Outline of doing business in Japan

1. Company formation and taxation

The following types of corporation can be formed in Japan.

1-1 Domestic corporation

( Head office is registered in Japan .)

Kabushi Kaisya ( Joint stock company, KK ) is the most widely used form.
The compnay must be registered in the Japanese registry office.
Incorporation of a Japanese corporation requires the drawing up of the company article.

One of representative directors must be a resident in Japan. Other directors are not
required to be a resident in Japan. He is not necessarily a citizen of Japan.

Minimum Capital Not less than yen 1
Number of director At least 1 director

1-2 Foreign corporation

( Head office is registerd outside Japan , ex. Branch )

A branch must be registered in the Japanese registry office . One of the representative in Japan branch must be a resident in Japan but not necessarily a citizen of Japan.

1-3 Representative office

A representative office is not a legal entity and is not required to register in Japan. It’s activitties are limited soley to information gathering, advertising and publicity, market reserch and general liaison with the head office of a foreign corporation. Liaison office are not allowed to engage in any commercial transactions such as making contracts, taking orders or invoicing or collection money.

1-4 Scope of Taxable Income

1) Domenstic Corporation
Income from all over the world

2) Branch of a foreign corportion
Income derived from the sources only within Japan
The taxes paid in Japan may be offset as a tax credits in the country of the head office located.
Main difference in tax treatments between a domestic corpoation and a foreign corporation

Profit Distribution Domestic corp. 20%
withholding tax (Reduced 10% -15% on a tax treaty )
Branch Nill

3) Representative office
No tax will be imposed.

1-5 Accounting and corporate tax procedures

A corporation records a book and prepares the financial statements in accordance with Generally accepted accounting principle.
A corporation holds General Shareholders’ meeting in 2 or 3 months after the year end based on busniess law.
The corporate tax return is required to file to the tax authorities by the due date 2 months afterthe year end ( 3 months if extention is approved. ) under the corporate tax law.
The corporate tax consists of National tax , Local inhabitants tax and enterprise tax.
Tax rates including 3 taxes will be aroud 30 % – 45% . It will differ based on the taxable amounts and captital amount.

1-6 Withholding tax system

Japanese taxes on taxable income is collected by the withholding system and the assessment tax system . The withholding taxes are imposed on interest income, divident income, salaries,professional fees, royalties etc. paid to individuals and corpotations. Withholding tax is withheld at source from payments to individuals as well as corporations.
The withholding tax rate is generally 10% – 20% which will differ from type of income, and type of residets or non-residents. However, the tax withheld from the salaries paid to resident individuals is often higher than 20% because the tax is caluculated by applying a progressive tate.
The withholding tax on interest, dividend, royalties etc. to non-residents or overseas corporations will be reduced by applying the relevant tax treaties.

1-7 Consumption tax

Consumption tax is levied at the rate of 5% on almost all domestic transactions such as sales and leasing of goods, the provision of services carried out within Japan and imported goods delivered from bonded areas.
Main non-taxable transactions are sales or lease of land,financial transactions, medical transactions, education service, rent of residential house etc.
Consumption tax due is calculated by deductiong the consumption tax paid on the puchased goods or services from the consumption tax received on the sales transactions.
Consumption tax return is required to file the tax authorities by the due date 2 months after the year end.

2. Individual tax

2-1 Resident Status

The Scope of taxable income in Japan is determined in accordance with the resident status.
Resident staus is classified into Resident and Non-resident .
Resident is further classified into Non-permanent and Permanent resident.

1. Resident

A person who has a domicile in Japan or a residence in Japan for one year or more.

1) Non-permanent resident
A resident who is not a Japanese national and has had a domicile in Japan for an aggregate period of 5 years or less within the last 10 years.

2) Permanent Resident
A resident other than non-permanent resident.

2. Non-resident

A person other than resident

2-2 Scope of taxable income

The taxable income is clasified into the following in accordance with the status.

1. Resident

1) Non-permanent resident

  1. Income from Sources in Japan
    1. Paid in Japan
      All income paid in Japan is taxable.
    2. Pain Abroad
      All income paid in Abroad is taxable.

2) Income from Source Abroad

  1. Paid in Japan
    All income paid in Japan is taxable.
  2. Paid Abroad
    Only the portion deemed remitted to Japan is taxable.

3) Permanent Resident
Income from sources in Japan and all income from source abroad

2. Non-resident

Income from sources in Japan
( Note) Salaries performed in Japan are treated as ” Income source in Japan”, whether it is paid in Japan or abroad.

2-3 Income tax return filing

1) Principle
The individual income tax is based on the self-assessment system for the annual period from Jan. 1 to Dec. 31. A taxpayer is required to calculate the tax amount , file the tax return to the tax authorities and make a payment by the due date March 15.

2) Parmanent departure from Japan

  1. Designating of a tax agent
    Filling and payment due date is March 15 of the next year.
  2. Non designating of a tax agent
    Filling and payment due date is on the date of departure from Japan .

2-4 Income tax rate

1 Resident

The simplified formula for income tax rate are as follows;

1) National tax
Taxable Income amount ( A) Tax Rate Formula
Not more than JPY 1,950,000 5% (A) x 5%
Not more than JPY3,300,000 10% (A) x 10% less JPN 97,500
Not more than JPY 6,950,000 20% (A) x 20% less JPN 427,500
Not more than JPY 9,000,000 23% (A) x 23% less JPN 636,000
Not more than JPY 18,000,000 33% (A) x 33% less JPN 1,536,000
More than JPY 18 million 40% (A) x 40% less JPN2,796,000

2) Loca tax
Taxable Income Tax Rate Formula
Total Taxable income (A) 10% (A) x 10%
( Note ) Loca Individual local tax is imposed on the taxable income of the previous year to the person who has the resident in Japan on January 1 .
In other word the person who leaves Japan before January 1 will not be subject to the local tax. It means that the local tax is not imposed on a nonresident person even he has income from source in Japan.

2 Non-resident

The tax rate is 20% in principal.

3. Social insurance and Labor insurance

3-1 Social insurance

Social insurance consisting of Health insurance and Pension insurance is a system for helping workers providing medical or pension benefits for illness, injury, childbirth, death, old age, physical disability etc. Every foreigner as well as Japanese who is employed on a full time basis will be required to join the social insurance system.
Monthly premiums are determined based on the insured worker’s monthly standard salary and the premium is shared equally between the employer and the insured worker. The total premium for both the employer and the insured worker is about 24% of the standard monthly salary of the worker.

3-2 Labor insurance

Labor insurance consists of workers compensation insurance and employment insurance. Both the employers and employees must join the Labor insurance system regardless of nationalities. Directors are not eligeble to join the system. The workers compemsation premium is 0.3% of the salary of the insured worker and paid fully by the employer. The employment premium is paid 0.85% by an employer and 0.5% by an insured worker.

4. Employee work rule required to submit to the Labor Standard Inspection Office

An employer with at least 10 or more employees is mandatry to submit the emplyee work rule to the labor standard inspection office with the written statement of opinion from a representative in employees. The work rule contains Work hour, Break time, Days off, Wages, Retirement including gorunds for dismissal etc.
Even an employer who employees less that 10 regular workers will be recomended to furnish the work rule.

5. Government subsidy support

There are so many Government subsidiary supports in Japan. However, the applicable conditions and procedures are very complicated. It will require utmost attention and confirmation to satisfy the necessary conditions and procedures for the local government office.
We introduce you the initial hiring employee subsidiary after incorporation granting yen 1.4 million per hiring posisioned person.
A company is required to meet the following conditions;

1) The compnay joins the Government labor insurance system.

2) The compnay will hire a certain employee subject to the local government requirement.

3) Expenditure more than yen 3 million will be invested for new business such as new office, fasility, equipments etc.

4) Applications for certaine planning reports etc. will be subumitted to the local government.

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