role in Japanese taxation as one of the main means the authorities use to adjust non-arm’s length transactions between tax payers, often in a related party context. For example a purchase by an entity at above market price would be treated as a non deductible donation for the difference between actual transaction value and market value. Donation taxation can give rise to double taxation if the tax treatment between donor and done is not symmetrical but proposals in 2010 tax reform include elimination possible double taxation arising from such transactions inside a consolidated tax group.
Bonuses of certain directors – a certain amount of bonuses of certain senior staff are not deductible.
Entertainment expenses – the classic permanent item
Transfer pricing adjustments
Excess interest paid further to adjustments under the thin capitalisation rules.
How are dividends from domestic Japanese subsidiaries taxed for Japanese companies? Is there a dividends received deduction or similar?
In order to reduce the impact of double taxation dividends from Japanese subsidiaries can be excluded from Japanese taxation to different extents depending on the capital relationship between the paying and receiving company. This section discusses dividends and shareholder distributions in more detail and also look at the diagrams section for more explanation.
Dividends from subsidiaries in a consolidated group dividends can be excluded entirely from income.
Dividends from subsidiaries the recipient of which has held 25% or more of the total share capital of the paying company for six months or more can be excluded from income net of interest costs attributable to the dividends.
50% of dividends from other companies can be excluded from income, net of attributable interest costs.
The above is an outline only – care should be taken for special rules applying to deemed dividends and special types of company or dividends from trusts and similar and for short term holdings of shares and dividends arising in corporate reorganisations. Simplified methods of calculating interest costs that reduce the amount of dividend exclusion are also available. Back to top
Are there any Japanese withholding taxes on interest, dividends or similar paid to a Japanese company? What happens if a Japanese company suffers Japanese withholding taxes?
This is a complex area given the wide scope of possible interest charges and different exemptions from withholding tax available – for example, many financial institutions do not suffer Japanese withholding taxes. A 20% withholding tax applies to dividends from unlisted shares or for non-financial institutions holdings of most domestically issued corporate bonds.
The key point to note is that Japanese companies that suffer Japanese withholding taxes on interest or dividends can in principle recover such taxes by set off against corporate tax or repayment. The amount of such set off or repayment depends can depend on the time that securities on which dividends or bond coupon arose are held, although simplified methods of calculation of the holding period can allow such period to be very short in practice and still recover all or a substantial part of the withholding tax concerned.Back to top
Japanese tax reform has introduced a wide range of special corporate reorganizations that may be tax qualified including corporate mergers, corporate splits and share for share exchanges. In general if these transactions are tax qualified then they may be done without a rebasing of the assets and liabilities of certain target entities to market value and resultant taxation that would apply to non-tax qualified transactions.
Tax qualification of transactions, especially in non wholly owned groups, requires meeting various conditions a number of which are related effectively to continuation of business, ownership or similarly of size and nature of businesses involved in the transaction.
Especially given the taxation of goodwill outlined above it is not always favorable for transactions to be treated as tax qualified. Back to top
There are a range of differences including ability to carry back losses, tax rate, tax office of jurisdiction and other matters. This will be the subject of a later post. Back to top
Are there any special tax avoidance provisions or something like the step doctrine or business purpose doctrines similar to the US?
Possibly because of a historic reluctance to litigate tax issues judicial doctrines around tax avoidance are far less developed than in the UK or US. Taxpayers may have found that individual tax auditors have tended to apply their own interpretation of an “economic substance over legal form” principal.
Notwithstanding the above, the Japanese tax law includes an extremely powerful anti avoidance tool, which is the ability of the authorities to adjust the tax return of any company that is a “family” company as defined. This power is not often used in the experience of the editor, but has very wide scope in that many companies with few shareholders (including most wholly owned or JV subsidiaries of foreign groups) are family companies for Japanese tax purposes. Back to top
File your returns and elections on time. Filing time limits come remarkably soon after the year end compared with the UK or US and penalties for late filing are much more severe and could for example include loss of carry forward tax losses if certain conditions are not met (such as maintaining blue form filing status).
A classic example of an election that has to be filed on a timely basis is the “blue form” tax filing” election that has to be submitted very soon after company or branch formation in order to allow carry forward of tax losses. The economic loss from failure to file elections such as these can be dramatically disproportionate from the administrative or control effort involved. Back to top
Tax accounting issues
Japanese tax returns include a schedule (schedule 5 別表５/beppyou 5) which summarizes all of the historic tax timing differences that make up your deferred tax asset. Reconciliation requires some effort, but is still quite straightforward. Back to top
Can you set up deferred taxes under Japanese GAAP? How does that work – something like FAS109 in the US?
Japanese deferred tax (DTA) recognition is similar in principal to US concepts but the practical steps and method used is very different. In summary companies are put into different categories based on their overall financial health and then depending on the category a different method for calculating the DTA applies. Historic profitability and existence or use of carry forward losses are examples of measures of financial health.
As an example of the methodology, the least healthy companies can apply only a one year projection of profits, those in the middle category a five year projection while the most financially healthy companies are not restricted in forward projection of profits for DTA purposes although a DTA may not be allowed for certain classes of timing differences. Future articles will explain this in more detail. Back to top
Value added taxes
How do value added taxes work in Japan?
Japan operates a consumption tax system that is very similar to the European VAT systems but very different from US sales taxes which tend not to apply along the value chain but only at the point of final sale.
All but the very smallest companies will tend to be VAT registered. Such companies have to charge consumption tax on their outputs at either 5% or 0% (for example, in relation to exports) or exempt their outputs from consumption tax (certain financial services, securities trading, lending etc are examples in this category).
Consumption tax registered companies can then recover consumption tax paid on their inputs depending on whether or not those inputs are attributable to taxable or exempt outputs. Accordingly, and again similar to the UK or European systems, some companies – such as many manufacturers – tend to have a very high consumption tax recovery rate while some financial services companies, such as insurance companies, may well have very low recovery rates.
Unlike many European systems VAT grouping is not possible and it is also not possible to agree “special methods” with the tax authorities around the attribution of input consumption tax to output consumption tax, although some business groupings, such as securities companies which base recovery on headcount in different taxable, non taxable and common business lines, do appear to have applied business wide conventions around consumption tax calculation approaches that are not challenged at a fundamental level by the tax authorities. Back to top