1. Notification
Please note that K.K. in the following sentences means both K.K. and Branch unless otherwise stated separately.
(1) Reporting and Elections
Reporting and elections for tax purposes are required after a K.K. (Kabushiki Kaisha) is established or a Branch is commenced for legal purposes. Following is a list of documents to be filed with the tax offices.
| National Tax Office | Filing due | |
|---|---|---|
| 1. | Report on establishment of company (KK only) A copy of articles of incorporation and a certified copy of company register must also be submitted |
Within 2 months after establishment |
| 2. | Report on the establishment of a foreign corporation (Branch only) | Within 2 months after commencement |
| 3. | Application for approval of filing a blue tax return | Within 3 months after the date of establishment or the first fiscal year-end, whichever is earlier |
| 4. | Application for extension of filing due date for corporate tax return - if needed | The end of the fiscal year |
| 5. | Report on commencement of payroll payment | Within 1 month after establishment of office |
| 6. | Application for approval of paying withholding tax by every July 10 and January 10(or 20) | Anytime if the number of employees is less than 10 |
| 7. | Report on depreciation method of depreciable fixed assets | Filing due date for the first tax return |
| 8. | Report on method of evaluation of inventory assets | Same as 7 above |
| Local Tax Office | Filing due | |
|---|---|---|
| 1. | Report on commencement of business A copy of articles of incorporation and a certified copy of company register must also be submitted |
Within 15 days after starting business |
| 2. | Application for extension of filing due date for enterprise and inhabitant tax return - if needed | Same as 4 above |
2. Blue tax return system
(1) Blue tax return system
Largely due to several privileges associated with blue tax returns, such as carry-forward of net operating loss, special measures for depreciation etc., a large number of companies presently file a blue tax return.
(2) Approval by NTA
A newly established company wishing to file a blue tax return must apply to the appropriate National Tax Office by the earlier of the following dates: 3 months after its establishment or the end of the company’s first fiscal year.
(3) Bookkeeping and maintaining accounting records
Under the blue tax return system, a company is required to keep proper accounting records, to maintain accounting books and reports for its income for 7 years (9 years for a company carries NOLs) at an office in Japan, based on the proper records and double-entry accounting in Japanese yen.
(4) Japanese Yen based bookkeeping
It is sometimes observed that Japanese Yen transactions are booked in foreign currency by applying applicable exchange rate. Then, the foreign currency base financial statements are retranslated into Japanese Yen at year-end for Japanese tax reporting purpose. As a result of this, cumulative translation adjustment account would be recognized in the Japanese Yen base financial statement.
However, such foreign currency base bookkeeping and retranslated financial statement are NOT allowed for Japanese tax purpose. As long as the business activities are conducted in Japan, functional currency must be Japanese Yen and Yen base bookkeeping is mandatory requirement for tax reporting purpose.
(5) Japanese GAAP vs. Other GAAP
Books and records should be maintained in accordance with the Japanese GAAP. If different GAAP such as US GAAP and/or IFRS is adopted, appropriate reconciliations between GAAPs must be made and the supporting documents should be maintained in Japan.
Although there is no significant difference in Japanese GAAP and others, typical differences at small foreign start-up companies would be:
- Length of useful life for depreciation
- Capitalization rule for properties
- Capital lease accounting
- Accrued vacation expense
- Deferred tax
(6) Accounting system
In case that the company uses foreign made accounting package system, it may not process consumption tax properly. The company may need to make an extra effort to segregate consumption tax portion with all transactions.
On the other hand, the Japanese accounting package system automatically segregates consumption tax and generates the analysis and reconciliation of consumption tax.
Generally speaking, using Japanese accounting package facilitates both bookkeeping process and consumption tax return preparation process.
3. Tax Return
| Reports | Due date | To be filed with |
|---|---|---|
| Interim corporate tax return | Within 2 months after the end of the first 6 months | National tax office |
| Interim consumption tax return | National tax office | |
| Interim enterprise and inhabitant tax returns | Local tax office | |
| Final corporate tax return (see *1) | Within 2 months after the fiscal year-end | National tax office |
| Final consumption tax return | National tax office | |
| Final enterprise and inhabitant tax returns (see *1) | Local tax office | |
| Depreciable assets return | January 31 | Local tax office |
- *1 Within 3 months, if one-month extension is applied.
4. Consumption tax
(1) Outline
Consumption tax is categorized as an indirect taxation to which almost every domestic transaction and every transaction for the import of foreign goods is subject at the rate of 5%, except for financial transactions, capital transactions, medical services, welfare services and educational services. The basic formula to calculate the tax due from the company is as follows:
(Note) A prerequisite for the application of purchase tax credit is the keeping of books and bills, etc. with respect to purchase tax credits in the taxable period.
(2) Timing of application for election to be a taxable enterprise
(i) Election of taxable enterprise status
If a company’s taxable sales during a “base period” are more than ¥10 million, the company must file a consumption tax return. A company’s “base period” is a fiscal year before last.
- A newly established company which has no “base period” is not exempt from consumption tax filing during its first and second fiscal years, if its capital is ¥10 million or more
- On the other hand, a newly established small company with capital of less than ¥10 million is exempt from consumption tax during its first and second fiscal years, as it has no base period.
- Effective from the fiscal year beginning on or after January 1, 2013, the new tax code disallows the above exemption to such small companies as its sales was ¥10 million or more in the first half (six months) of the previous year.
- However, this does mean that newly established small companies, except for the taxable company mentioned above, are disadvantaged in that they cannot claim a consumption tax refund during the first two fiscal years, even if the consumption tax paid on purchases is greater than the consumption tax received on sales. To compensate this disadvantage, the law allows a company to make an election to be a taxable enterprise voluntarily during its first two years.
- Under 2010 Tax Reform, a company acquires fixed assets (assets other than inventory with a cost of at least ¥1 million net of tax) cannot be a tax exempt status during three years including the “purchasing” period or the simplified tax system does not apply for the same period. Please consult with a tax specialist for details as necessary.
Generally speaking, if a company invests heavily in its business before starting substantial operations, i.e. in its first two fiscal years, electing to be a taxable enterprise to enable it to claim consumption tax refunds can be beneficial.
The decision to elect to be a taxable enterprise also depends on the cost of filing to obtain the refund. If the filing cost exceeds the potential net tax refund, it is clearly better for a company not to elect to be a taxable enterprise, and to therefore avoid filing.
(ii) Timing of application
If a newly established company with capital of less than ¥10 million wants to elect to be a taxable enterprise, it must submit a necessary application by the end of the first fiscal period.
(3) Interim returns
In some cases, the monthly, quarterly or semiannual interim return is required.
5. Net operating losses (NOL)
Most newly established companies are unlikely to make profits in their initial operating periods. For corporate tax purposes, a company that files a blue return may carry back losses to the previous fiscal year or carry forward losses to subsequent years, up to a maximum of seven years. However, the carry forward period is extended to nine years for the losses generated on or after April 1, 2008
6. Audit requirement
In Japan, you must hold a regular shareholders’ meeting of a company no later than 3 months after the company’s fiscal year end. The financial statements (balance sheet, profit and loss statement, statement of change of shareholders’ equities and statement of explanatory notes) of the company must be approved by the regular shareholders’ meeting.
It is possible to hold the regular shareholders’ meeting on paper only, subject to the size and the approval of the company. In this case, the minutes of the meeting will be prepared by an attorney.
Under the new Corporate law, a statutory auditor (so called Kansa-yaku) is not mandatory required for a Small-Medium Closed company. On the other hand, once the statutory auditor is elected, he/she is responsible for not only accounting matters but also operational issues, unless his/her responsibility is restricted to the accounting audit by the articles of incorporation. In case that the responsibility is limited to accounting audit, the wording of statutory auditor’s report might be:
“I, Statutory auditor, have examined the balance sheet of [Company Name] as of d/m/y, the related income statement, business report and statement of change of shareholders’ equity for the period ended d/m/y.
In my opinion, such financial statements present legally and fairly the financial position and results of operation of [Company Name].”
The auditor’s report should be dated in accordance with legal guidelines.
External Audit
There is no external independent audit (CPA’s independent audit) requirement for Medium-Small Corporation (capital amount less than ¥500 million and total liabilities less than ¥20 billion)
If a foreign Parent company wants an external audit for its small Japanese subsidiary or branch, a voluntary audit arrangement (or agreed upon review arrangement) can be made between the Parent auditor and a local audit firm in Japan.
7. Comparative chart between Branch and Corporation (K.K.)
The following shows the Japanese taxation and related matters comparing a branch and a corporation.
| Item | Branch | Corporation | ||||
|---|---|---|---|---|---|---|
| 1. | Scope of taxable income | Japanese source income | Worldwide income | |||
| 2. | Entity Tax Rates | |||||
| (1) Corporate tax | 28.05(Note 1) | 28.05(Note 1) | ||||
|
5.3% (Note4) 4.293%(Note5) |
5.3% (Note4) 4.293%(Note5) |
||||
| (3) Inhabitants Tax on Corporate tax Due | 20.5%(Note6) | 20.5%(Note6) | ||||
| (4) Total (1) - (3) | 43.39% | 43.39% | ||||
| Effective Tax Rate (4) x 1/(1+ (2)) | 39.59% | 39.59% | ||||
| 3. | Dividend to a parent company, or Remittance of Profit to a home office | |||||
| (1) Withholding tax | N/A (Remittance) | 20% (Dividend) This tax rate is reduced to 0%, 5% or 10% by most tax treaties. | ||||
| (2) Remittance guarantee | Guaranteed | Guaranteed | ||||
| 4. | Expense Allocation between the Home Office and a Branch, or Parent and Subsidiary | Expenses paid by the home office or a parent on behalf of a branch or a subsidiary is deductible in Japan as far as such expense can be identified specifically. However, it is easier for a branch to deduct general administrative type of expenses than for a subsidiary. This is because most treaties allow the deduction. Any expense incurred for a specific service is deductible by the company who receives the service. | ||||
| 5. | Tax Credit | |||||
| (1) Interest | Creditable | Creditable | ||||
| (2) Dividends received from Japanese companies | Not creditable | Creditable | ||||
| 6. | Scope of Financial Statements to be attached to the Corporate Tax Returns | The combined financial statements are required to be filed. | Only financial statements of a subsidiary are required to be filed. | |||
| 7. | Legal Audit under the Corporate law | N/A | Necessary if a subsidiary meets at least one of the following conditions.
| |||
| 8. | Compensation | |||||
| Bonus to a director of the branch or subsidiary | Not deductible (deductible if reported to tax authorities in advance) The company should minimize the number of the board members. |
Not deductible (deductible if reported to tax authorities in advance) The company must have at least 1 director. |
||||
| Regular compensation | Deductible | Deductible | ||||
| 9. | Accounting Report | Not as strict as a subsidiary | Japanese accounting standards must be strictly followed. | |||
- (Note 1)
Small-Medium Companies (SMC) are entitled to a reduced corporation tax rate up to ¥8 million of taxable income. Please refer to a tax specialist for details. - (Note 2)
A company with capital exceeding ¥100 million yen is subject to the Factor-Based Enterprise Tax. In such circumstances, a certain amount of enterprise tax will be imposed based on the value added factor and capital factor, even if the company has no taxable income.
Please refer to a tax specialist for details. - (Note 3)
As a provisional measure, enterprise tax has been divided to create a local corporation special tax. A company makes local corporation special tax filing and payment together with enterprise tax. - (Note 4)
The presented ratio is the maximum tax ratio applied to a company whose capital is less than or equal to ¥100 million yen AND whose taxable income is less than or equal to ¥50 million yen.
Reduced enterprise tax rate is available for a manufacturing company registered in Osaka prefecture. Please refer to a tax specialist for details. - (Note 5)
The local special corporation tax rate for a corporation that is not subject to the Factor-Based Enterprise Taxation is equivalent to 81% of enterprise tax due. The total tax due of enterprise tax and the local special corporation tax remains almost at the same level as calculated at the single enterprise tax rate before the tax reform. - (Note 6)
SMC with capital of ￥100millions or less may be entitled to a reduced inhabitant tax rate, if its national corporate tax calculated for the period is ¥20 million or less (¥10 million per semi-annual.) Please refer to a tax specialist for details.
8. IFRS adoption in Japan
As a member of IOSCO (International Organization of Securities Commissions), Japan has been pursuing convergence projects between Japan GAAP and IFRS. Since 1999, new Japanese accounting standards for deferred tax, R&D, cash flow statements, financial instruments, interim consolidation, retirement benefit, impairment of assets, and M&A etc have been implemented in the past 12 years. This activity was called the "Accounting Big Bang".
In August 2007, ASBJ and IASB agreed to full convergence by eliminating all differences between Japan GAAP and IFRS. In December 2007 a roadmap for convergence was determined, and in June 2009 an interim report on the approach for IFRS adoption in Japan was issued, the overview of which is as follows:
- Voluntary adoption from March 2010 fiscal year
- Mandatory adoption will be determined by 2012
- Actual full adoption would be 2 to 3 years following the decision of 2.
- Much reconciliation among tax laws, corporation laws etc. would be required
In the Interim Report, the conditions for mandatory full adoption are also discussed as follows:
- Appropriateness and fairness of IFRS
- Well organized Japanese translations
- Amendments to IFRS should be authorized only by IASB, and not by other bodies such as the EU or FASB
- Education for accounting staff, auditors and investors
- ASBJ involvement in IFRS and its governance process
- Implementation of XBRL for IFRS
After the issuance of an interim report, Minister for Financial Services announced so-called postponement of IFRS adoption,” Mandatory adoption will not take place from the business year ending March 2015, at the very least.” Minister for Financial Services announced that he will make every effort to realize international integration of accounting standard upon monitoring and discussing domestic companies’ voluntary adoption of IFRS, direction of convergence, appropriateness of earlier adoption for consolidated financial statements, coordination with taxation and treatment of non-consolidated financial statements.
The following are typically disputed areas between IFRS and Japan GAAP:
- Revenue recognition
- Fair value measurement
- Consolidation policy
- Derecognition of financial assets and liabilities
- FS presentation
- Retirement benefit
- Lease accounting
- Financial Instrument
- Equity/Liability disclosure