Understanding tax law is crucial to effective financial planning and making realistic growth projections. If you’re planning on opening a branch, establishing a new corporate subsidiary, or starting an entirely new business in Japan, you’re likely unfamiliar with their corporate income tax policy. Currently, Japanese corporate income tax is at about 32%, but this number changes frequently based on many factors including growth strategy and policy changes. Staying informed prevents mistakes in filing and recording tax information, and ensures the right funds go to the right place. Read on to learn what you need to know about corporate income tax in Japan.
Foreign Corporations vs. Domestic Corporations
Businesses in Japan fall into two categories: foreign corporations, and domestic corporations. Foreign corporations are businesses that are established in countries outside of Japan but have office branches, farms, or manufacturing plants within Japan’s borders. Foreign companies are only liable to pay taxes on income that was earned on Japanese soil. Domestic corporations are any businesses that established their corporate offices in Japan. This would include any subsidiary of a foreign corporation if that subsidiary was established in Japan.
Four Main Types of Corporate Income Tax
National Corporate Tax. The National Corporate Tax is a nation-wide tax that is applied to business profits after expenses and any other self-assessments have been calculated. This tax will not apply if a loss was sustained. The National Corporate Tax rate has declined over the past few years as a critical aspect of Japan’s current government’s strategy for growth. Small to mid-sized enterprises (SME) see a special reduced rate of 15% as opposed to the regular 19% for larger corporations. SMEs will experience this rate so long as their income does not exceed 8 million JYP.
Local Corporate Residential Tax. The Local Corporate Residential Tax is applied separately from the National Corporate Tax for companies that are registered in Japan. Corporations are to pay this tax to the local tax office where they are registered. Depending on fiscal-year-end finances, earned capital, and the total staff the company employs, the tax burden can equal an additional 2.6% to 4.4%.
Local Enterprise Tax. The Local Enterprise Tax is a tax levied by local governments. Despite Japan’s centralized administration, it does allow local entities the ability to establish their own system of taxation. These regional controls are only allowed to apply taxes within a certain threshold percentage stipulated by the Japanese government. The Local Enterprise Tax works similarly to the National Corporate Tax in that it is applied to business profits after expenses and self-assessments are calculated.
Local Corporate Special Tax. The Local Corporate Special Tax is a national tax, but filings are made to local entities in addition to the Local Enterprise Tax. Like the Local Enterprise Tax, the Local Special Tax is designed to allow local governments a means to generate tax revenue from businesses within their tax jurisdiction. The taxation percentage depends on the rate of income and ranges between 2.20% and 4.29%.
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