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accounting-and-taxation
17 January
About Corporate Tax in Japan
accounting-and-taxation

About Corporate Tax in Japan

In Japan, the corporate income tax is collectively referred to as “corporation tax” . It consists of three types of taxes: “corporation tax” , “corporation resident tax” , and “corporation business tax”. Both corporation tax and corporation business tax are taxes on a company’s income, but the difference is that corporation tax is a “national tax,” while corporation business tax is a “local tax.” Let’s take a closer look at the characteristics of corporation tax, corporation resident tax, and corporation business tax.

Table of Contents

  • Corporation Tax
  • Corporation Resident Tax
  • Corporation Business Tax

Corporation Tax

The key point about corporation tax is that it is a tax on a company’s income, not on its profit. This means that the way accounting is thought of in business accounting and tax accounting differs somewhat.

In business accounting, the general formula is “Revenue – Expenses = Profit,” while in tax accounting, the concept is “Income – Losses = Taxable Income.” Revenue and income are generally similar concepts, but it’s important to understand the distinction between expenses and losses when considering corporation tax. For instance, director’s compensation, bonuses, entertainment expenses, donations, and depreciation are not considered as losses. Therefore, “Profit” and “Taxable Income” are different.

Corporation tax is calculated as: Income × Tax Rate of 23.2% (※) (when calculating for corporations other than small and medium-sized corporations). So, if the income is positive, corporation tax will be paid; if the company incurs a loss, the corporation tax amount is 0 yen. ※ The tax rate may vary depending on the business commencement year and capital.

Corporation Resident Tax

Corporation resident tax is not a national tax but a local tax. It is a tax that must be paid to the local authorities of the area where the company’s business is located, as it reflects the benefit the company receives from local public services. The calculation method for corporation resident tax involves multiplying the corporation tax amount by the “corporation tax ratio” for resident tax and a fixed “equalization tax ratio” based on the corporation’s capital. Therefore, the formula for calculation is: “Corporation Resident Tax = Corporation Tax Ratio + Equalization Tax Ratio.”

Another point to remember is that the equalization tax ratio is a fixed amount, depending on the company’s capital, so it is an unavoidable expense. This means that, unlike corporation tax, even if a company incurs a loss, it must still pay corporation resident tax.

Corporation Business Tax

Corporation business tax is a local tax imposed by local authorities based on the company’s business operations. Essentially, it can be viewed as a tax on the business activities conducted by the company itself. It is based on the idea that businesses benefit from various administrative services provided by local authorities in their business activities, and thus, they should contribute to the necessary expenses. The calculation method is: “Corporation Business Tax = Income × Corporation Business Tax Rate.” The tax rate applies to income, which means the rate is zero in case of a loss. However, if corporation business tax is assessed based on added value or company capital (as in the case of “appearance-based standard taxation” corporations), the company may still be required to pay taxes even if it is incurring a loss.

One major difference between corporation tax, corporation resident tax, and corporation business tax is that corporation business tax allows losses to be carried over to the next year. Although it is a tax, it can also be included as an expense and counted as part of the losses. For example, in Tokyo, corporation business tax is divided into three categories based on annual income: 3.5% for income up to 4 million yen, 5.3% for income between 4 million and 8 million yen, and 7.0% for income exceeding 8 million yen.

Additionally, companies with capital exceeding 100 million yen are subject to a separate tax called “appearance-based standard taxation.” This tax is calculated based on external objective standards, such as office space, number of employees, capital, and added value, all of which are used to determine the taxable base. This form of taxation applies to businesses with significant capital and is based on the company’s scale and activity level, ensuring correct tax calculations.

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17 January
Things about “Blue Return” in Japanese Corporate Taxation
accounting-and-taxation

Things about “Blue Return” in Japanese Corporate Taxation

After registering a company in Japan, similar to the process in your home country, the first step is to complete the tax registration procedures with the tax office. Typically, when registering for tax purposes, the “Blue Return” is also submitted. So, what are the benefits of the Blue Return? Here’s a brief introduction.

Table of Contents

  • Loss Carryforward
  • Loss Carryback
  • Deduction for Small Depreciable Assets
  • Corporate Tax Deduction System

Loss Carryforward

The advantage of submitting a Blue Return in Japan is the ability to reduce tax burdens, with the most notable benefit being loss carryforward. Loss carryforward allows a company’s losses in one fiscal year to offset income in the next fiscal year. If the next fiscal year’s income is insufficient to cover the loss, it can be carried forward each year, with a limit of up to 10 years. If you have any questions regarding the accounting treatment of this, please feel free to consult with our company.

Loss Carryback

After submitting the Blue Return, as mentioned earlier, it is possible to carry losses forward to the next fiscal year. In addition, Japan’s tax law also allows for the retroactive refund of corporate taxes already paid. For example, if a company paid corporate tax in the previous fiscal year due to a surplus in finances, and then incurs a loss in the current year, the current year’s loss can offset the taxable income of the previous year, and the paid tax can be refunded. The loss carryback period is one year. Additionally, the loss carryback can only apply to the previous fiscal year. For losses in the same accounting year, both the loss carryback and carryforward cannot be applied simultaneously. If you’re unsure which option is more advantageous, feel free to consult with us.

Deduction for Small Depreciable Assets

If the company qualifies as a small or medium-sized enterprise, there is a special provision for small depreciable assets. The special provision for small depreciable assets in Japan’s tax law refers to a rule that allows small assets (valued at less than 300,000 yen) to be fully expensed in the current year, instead of depreciating over multiple years.

Corporate Tax Deduction System

When purchasing new machinery and equipment, small and medium-sized enterprises that file a Blue Return can deduct 7% of the purchase price from corporate taxes. This policy was set by the Japanese government to encourage investment by small and medium-sized enterprises. The assets eligible for this deduction include software over 700,000 yen, machinery and equipment over 1.6 million yen, and trucks with a load capacity of more than 3.5 tons. This tax incentive is very beneficial for manufacturing enterprises that make large equipment investments at the time of company formation. Moreover, it’s important to note that this tax benefit applies to small wholesale and retail businesses, but not to real estate or leasing companies.

For companies applying this system from the first fiscal year, the application must be submitted within three months of company establishment. If the three-month period crosses over into a different fiscal year, the application must be submitted before the end of the previous fiscal year. For already established companies, the application must be submitted before the fiscal year in which the Blue Return is planned to be applied.

The application for Blue Return approval is not a mandatory document when establishing a company. However, submitting this application at the time of establishment ensures that you can enjoy all the benefits related to the Blue Return for corporations.

If you entrust us with your company registration, we will submit the Blue Return application along with the tax registration procedures. For foreign investors who lack knowledge of Japan’s tax system but are investing in Japan, we believe our professional services will maximize your investment benefits. Feel free to contact us whenever you need assistance!

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17 January
About withholding income tax
accounting-and-taxation

About withholding income tax

In Japan, when an employer hires employees and pays their salaries, the employer is required to withhold income tax and special reconstruction income tax, which are collectively referred to as “withholding income tax” (源泉所得税) in Japan.

Generally, when a company hires employees, it becomes the withholding tax collector (源泉徴収義務者) and is obligated to deduct a small amount of income tax from each employee’s monthly salary, which is then paid to the tax office on behalf of the employee. There are about 10 types of income tax in Japan, which apply to different categories of income, including interest income, dividend income, real estate income, gift income, business income, retirement income, capital gains income, forestry income, one-time income, and other income. Employee salaries fall under the category of gift income (給与所得).

Since the withholding income tax deducted by the company is based on an estimate of the employee’s income, year-end adjustments are necessary to balance any overpayment or underpayment of withholding income tax. As a result, employees do not need to file an income tax return unless they have additional income outside of their salary or need to claim medical expenses or other special deductions.

In general, the withholding income tax deducted from the salary must be paid to the tax office by the 10th of the month following the actual salary payment date. However, if the company has 10 or fewer employees, it is allowed to pay the withholding income tax in a lump sum every six months. This payment method is called a special exception for tax payment deadlines.

The calculation of withholding income tax is based on the following process, assuming the salary amount is determined:

  1. Employee’s dependents
  2. Employee’s salary amount
  3. Reference tax tables

First, the number of dependents the employee supports must be determined by whether the employee has submitted the “Declaration of Dependent Deductions for Employment Income Earner” (給与所得者の扶養控除等（異動）申告書). This form includes information about the employee (the earner) and their family members.

Next, the income amount on which the tax is based needs to be determined. This includes all the employee’s salary, overtime pay, etc., from which the social insurance premiums that the employee must pay will be deducted.

Finally, using the tax amounts published annually by the National Tax Agency of Japan in the reference tax tables, the final withholding income tax to be deducted and paid by the company is determined.

Our company’s social insurance labor consultant can provide professional services in human resources and labor fields and can respond to inquiries in multiple languages. If you have any questions regarding employee withholding taxes, please feel free to consult with us at any time!

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