National corporation tax

This is a national tax levied against profit after subtracting expenses (they will not be levied when loss is incurred) and through self-assessment. Due to the economic situation of Japan, the government has modified the fiscal legislation several times the past few years. Lowering the corporate taxation rate has been an important aspect of the growth strategy of the present government, while at the same time broadening the tax base.  For SMEs in Japan, a special reduced rate of 15% (instead of the regular 19%) has been in place during the last years. 

 

 %

FY 2015

FY 2016

FY 2017

Regular companies

23.9

23.4

23.2

SMEs

Income < ¥8mln/y

19.0

(15.0)

19.0

(15.0)

19.0

Income>¥8mln/y

23.9

23.4

23.2

Source: Ministry of Finance, 2016 Tax Reform Proposal Brochure  (In Japanese)

 It means for a SME with a permanent establishment in Japan that its business income will be taxed on a 15% rate basis up until JPY 8 million. Please note that this rate is a temporary measure. In April 2015, it was extended for another two years. All income in excess of JPY 8 million will be taxed at 23.9%.

For any domestic corporation registered in Japan, both for domestic and subsidiaries of foreign companies, a corporate tax on national level is levied by the National Tax Agency, an integral part of the Ministry of Finance. The present corporate taxation level will vary from 15 up to 23.9% on the annual net business income of the company. The total tax burden for corporations will vary between 20.35% up to a steep 35.86% as effective rates (the maximum nominal rate can actually add up to 39.54%) depending upon factors like capital, employees, place of business registration, geographical spread of offices and manufacturing plants nationwide and total taxable income.

 Source: Rob Van Nylen, Accounting and Taxes (EU-Japan Centre for Industrial Cooperation Report)

The consolidated taxation system was introduced in Japan in April 2002. Under this tax system, a parent company and its subsidiaries are deemed to be a consolidated group that is subject to corporation tax. This system mainly applies to larger groups of Japanese companies in which a Japanese parent company owns 100% of the other Japanese companies (fully-owned subsidiaries). In that case, the parent company shall file the consolidated tax return based on the aggregated taxable income, including the business results of the subsidiaries. 


 Also taxes imposed on transfers of real estate or shares within the group will be deferred until the assets are sold outside of the group. Taxation for corporate reorganizations, when a corporation is reorganized by means of a merger, company split, capital contribution-in-kind, post formation, share exchange or share transfer and its reorganization meets certain requirements, special tax treatment is applied and the recognition of the gains and losses on the transfer of the assets will be deferred.

 Under the system of the thin capital taxation system, most recently reformed in 2006, interest is partly excluded from a corporation’s deductible expenses when the corporation has borrowed money exceeding three times the amount of its capital from its foreign leading shareholders.11
The thin capitalization system in Japan its main goal is prevent overseas headquartered enterprises from over-leveraging their fully-owned subsidiaries or branches in order to claim excess corporation tax deductions through interest charges booked into the annual financial statements of the local commercial entity in Japan.

Source: Rob Van Nylen, Accounting and Taxes (EU-Japan Centre for Industrial Cooperation Report)