Japan Tax & Business Guide - Deloitte

/Home/I-J Countries/Japan (Country Code 81)/Japan Tax Resources

Basic facts
Population 127.4m Inflation -0.3% (2005)*
Main languages Japanese GDP per head US$35,877*
Currency Yen (ï) GDP growth 2.6% (2005)*
Economic communities Asia Pacific Economic Co-operation, OECD, WTO
GDP sources 1.3% agriculture, 25.3% industry, 73.4% services
*Economist Intelligence Unit.
Political environment

Japan is a representative democracy. Executive power rests with the cabinet, which is responsible to the Diet (parliament). Emperor Akihito is titular head of state.

The party political structure is dominated by the conservative Liberal Democratic Party (LDP). Shinzo Abe was elected LDP leader and prime minister at end-September 2006.
Foreign trade and investment
Exports US$567.9bn (2005)* Imports US$449.7bn (2005)*
*Economist Intelligence Unit.

Leading export markets: The US, China and Korea.

Major exports: Industrial and consumer machinery and equipment, transport equipment, chemicals and metals.

Few formal restrictions apply to inward foreign direct investment (FDI), but some informal barriers exist (eg complex regulations, high costs). Direct investments must be reported to the Ministry of Finance, although in most industries this can happen after the fact.
Business and financing
Business forms Joint stock companies, limited liability companies, branches

Foreign investors prefer three types of commercial entities: joint stock companies (kabushiki kaisha, or KK), limited liability companies (yugen kaisha, or YK) and branches. The KK form is the most popular, although it has some complicated requirements. Company law changes that came into effect in May 2006 eliminate the YK, but offer more flexible forms of the KK.

Wholly owned subsidiaries are used to protect proprietary information and penetrate markets, and there are subtle but substantial barriers to imports.

Most foreign firms prefer to work with foreign banks operating in Tokyo, although joint ventures often use Japanese banks for relationship reasons.
Labour environment
Unemployment rate 4.4% (2005)* Minimum wage Varies by region and industry
*Economist Intelligence Unit.

Lifetime employment was once standard practice, along with elaborate fringe benefits and seniority-based wages, but this is changing. Unionisation of the workforce is around 20%.

Minimum wages vary by region and industry; the average industrial minimum wage is ï132,000 per month, and the average regional minimum wage is ï664 per hour.

The Ministry of Justice reviews all visa applications from foreign nationals seeking permission to work in Japan.
Taxation
Corporate tax
Main rate Effective rate, 41%

Resident companies are taxed on their worldwide income; non-resident companies are taxed only on Japanese-source income. A company that has its principal or main office in Japan is considered to be resident. A corporation is subject to national corporation tax, local enterprise tax and local inhabitants tax. Corporation tax is charged at the rate of 30%; the enterprise and inhabitant taxes vary according to the locality. The effective rate is generally around 41%. Company law changes that went into effect in May 2006 limit the scope of Japanese branch operations of foreign companies where the company has little or no activity outside Japan.
Individual tax
Progressive rates to 50%

Resident individuals are taxed on their worldwide income; non-residents are taxed only on their Japanese-source income as long as non-Japanese-source income is not remitted into Japan. An individual domiciled in Japan or present in Japan for one year or longer is considered a resident. A person is considered domiciled in the place that is the base and centre of the personÌs life. Individuals are charged tax at progressive rates up to 37%, but local taxes can raise this to 50%. Local taxes include municipal and prefectural inhabitants tax, and municipal and prefectural per capita tax.
Capital gains
Generally taxed as income

Capital gains of companies are generally taxed as income. Individuals are taxed on gains from shares at 20%. However, a 10% rate applies to the sale of listed shares subject to certain conditions. Long-term gains of individuals from the sale of land are taxed at 20%. Short-term gains are generally taxed at 39%.
Indirect tax
Consumption tax rate 5%

The consumption tax applies to most goods and services. The effective rate is 5%. Zero-rated items include the export of goods and related services; the handling, carriage and storage of foreign cargo; the provision of services to non-residents (with certain exceptions); and the transfer or loan of patents, trademarks or copyright to non-residents. Exemptions include the transfer of land, financial services, medical services and residential rents.

Businesses with annual turnover above ï10m in the two years prior to or ï10m or more in capital in its first two business years automatically become consumption tax taxpayers.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: calendar year

Individuals and companies that keep appropriate accounting records may file tax returns under the blue return system, giving them full access to special depreciation, the establishment of reserves and the utilisation of tax losses. Companies generally must submit tax returns and tax payable two months after the accounting year-end, and a one-month return extension may be available. Tax is withheld at source from the employment income of individuals. Where an individual needs to file a tax return, this is due by March 15th following the end of the calendar year.
Additional tax information
Withholding taxes Dividends 20%, Interest on loans 20%. Interest on deposits and bonds 15%, Royalties 20%. Rates may be reduced by tax treaty.
Tax treaties Japan has concluded 45 tax treaties (applicable to 55 countries).
Dividends For corporations, dividends are taxable but with an exemption for domestic dividends in certain circumstances. For individuals, a reduced rate is available for dividends from listed companies.
Revenue protection There is transfer-pricing, thin-capitalisation and controlled foreign corporation (CFC) legislation.
Groups Consolidated filing of tax returns is possible.
Incentives Research and development and information technology investment credits are available.
Other taxes Municipal fixed assets levy, Real property transfer and property taxes.