Definition of SME under Japanese law

The Japanese Small and Medium Enterprise Basic Act (Chushokigyōkihonhō) does not have one comprehensive definition for SMEs. It discerns a four of types of SMEs depending on their business activities. However, the Corporation Tax Act overrides any other legal definition and is used on these pages as it is the only one applicable for tax purposes. Under the Japanese Corporation Tax Act, a company is considered as a SME when its capital does not exceed JPY 100 million (≈ EUR 763,000, 2019 JP Government rates), regardless its business (JETRO, See 3.3.2 note 3).

 
SMEs
Micro-business
Business activity
Overall Capital or investment (JPY)
Regular employees
Regular employees
Manufacturing etc.
< 300 million
< 300
< 20
Wholesaler
< 100 million
< 100
< 5
Service providers
< 50 million
< 100
< 5
Retailers
< 50 million
< 50
< 5
Source: SME Agency (In Japanese)

The definition of an SME adopted by the European Commission in the recommendation 2003/361/CE, i.e. fewer than 250 employees and up to EUR 50 million annual turnover (or an annual balance sheet total not exceeding EUR 43 million), therefore differs from the one used in Japan.

Major taxes in Japan

 
National
Local
Taxes on:
Prefectural
Municipal
Income
Individual income
Corporate income
Inhabitants’ tax
Enterprise tax
Inhabitants’ tax
 
Gifts and inheritances
Gifts
Inheritance
 
 
Property
Motor vehicle tonnage
Automobiles
Fixed assets
Special landholding
City planning
Light motor vehicles
Enterprise establishment
Consumption
Consumption
Tobacco (J)
Liquor
Local consumption
Tobacco
Golf course utilization
Tobacco (J)
Transactions
Stamp duty (J)
Registration and licenses
Real estate acquisition
Automobile acquisition
 

The Tokyo Metropolitan Bureau of Taxation offers a comprehensive guide in English explaining the various taxes applied in Japan at the national, prefectural and local levels. (2019 edition)

European SMEs are subjected to different taxes when doing business in Japan:

The National Tax Agency (NTA) administers the business taxation system on a nationwide scale for both corporate entities and individuals running a business.

The basic principle of the business taxation system in Japan, is based upon a self-assessment method with an external accounting office or internal auditor/board of auditors for bigger companies, which need to be filed within 2 months, at the local taxation bureau of the registered corporate address, after the closing of the financial year.

The taxation system is a neutral system for all domestic corporations engaged in economic activities.
Important to bear in mind that tax evasion and late payment are subject to steep fines in Japan, sometimes amounting up to 50% of additional taxation.

Another important point is that the actual payment of the business tax and the consumption tax to the National Tax Agency is due within 2 months after the closing of the financial year.

Compared to other Asian developed economic nations, Japan’s business taxation percentage has always been on the higher side, as approximately 40% burden on profits has been the norm for a long time. In recent years however, there have been government efforts to lower the corporate tax burden and attract more foreign companies.

As many Japanese SMEs have been financially struggling there have been a number of fiscal measures in place to alleviate their tax burden. Smaller business therefore are enjoying a lower tax burden than larger companies. Although many of these measures are deemed temporarily, they are usually extended.

Blue form tax return system

The corporate taxpayer can select between the blue or white form tax return systems. The blue form tax return system is intended to encourage better, uniform and systematic record keeping and reporting by corporate taxpayers by offering certain benefits and preferential tax treatment to approved blue form taxpayers. The blue form tax return is not only limited to corporate taxpayers but can also be used by individual taxpayers. Important to bear in mind that a blue tax form return status is a privileged status, approved by the head of the local tax office, and hence can also be revoked at any time. JETRO, 3.3.10 point 3

Accounting in Japan

Accounting and tax support is provided by certified public accountants and tax accountants. The role of certified public accountants is to perform audits under the Certified Public Accountant Law, while tax accountants engage in typical tax agent services such as the preparation of tax...

Taxable presence

Under Japanese Tax Law, Japanese companies are taxed on their worldwide income, while foreign companies are taxed only on the income earned from their activities in Japan. A Japanese company is defined as a company whose head office or main office is located in Japan (usually when the company is...

Tax treaties

Main points: Tax treaties will modify the scope of exposure to Japanese taxes for a foreign companyMany tax exemptions may apply to a foreign companyIn order to benefit from tax exemptions, the company has to notify the relevant Japanese tax officeMost of the European Union member states have signed...

Online business

E-business can easily follow the definitions of a permanent establishment in order to determine the taxable situation of a company doing business in Japan. If a SME is conducting business in Japan online without having any physical presence in Japan, it will not be taxable in Japan...

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