The Japanese corporate income tax regime comprises of:

• The national corporation tax
• The local business tax
• The local prefectural and municipal inhabitant taxes.

A Japanese company (ie. a company which is resident of Japan) is generally subject to Japanese corporate income tax on its worldwide income.

Taxable income is the company’s gross revenue less costs, expenses and losses, on an accruals basis per the prevailing accounting standards and in accordance with any tax adjustments under the relevant tax laws.

A company will be a resident of Japan for Japanese tax purposes if its main or head office is located in Japan. Unlike many other jurisdictions, Japan does not consider the ‘effective place of management’ concept when determining the residence of a company.

The national corporate tax rate depends on whether the company is considered a “small and medium-sized” company (SMC) (see Question 6) or not. For SMC’s the first JPY8 million of taxable income is taxed at 15% and taxable income in excess of JPY8 million is taxed at a rate of 23.2%. The taxable income of non-SMCs is taxed at the flat rate of 23.4%.

An SMC is a company with stated capital of JPY100 million or less, except for the following cases:

• The company is 100% owned (directly or indirectly) by one large sized company (LSC) (see Question 7), or
• The company is 100% owned (directly or indirectly) by two or more LSCs in a 100% Group (see Question 8).

A Large sized company is a company whose stated capital is JPY500 million or more.

A 100% Group is a group of companies which have a 100% Control Relationship.  This includes:

• a “person” holding directly or indirectly 100% of the company’s (outstanding) shares; or
• 100% of the company’s (outstanding) shares and 100% of the (outstanding) shares in another company are directly or indirectly held by the same person.

A ‘person’ includes a Japanese company, foreign company or an individual.

Business tax is imposed on a company’s taxable income, unless the company carries on the business of supplying electricity or gas or as an insurance provider, in which case business tax is imposed on the company’s adjusted gross revenue and not its taxable income

The business tax rate depends on a number of factors, including the company’s stated capital, the nature of its business (see Question 9), where its head office is located and so on.  Companies with stated capital exceeding JPY100 million are also subject to the “sized based” business tax.  From 1 October 2019, the size-based tax no longer applies.

The size-based business enterprise tax is imposed only on large companies and comprises a value-added component and a capital component. The value-added component comprises the company’s salary costs, net interest expenditure, rent expenditure, and income or loss for the year.  The capital component is made up of the company’s capital plus any capital surplus for tax purposes.

The Japanese corporate income tax regime comprises a number of taxes, some of which are levied at different rates based on certain factors.  Therefore, only an estimate or effective corporate tax “range” based on certain assumptions is possible.

For companies located in Tokyo and with capital exceeding JPY100 million the effective corporate tax rate is typically between 30% and 31%.  For companies located in Tokyo and with capital of JPY100 million or less the effective tax rate is typically 34% to 35%.

The undistributed retained earnings of certain privately held Japanese companies referred to as ‘Specified Family Companies’ may be subject to additional taxation.

This tax is imposed on the “excess” of a Specified Family Company’s retained earnings for each fiscal year.  The excess amount is the largest of the following three tests:

• JPY20 million
• 40% of the company’s taxable income for the fiscal year
• 25% of the company’s stated capital less the accumulated retained earnings at the end of the fiscal year (excluding that fiscal year’s earnings)

The tax is imposed on the retained earnings at marginal rates – 10% on the first JPY30 million; 15% on JPY30 million to 100 million and 20% on retained earnings exceeding JPY 100 million.

A ‘Specified Family Company’ is a Japanese company directly or indirectly controlled by one shareholder and related persons of the shareholder.  However, a Specified Family Company does not include a small and medium-sized company (SMC) as defined in Question 6.

A company’s taxable year aligns with the company’s accounting period (i.e. fiscal year).  A taxable year may not exceed 12 months but may be less than 12 months.  A company may elect its fiscal and taxable years.

A corporate tax return and inhabitant/business tax returns must be lodged with the relevant tax office and local government respectively within 2 months of the end of the company’s fiscal year.

A one month extension is generally available for blue tax return filers and longer extensions may be granted depending on the circumstances of the company.

Blue tax return filers qualify for certain tax benefits which are not available to taxpayers who do not have blue tax return status. To attain blue return status the taxpayer needs to lodge an application either within 3 months from the establishment of the company or by the end of its first fiscal year, whichever is earlier.

The company’s final tax liability for the fiscal year is due for payment within 2 months from the end of the fiscal year, regardless of whether an extension to lodge the tax return has been granted.

Documents to be filed with the final corporate tax return include the company’s balance sheet, profit and loss statement, statement of changes in net assets, details of accounts, an outline of the company’s business activities and other prescribed documents in certain cases.

Companies are generally required to lodge an interim tax return within 2 months of the end of the first 6 months of the fiscal year.  An interim return is generally not required where the prior year’s corporate tax liability – when multiplied by six and divided by the number of months of the preceding fiscal year – is JPY100,000 or less.

However, this test does not apply to companies subject to the size-based business tax or business tax imposed on gross revenue rather than net income (see Question 9).  Such companies must always lodge an interim tax return with respect to business tax, regardless of the amount of the corporation tax for the preceding fiscal year.