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| Overview of National Corporate Income Tax (Houjin Zei) in Japan |
| Last Update 2012/4/3 |
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| Taxpayer |
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Domestic Corporation |
Worldwide income |
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Head Office or Main Office in Japan |
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Foreign Corporation |
Japan Source Income
ex. Income from business in Japan |
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Other than Domestic Corporation, typically a branch or a factory |
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*Branch and factory is called Type 1 Permanent Establishment. In addition,
there is Type 2 (Certain Construction Sites) and Type 3 (Certain Agents). |
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| Tax Codes |
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Corporate Income Tax Law (CITL, sometimes referred to as Corporation Tax Act, in Japanese Houjin
Zei Ho) and
Special Measure Tax Law (SMTL, sometimes referred to as Act on Special Measures Concerning Taxation,
in Japanese Sozei Tokubetsu Sochi Ho) Regular Corporation |
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•Unofficial translations can be found on http://www.sozeishiryokan.or.jp/corporation_tax/corporation_tax2010e.html. |
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•Enforcement Orders by Cabinet and Enforcement Regulations by Ministry are also considered as laws. |
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•Interpretations of Laws by National Tax Agency (NTA) (Tsutatsu) is not a law, but tax auditors usually follow these interpretations. |
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| Filing Due Date |
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Generally, Tax Return has to be filed within 2 months after the Fiscal Year End. |
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Extension of Filing can be admitted by 1 month if there is a good reason
(audit by public auditor, AIC..).
Extensions for Local Corporate Income Taxes can be admitted by separate
procedures.
No extensions are admitted for Japan Consumption Tax.
If not filed timely, Non-Filing Penalty will be assessed (5%, 15%, 20%) in addition to interest. |
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| Tax Rate |
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Regular Corporation |
30% → 25.5% (28.05%) |
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Small Corporation |
Up to JPY 8 million 18% → 15% (16.5%) (excl. a subsidiary of a big corporation) |
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Specific Public Corporation |
22% → 19% (20.9%) |
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*The new rate will be applied from the fiscal year starting on or after
2012/04/01. For 3 years until the fiscal year starting before or on 2015/3/31,
10 % additional tax for Recovery from the Earthquake/Tsunami will be added. |
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| Blue Return |
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CIT Return can be filed in a blue form (in the past, the color of the paper
was blue) if approved by theTax Office.Regular Corporation
Taxpayer has to prepare accounting books correctly and file tax return in time.
One of the biggest benefits of a blue return is that Net Operating Loss Carryover can be used. |
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| Financial Statements to be based |
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Financial Statements to be used as a base for preparing tax return need
to be approved by Shareholders.
These Financial Statements need to be prepared in accordance with Generally
Accepted Accounting Standards in Japan.
Income on the Financial Statements will be adjusted to reach to the Taxable
Income as stipulated in Tax Law.
There are several items that need to be expensed to be deductible for tax purpose. |
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Ex. Depreciation
If Maximum Tax Depreciation for a machine is 1,000 and the corporation
expensed only 100 on its accounting book, the Tax Depreciation allowed
is 100 only. |
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| Net Operating Loss (NOL) |
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Certain NOL Carry Back or Carry Forward is permitted only when Blue Return is approved.
For a certain corporation, NOL can be Carried Back for 1 year.
Generally, NOL Carry Forward is permitted for 7 years until the fiscal year starting before 2012/04/01.
Generally, except for a small corporation or a Tokutei Mokuteki Kaisha
(TMK), from the fiscal year starting on or after 2012/04/01, the taxable
income that can be used for NOL Carry Forward is limited to the 80% of
Current Taxable Income, but the NOL Carry Forward is permitted for 9 years.
When there is a change in the ownership of a corporation, NOL Carry Back
/ Carry Forward might be influenced to avoid tax evasion. |
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| Revenue |
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All sources of economic benefits including revenue from business operation
and capital gain are included in Revenue.
Accrual Basis is adopted. Within several approaches in accrual basis, revenue
is recorded when the rights to a property is acquired (when title is transferred)
(“Rights Acquired Basis”).
Additionally, under certain circumstances, revenue is recognized when cash
is under control (“Control Basis”). |
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| Expenses |
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All of expenses including loss from business operation and capital loss are included in Expenses.
However, except for depreciation expenses, expenses of which liabilities
have not been fixed cannot be deducted (“Fixed Liabilities Basis”). For
instance, basically, estimated expenses for bonus allowance are not deductible. |
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| Consolidated Tax Returns |
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A group of domestic corporations can file a consolidated tax return by their election.
If elected, ALL of the 100 % subsidiaries have to participate this Consolidated Return.
At the time of election, corporations have to re-evaluate certain assets
with Fair Value, and the differences from the book values have to be captured
as income or deductions.
Before the 2010 (Heisei 22)Tax Reform, it was not possible to bring in
subsidiaries’ NOL and the NOL was to be extinguished, but now, it is possible
to bring in with some limitations.
Consolidated Tax Return is allowed only for National Corporate Income Tax
purpose, and Consumption tax nor Local Taxes do not allow consolidated
returns. |
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| National Group Corporate Tax |
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Introduced by 2010 (Heisei 22) Tax Reform. The aimed corporations are fully
controlled corporations, including subsidiaries of foreign corporations.
There are some similarities between Group Corporate Tax Law and Consolidated Tax Return System.
Group Corporate Tax Law is applied to all corporations without any elections.
There are several areas that are impacted by this law, but 2 major areas may be as follows: |
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1. There are several measures that alleviate tax burdens of small corporations
(generally, capital is equal to or less than 100 million JPY), but if a
small corporation is fully owned by a large corporation
(capital is equal to or more than 500 million JPY), these alleviations cannot be used anymore.
Examples of alleviations measures are decreased tax rate, additional tax
on retained earnings of certain closely held corporation (see the following
page) and deductibility of entertainment expenses. |
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2. Gains and Losses from the sale of certain assets (in general, fixed
asset, land, securities etc whose fair value is more than 10 million yen)
among domestic group corporations are not recognized until these assets
are sold to other persons not in the same group. |
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| Special Treatments of Closely Held Corporations |
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There are a lot of special tax treatments for Closely Held Corporations
(“CHC”, Douzoku Kaisha). |
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CHC is defined in Corporate Income Tax law as follows: |
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CHC is a corporation in which more than half of its shares are held by
equal to or fewer than 3 persons and their related individuals or their
related corporations. A person includes both an individual and a corporation.
And, related individuals include relatives, a spouse, an unmarried partner
and other specific person. |
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Major special treatments under National Corporate Income Tax Law are: |
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1. Acts or Calculations by CHC |
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If the Tax Office considers that an act or calculation by a CHC reduces
the burden of National Corporate Income Tax unreasonably, the Tax Office
has a power to deny the acts or calculations, and the Tax Office can recalculate
the tax base or tax amount as appropriate. |
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2. Retained Earning Tax for specific CHC |
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In general, the target corporation of this treatment is a CHC in which
more than half of its shares are held by one person and its related individuals
or its related corporations. But if the person is a corporation, and if
the corporation is not owned by one person and its related individuals
or related corporations, this rule does not apply.
Additionally, this rule does not apply if its capital is equal to or less
than 100 million yen. However, if the corporation is owned by a large corporation,
this rule applies.
When this rule applies, 10% to 20% of certain retained earnings needs to be paid additionally. |
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| Remunerations for Directors |
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Remunerations for Directors need special attention in Japan. Traditionally, bonuses to Directors were
considered as paid out of Profit (not an expense of a corporation), and treated as non-deductible for
tax purposes. However, these days, some portions are treated as deductible with strict limitations.
Financially, these items are permanent book-tax differences and might affect effective tax rate. |
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In general, only 3 following types of regular remunerations are deductible from Corporate Income Tax perspective. |
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Fixed-Term-Fixed-Amount Salary |
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This means a monthly salary (fixed-term) in the same amount (fixed-amount).
If the monthly amount is not the same among months, they are treated as
non-deductible.
It is considered that the increase of Directors Salaries are decided by Annual General Shareholders’ Meeting.
Therefore, the increase needs to take place within 3 months after the beginning
of a new fiscal year, just after the Annual General Shareholder’s Meeting.
Unreasonably high amounts are not deductible.
Fringe Benefits such as Monthly Payment for Corporation Provided Housing
will be treated as Fixed-Term-Fixed-Amount. Payment frequency of Fringe
Benefit has to be watched carefully. |
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Pre-Determined-Notified Salary |
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This is a salary to be paid in accordance with a determination to pay at
a certain time, and the determination has to be notified to the Tax Office.
The main type of this salary is: |
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- Determination at a Shareholder’s General Meeting |
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The notification to the Tax Office has to be made within 1 month
after the meeting or within 4 months after the beginning of the fiscal
year, whichever earlier. |
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Profit Based Salary |
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This is a salary based on the performance of a corporation, but a Closely
Held Corporation such as a 100% subsidiary of a foreign corporation cannot
use this type. Very strict and complicated rules exist. |
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| Tax Laws and Tax Treaty |
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As of 2011 October, Japan has tax treaties with 63 countries (number of treaties are 52).
In Japan, a tax treaty overrides tax laws if there are any discrepancies. |
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| Charitable Contribution and Other Contributions |
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In Japan, Charitable Contribution and Other Contributions defined in National
Corporate Income Tax Law are much broader than regular charitable contributions.
When a corporation transfer assets or render services free of charge or
at lower prices than fair values, it is very probable the Tax Office will
considers these transactions as Other Contributions.
There is a limit of the deductible amount for Other Contributions, and
the deductible amount is very small. It is planned that the limit of the
deductible amount is reduced further from the fiscal year starting on or
after 2012/4/1. |
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| Entertainment Expenses |
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Sometimes, Entertainment expenses, Other Contributions, Advertisement expenses,
Employee Benefits expenses might be very difficult to distinguish, but
they are treated differently for National Corporate Income Tax purpose.
For instance, condolence money for employee’s relative in accordance with
rules of employment is deductible as an Employee Benefit expenses, but
condolence money for a supplier is considered as an Entertainment Expense
and generally is not deductible.
For a small corporation, except for a subsidiary of a large corporation,
up to 6 million yen, 90% of Entertainment Expense is deductible. However,
for a large corporation, there is no deductible amount. |
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| Transfer Pricing |
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When a corporation has transactions with a foreign related party and the
transactions are not made at the Arm’s Length Prices, the Tax Office will
assume that these transactions were made at the Arm’s Length Prices. |
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There are several methods to calculate the Arm’s Length Prices, and the
following methods will be used to calculate Arm’s Length Price as appropriate: |
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(1) Comparable Uncontrolled Pricing method (CUP) |
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(2) Resale Price method (RP) |
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(3) Cost Plus method (CP) |
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(4) Profit Split method (PS) |
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(5) Transactional Net Margin method (TNMM) |
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A corporation can have an Advance Pricing Agreement (APA) with the
competent tax authority in Japan. |
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If a corporation is taxed because of Transfer Pricing, and if Japan has
a tax treaty with the other country, the corporation can request Japanese
competent authority to start mutual agreement procedures with the other
country’s competent authority to eliminate international double tax. |
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There are several English guidelines by the Tax Office, but a little bit
old. |
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http://www.nta.go.jp/foreign_language/07.pdf (in English)
http://www.nta.go.jp/shiraberu/zeiho-kaishaku/jimu-unei/hojin/010601/00.htm (in Japanese) |
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| Thin Capital |
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Interest payment is a deductible expense, but dividend is not deductible
under National Corporate Income Tax Law. In order to avoid tax erosion
by using this difference, there is a measure to block this.
Generally, if borrowings (including guarantee) from foreign controlling
shareholders are 3 times bigger than the capital amount, some portion of
interest payment is not deductible.
Additionally, in the Tax Reform 2012, it was decided that if net interest
expense to be paid to Related Parities are bigger than 50% of Adjusted
Profit, interest expense that corresponds to the excess amount is not deductible.
This measure will be applied from the FY that starts on or after 2013/04/01. |
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Additionally, in the Tax Reform 2012, it is planned that certain interest expense bigger than half of profit will become non-deductible. |
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| Tax Haven (Controlled Foreign Corporation) |
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A domestic corporation can incorporate a subsidiary in a low tax country
or a jurisdiction, and by using this foreign corporation it might be possible
to evade Japanese tax. In order to avoid this type of tax erosion, some
profit of Specific Foreign Subsidiary is incorporated into the domestic
corporation, and National Corporate Income Tax will be levied.
There are several tests to judge whether this article applies or not, and
one of them depends on the corporate income tax rate of the country or
area (Trigger Tax Rate). There was a tax reform in 2010 (Heisei 22), and
the current trigger tax rate is reduced to 20% from 25%. |
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| Foreign Tax Credit |
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There are 2 ways to eliminate international double taxation. One way is
to use Foreign Tax Credit and the other is to use Foreign Income Exclusion.
In general, Japan uses Foreign Tax Credit (FTC). In the past, it was also
possible to use FTC for foreign income taxes paid by certain subsidiaries,
but after the Tax Reform 2009 (Heisei 21), as for the dividends from certain
subsidiaries, FTC cannot be used but Foreign Income Exclusion (up to 95%)
can be used under some limitations.
In Bailiwick of Guernsey, it is possible for a corporation to decide the
corporate income tax rate with the government, but this tax is not eligible
for FTC from 2011/6/30. |
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