Intellectual Property Law

Taxation of Corporations in Japan

By IBLS Editor

Asian economies are growing at exponential rate.  Even though most of their expansion is caused by intensive international trade and banking services, e-commerce is getting momentum in the Asian economies nowadays.  Japan, as one of the largest economies in Asia is attracting foreign investors and corporations that want to establish their quarters in this country and Japanese are expanding their business? ?nets abroad.  This article provides a summary of Japan?s corporate tax system.

Japan Corporation Tax Act (?CTA?) classifies corporation in two types: domestic and foreign corporations.  A domestic corporation is defined as a legal entity with its head office located in Japan.  Any other corporation is classified as foreign corporation.  It is important to note that even if a corporation is incorporated under the laws of another country but has its head offices in Japan; it will be considered a domestic corporation for corporate tax purposes.   Thus, the relevant issue is not where the company is incorporated but where the headquarters are located. 

There are five types of domestic corporations under Japan?s laws:  1) public corporations; 2) public interest corporations; 3) cooperatives; 4) nonjuridical organizations; 5) ordinary corporations.  Ordinary Corporation is the most common type of corporate structure in Japan and accounts for most of Japan?s corporate tax payers.   They may be formed under the rules of Japan?s Commercial Code or the Limited Liability Act. 

Ordinary Corporations may also be subdivided in four types of corporations according to Japan?s Corporate Tax Act: 1) Stock companies; 2) Partnerships; 3) Limited Liability Companies; and 4) Limited Partnership Companies.   

Regarding foreign corporations and for tax purposes, CTA classifies them in 1) Public Corporations; 2) Public Interest Corporations; 3) Nonjuridical Corporations; and 4) Ordinary Corporations. 

The Japan Corporate Tax Act and its enforcing authority required corporations to file tax returns in Japan, pay taxes, and provide detail information about how the company computed its taxable income.  Finals tax returns must be filed within 2 months after the end of the corporation?s tax year.  Japan taxes corporations on their ordinary income.  Companies with capital exceeding JPY 100 million are taxed with a 30% rate on all ordinary income.  Companies whose capital is equal or less than JPY 100 million are taxed with a 22% rate on up to 8 million and a rate of 30% on the remanding ordinary income. 

Foreign corporations with a branch office in Japan are taxed on their entire income source in Japan.  Those foreign corporations with a permanent establishment in other country but conducting business through an agent in Japan are taxed on all income derived from the activities conducted in Japan.  

The basic principle of income determination under Japan?s Tax Code requires tax payers to subtract deductable expenses from the company?s gross income for the specified period.  The gross income is based on sales; services rendered; transfer of assets; acquisition of assets without paying for its value; and any other non-capital transaction.  Deductible expenses are specifically stated under the CTA.  For instance, deductions are allowed for administrative expenses, sale expenses, construction and similar costs, ordinary and necessary expenses, and losses. 

Domestic Corporations and Foreign Corporations with a branch in Japan must pay taxes in the tax office having jurisdiction over their head office in Japan.  If the foreign corporation has permanent establishment in other country but conducts business through an agent in Japan, that corporation has to pay corporate taxes at the office where the transaction was performed or request information to the tax authority on the specific office it would be required to pay its corporate taxes.  CTA establishes some rules regarding payment of taxes by foreign corporations when their transactions in Japan are complex and jurisdiction of the tax authorities is not easily determined.   

In 1978, Japan introduced an anti-tax heaven rule.  According to this rule, earnings by foreign corporations located in a tax heaven and whose shareholders are Japanese are added to the income of those shareholders in Japan.  This rule applies if at least 50% of the shares or voting power is on a Japanese resident or Japanese corporation; and when the foreign corporation has its principal place of business in a tax heaven or in a country with a corporate income rate equal or less than 25%.  Thus, according to this rule, Japanese individuals or corporations holding e-commerce businesses located in a tax heaven or low tax jurisdiction are levied on the income earned by those e-commerce businesses abroad when they own at least 50% of the shares of those e-commerce businesses.  

Full post as published by IBLS Internet Law Blog on March 17, 2008 (boomark / email).