Expatriates are required to contribute to both the Japanese social insurance system and the one in their mother country, except for citizens of the following countries that have treaties in place to avoid double payments: Germany, UK, South Korea, USA, Belgium, France, Canada, Australia, Holland, Czech Republic, Spain, Ireland, Brazil, Switzerland and Hungary. This list is currently growing and more countries may pass a similar treaty at any time. For foreigners who are not exempt from making double contribution payments, the only remedy is to obtain a (possibly partial) refund from the pension system when they leave Japan.

Social/labor insurance
contribution rates
(as of September 2020)

Income taxes include National Income Tax and Inhabitant Taxes (Prefecture and City) with the rates as follows:

National

Inhabitant: Prefecture

4% + ¥1,500

Inhabitant: City

6% + ¥3,500

(*) Japanese government announced on June 1, 2016 that consumption tax reform to be postponed to October 2019; it will raise consumption tax rate to 10% (currently 8%) and lower tax rate items will be introduced.

Taxpayers—consumption tax return filers, corporations or other business entities—are required to keep well-documented books and records supported by invoices and proper documentation.

Scope of Consumption Tax

There are out-of-scope items, non-taxable items and zero-rate items stipulated by laws, regulations and rulings. However, almost all goods and services that are sold in Japan are now taxed at a flat 8% rate.

• Out-of-scope items
  Includes transactions occurring outside Japan, salaries, gifts, donations, dividends, insurance, etc.

• Non-taxable items
  Includes sale or lease of land, sale of marketable securities, interest earned, gift vouchers, foreign exchange commissions, school tuition, etc.

• Zero-rate items
  Includes exports of goods, international airfare, international communications, etc.

Filing

There are various special clauses for small businesses pertaining to election, filing and other matters.

In order to obtain certain tax benefits by making elections, budget information is indispensable to improve decision-making. The timing of filing is important since such elections will bind you for the next two years.

Tax returns are due two months after the balance sheet date and no extension is allowed.

(updated August 2016)

There are three types of corporate income taxes as follows:

(Tax year starting on or after April 1, 2016)

1. National

• For national 23.4% of taxable income
• For local: 4.4% of national tax

2. Local (prefecture and city)

• 16.3% of national tax

3. Enterprise

• 3.78% of taxable income

Enterprise tax is deductible for other tax purposes resulting in an effective tax rate of 30.86%.

Depending upon profit, stated capital and the local government where an operation is located, rates may be lower.

Deductions denied

• Director’s bonus
  Any additional pay, incentive bonus or other types of additional economic benefits, other than monthly fixed pay, given to directors (as defined by Japanese Commercial Code and Tax Law) are not deductible for corporate tax purposes unless certain notification has been filed on a timely basis.

This will, of course, raise the effective tax rates described above.

If you, as a director, want to obtain incentive bonuses and yet avoid additional corporate tax expenses, some creative ideas are required.

• Entertainment expenses

From tax year starting April 1st, 2014, 50% of entertainment expenses are not deductible.

Smaller companies of which stated capital is 100 million yen or less, have option to choose above 50% or excess of fixed ceiling amount of 8 million yen.

Setting up a giant computer system or bringing in the system used by the parent company tends to be a mistake, from both a cost and function perspective. Inexpensive “off the shelf” PC accounting software from your home country also tends not to be an ideal option. The drawbacks of these methods are the consumption tax system used in Japan and the number of digits involved in currency transactions here.

Until your budget permits the purchase or construction of a customized accounting system, the most practical and cost-effective solution would be to utilize Japanese accounting and tax professionals familiar with Japanese accounting software packages. They can then download the necessary information into a spreadsheet for you and your parent company. This solution is not necessarily the cheapest, but it certainly costs less than constructing a large in-house accounting system from scratch.

For a new business operation, sending monthly reports in spreadsheet format by email to the parent company will usually prove sufficient in providing the information the parent company requires.

Although this statement is true, the costs associated with incorporation are outweighed by the benefits. Japanese business people and banks, as well as your future customers, are likely to feel more comfortable doing business with an incorporated foreign-owned entity. By incorporating an operation in Japan, the parent company demonstrates its commitment to doing business here.

It is also important to consider tax-related consequences, particularly the effects of your Japanese operation on the parent company’s tax situation. Businesses must carefully weigh the impact of a consolidated tax return, withholding tax on dividends, a net operating loss carry-forward period of nine years and tax treaties, if applicable.

We highly recommend consulting with qualified professionals before implementing any business plan.

The topics included in this summary cover only selected issues that foreign capital companies may encounter when they first come to Japan to set up operations. The chosen items have been arbitrarily selected from the author and president’s past experiences with foreign firms.