Accounting & Taxes

1. Basic Knowledge of Tax Filing in Japan

Corporations operating in Japan are subject to several key taxes: corporate tax (national), consumption tax (national and local), and local taxes such as corporate inhabitant tax and corporate enterprise tax.

Corporate tax is imposed on company profits, with rates based on capital and income. For example, small to mid-sized companies pay 15% on annual income up to 8 million yen and 23.2% on any amount above that.

Local taxes include corporate inhabitant tax, comprising a "per capita levy" (a fixed amount paid regardless of profit) and a "corporate tax levy" (based on corporate tax amount), and corporate enterprise tax, which is calculated on the same income as corporate tax. Notably, corporate enterprise tax can be treated as a deductible expense in the following fiscal year.

Consumption tax is an indirect tax applied to goods and services in Japan. The standard rate is 10%, with some reduced rates at 8%. Companies pay the net amount between the consumption tax they collect and the amount they pay on purchases.

Certain corporations, such as those with taxable income of 10 million yen or less in the base period two years earlier, qualify as "tax-exempt businesses" and are exempt from paying consumption tax. However, tax-exempt businesses are not eligible for consumption tax refunds, so in some cases, opting to be a taxable business is more advantageous depending on the business strategy.

2. Procedures for Corporate Registration of a Subsidiary in Japan

To establish a subsidiary (Japanese corporation), the foreign parent company must choose a company type and register it with the Legal Affairs Bureau.

After registration, the National Tax Agency assigns a 13-digit corporate number, which must be included in tax filings and official documents. This number is public and searchable on the National Tax Agency’s website.

Following incorporation, several notifications must be submitted using this corporate number. The first is the notification of incorporation of a corporation to the tax office, due within two months from the date of registration. Required documents include the articles of incorporation and certificate of registered matters.

It is also common to apply for approval of blue form tax return status at this time, which allows benefits such as loss carry-forward. This application must be submitted within three months of the start of the first fiscal year (or by the day before its end, whichever comes first).

If you begin paying salaries to employees in Japan, submit a payroll office establishment notification to the tax office within one month, and also apply for relevant withholding tax payment procedures (e.g., special provisions for payment deadlines).

Local tax offices (prefectural and municipal) also require a separate incorporation notification for local taxes. Make sure these are completed promptly so that you receive necessary documents like payment slips and electronic filing credentials.

3. Establishing the Tax Filing Process in Japan

Once the corporation is established, it is essential to set up an internal system for accounting and tax filing.

Choose an appropriate accounting system to accurately track daily transactions. Many cloud-based solutions are user-friendly and don’t require advanced knowledge.

Companies approved for blue form tax return status must maintain proper double-entry bookkeeping records and preserve them for seven years. Both physical and digital records must be kept at a Japanese office, and documents such as invoices and receipts must be stored for at least seven years (in some cases, ten years).

The typical tax filing workflow includes:

Daily bookkeeping
Year-end closing and financial statement preparation
Tax calculation and return preparation
Filing and payment

Prepare financial statements at year-end, then calculate taxable income and applicable taxes. Any adjustments (e.g., for depreciation or allowances) are added via separate schedules to determine final taxable income.

Submit the tax return and supporting documents to the tax office, either on paper or electronically. Note that interim declarations and payments may be required if prior year tax exceeds certain thresholds.

An annual tax calendar should also track monthly obligations such as withholding income tax and social insurance. If internal handling is difficult, consider outsourcing to an accounting firm for preparation and review.

4. Meeting Submission Deadlines

Strict adherence to tax deadlines is crucial in Japan.

The filing deadline for corporate, local corporate, and corporate inhabitant/enterprise taxes is generally within two months of the end of the fiscal year. The consumption tax return is due on the same timeline.

Interim filing requirements vary by business size.

To meet these deadlines, coordinate your filing schedule with head office reporting and group consolidation timelines. Especially in the first year, act early to collect data, meet with accountants, and plan systematically.

5. How to Prepare Necessary Documents

Tax filing in Japan requires comprehensive documentation.

For the corporate tax return, submit the corporate and local corporate tax return forms and accompanying schedules detailing income, tax credits, and adjustments.

Also prepare complete financial statements (balance sheet, income statement, changes in equity) and account breakdowns that detail content, counterparties, and amounts for major accounts.

Include a company overview reporting business activities, employee numbers, and major financial figures.

For consumption tax, required forms depend on the taxation method. Under the standard method, submit the Consumption Tax and Local Consumption Tax Final Return and its attachments, including tax rate-based calculation sheets and deduction ratio schedules. Internal working documents, such as taxable sales and purchases tables, help validate return figures.

Local tax return formats vary by municipality but are generally filed alongside the corporate tax return. In Tokyo’s 23 wards, a unified form (e.g., Form No. 6) covering corporate inhabitant tax, enterprise tax, and local corporate special tax is commonly used.

Always fill out forms accurately and thoroughly. Use tax software or engage a tax accountant to ensure completeness.

6. Specific Points of Caution for Foreign Companies

Subsidiaries must take care with transactions involving their foreign parent company, particularly regarding transfer pricing.

Transfer pricing regulations require intercompany transactions (sales, services, loans, royalties) to be priced at arm’s length. If pricing is deemed inappropriate, authorities may make adjustments and impose additional tax.

Be sure to verify pricing methods and maintain documentation—preferably in English—showing the basis for calculations.

Large multinational groups are also required to prepare formal transfer pricing documentation.

Watch for Permanent Establishment (PE) risks. Typically, a foreign company is not taxed in Japan without a PE, but if a Japanese subsidiary is found to constitute a de facto business base, the parent company could be taxed in Japan.

7. Utilization of Japanese Experts and Collaboration Methods

Given the complexity of Japan’s tax system, consulting local professionals such as tax accountants or CPAs is highly beneficial.

Tax accountants are qualified to file on your behalf and communicate with authorities. International tax matters require deep expertise, and professionals can help avoid errors and utilize available incentives.

They also assist in audit readiness, regulatory compliance (such as the Electronic Books Preservation Act), and tax system updates, letting you focus on operations.

8. Summary

Successfully managing a Japanese subsidiary's tax responsibilities requires early planning and the right expertise.

At incorporation, ensure all required notifications are filed on time, and obtain a corporate number. Establish a robust accounting and filing process, and seek guidance from trusted Japanese tax professionals.

With the right systems and partnerships in place, you'll be well-positioned for smooth operations, compliance, and potential tax savings in the Japanese market.