Foreign companies operating in Japan are liable for corporate income taxes only for that income which is coming from sources within Japan. In contrast, Japanese corporations are liable for corporate tax both on their Japanese source income and their foreign source income. [1] 

Tax notification must be given by foreign corporations who have generated income subject to corporate tax in Japan even without establishing a branch office. Your corporation will be subject to this, in the following cases:

  • When construction/installation/assembly/other works, or supervision and control of works lasts for longer than one year.
  • When using certain agents, such as:
    • those who have been given the authority to conclude business agreements on your corporation’s behalf;
    • those who store assets on your behalf in a volume/quantity in line with ordinary requirements of customers and deliver such assets to meet customer requests;
    • those undertaking a significant amount of the work required for order acquisition, consultation and other activities in order to conclude business agreements solely or principally on behalf of your corporation. [2]

[1] Japan Federation of Certified Public Tax Accountants' Associations, Guide to Japanese Taxes, 2012
[2] JETRO, Taxes in Japan: Overview of Japanese Corporate Tax System for Investment in Japan, 2013

The mode of a foreign corporation’s activity in Japan affects its taxable income. Those with a branch, sub-branch, office, factory or business establishment in Japan will find all income derived from activities in Japan to be taxable; however, exceptions exist for fixed locations used only for the purchase or storage of assets or those used only for publicity/advertising, market surveys, information provision and other secondary activities. Those doing business through the agents mentioned in the previous paragraph will be liable to pay taxes on Japan-sourced income.

[2] JETRO, Taxes in Japan: Overview of Japanese Corporate Tax System for Investment in Japan, 2013

The source of the income might have an effect on the taxable situation. Please refer to the following table to understand which kind of income is taxable depending of the physical presence or not of the company in Japan.

Type of income

Type of foreign company

Foreign company with a permanent establishment in Japan

Foreign company without any physical presence in Japan

Income from business activities conducted in Japan

Taxable in Japan

Not taxable in Japan

Income from the utilisation, holding or transfer of assets located in Japan

Taxable in Japan

Taxable in Japan

Consideration for services rendered in Japan (for example engineers)

Taxable in Japan

Taxable in Japan

Income from the lending or transfer of any right on real estate located in Japan

Taxable in Japan

Taxable in Japan

Interest on deposits and savings located in Japan

Taxable in Japan

Not taxable in Japan

Dividends received from shares of a Japanese company

Taxable in Japan

Not taxable in Japan

Interest on loans provided in Japan

Taxable in Japan

Not taxable in Japan

Royalties for any patent, trademark, copyright and machinery or equipment

Taxable in Japan

Not taxable in Japan

The table shows that some foreign companies are required, under Japanese domestic law, to pay taxes on some sources of income even though the companies do not have any physical presence in Japan. In practice, such a company would have to appoint a Japanese tax accountant. The kind of income affected by a tax even when a company does not have a permanent establishment in Japan seems quite logical, as the considered matters are more directly connected to Japanese territory. Some taxes may be paid directly through a withholding system without any proactive action from the company.

Please note that this table is not exhaustive. It focuses only on the most common operations done by SMEs. Additional rules may apply for government bonds, lending of funds, pensions received from insurance contracts concluded in Japan or dividends received from partnerships.

Note also that a double taxation avoidance treaty may significantly modify the scope of this table. It is very important to check the treaty (if existing) that the country of residence of the company has signed with Japan.

 

Total of Corporate Income Tax Rates

At present, all the aforesaid combined tax rates brings the Japanese Tax system to the following total tax rate, depending upon your taxable corporate income. (Figures until March 2015)

  • Up to 4 million yen: 22.45% (effective rate: 21.42%)
  • Between 4 to 8 million yen: 24.89% (effective rate: 22.20%)
  • Over 8 million yen: 39.49% (effective rate: 36.05%{2])

Source: Rob Van Nylen, Accounting and Taxes (EU-Japan Centre for Industrial Cooperation Report), [2] JETRO

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