3.3 Overview of corporate income taxes (corporate tax, corporate inhabitant

  1. *1

    Permanent Establishments (PE) are locations, sites, agents, etc. of the foreign corporations falling under the following:

    • Foreign corporations having a certain fixed place of business(*1), such as a branch, sub-branch, business establishment, office, or factory in Japan.
      (*1) However, the following locations do not fall within the definition of a “certain fixed place of business” herein only if they have a preliminary or ancillary function for the conduct of the business of the foreign corporation (see 3.3.5):
      (a) A fixed location used by a foreign corporation solely for the purchasing of its assets or collecting information .
      (b) A fixed location used by a foreign corporation solely for the storage, display and delivery of its assets.
    • A foreign corporation engaged in business through a long-term construction site, etc. in Japan or an agent for conclusion of a contract, etc.. Business year commencing on or after
      January 1, 2019, certain activities which constitute complementary functions that are part of a cohesive business operation provided by a person or entity closely related will be regarded as PE.

  2. *2

    Even when filing for Corporate tax return, withholding at the source is required. As for transfer of assets located in Japan, only transfer of land, etc. is subject to withholding at the source. However, foreign corporations who have PE will be exempted from the withholding tax if they obtain a withholding exemption certificate regarding income attributable to PE.

3.3.5 Income of representative offices, etc.

Representative offices, etc., through which a foreign corporation engages in business in Japan are not supposed to derive any income subject to corporation tax from storing, displaying, and delivery, or collecting information on goods, etc. and other activities auxiliary to the performance of its business (see 3.3.4). Business year commencing on or after January 1, 2019, certain activities which constitute preliminary and complementary functions that are part of a cohesive business operation provided by a person who has a special relationship with the foreign corporation or foreign corporation will be regarded as PE.

3.3.6 Calculation of income subject to corporate tax and tax credit

The amount of income used as the tax base for corporate taxes on income for each taxable year is determined by making the necessary tax adjustments to corporate profits calculated using accounting standards generally accepted as fair and appropriate. Costs and expenses incurred in earning profits are deductible, except in certain exceptional instances (examples provided below).

Foreign corporations face no restrictions on the locations in which costs and expenses deductible from Japan-sourced taxable income may be incurred. However, detailed statements of costs and expenses incurred overseas and deducted from income in Japan must be prepared, and these costs and expenses must be allocated fairly in the prescribed manner.

Examples of items for which there are limits on deductible costs and expenses:

  • Corporate taxes and penalties
  • Nondeductible amount for donations
  • Nondeductible entertainment expenses
  • Amount of allowance reserved
  • Amount exceeding depreciable limit of depreciable and deferred assets
  • Write-down of assets
  • Compensation or retirement benefits for directors

Examples of tax credits

A tax credit canmay be available against the amount of corporate tax imposed on taxable income if certain requirements are met. Followings are some examples of tax credits:

  • Small and Medium Enterprise Investment Promotion Tax Incentives (tax credit for the acquisition of machinery, etc. by small and medium enterprises, etc.*)
  • Special credit against corporate tax for increasing the amount of salary payment, etc.
  • Digital Transformation investment promotion tax incentives (tax credit for the acquisition of equipment for information technology business adaptation*)
  • Carbon Neutrality-related investment promotion tax incentives (tax credit for the acquisition of equipment for improving production process efficiency*)

  1. *

    Can choose special depreciation (for calculating depreciation expenses) instead of a tax credit.

3.3.7 Taxation of retained earnings of family corporations

A Japanese corporation that is a family corporation and meets certain conditions is subject to taxation of retained earnings as well as corporate tax on ordinary income. Taxation of retained earnings is calculated by multiplying the taxable amount of retained earnings (obtained by subtracting the retained earnings deductible from the amount of retained earnings in each business year) by the special tax rate. The special tax rate varies according to the taxable earnings. If the annual taxable earnings do not exceed 30 million yen, it is subject to a tax rate of 10%. However, if the taxable earnings exceed this amount, a rate of 15% is charged on the amount in excess of 30 million yen and up to 100 million yen, and any amount in excess of 100 million yen is taxed at a rate of 20%.

3.3.8 Treatment of losses

Net losses under income in each business year are carried forward for the next nine years (or ten years in the case of losses arising during the business years beginning on or after April 1, 2018). Losses may only be carried forward in this way if a blue form tax return is filed for the business year in which the loss arose, and a final tax return is then filed every subsequent year. Note that if a corporation has paid-in capital in excess of 100 million yen or is a wholly owned subsidiary of a large corporation with paid-in capital of at least 500 million yen (including foreign corporations), the amount of loss that may be deducted from income cannot exceed 50% of income. Certain corporations, such as prescribed small and medium-sized enterprises that file a blue form return, are also allowed to carry back a loss to the business year commencing not more than one year prior to the date of commencement of the business year in which the loss arose, and are allowed to receive a full or partial refund of the amount of corporate tax in the business year in which the loss was carried back.

However the deductible percentage is 100% for a certain period if the corporation is an unlisted company, undergoing reconstruction, etc.

3.3.9 Corporate reorganization tax system

If a corporation transfers assets as a result of a split, merger, or investment in kind (“reorganization”), gain or loss from the transferred assets is subject to taxation in principle. However, reorganizations meeting certain conditions, such as certain reorganizations between corporations that are wholly owned/owning directly or indirectly in ownership, certain reorganizations between corporations that are owned/owning 50% directly or indirectly in ownership, or those undertaken for the purpose of a joint venture, are treated as “qualified reorganizations,” and qualify for deferment of taxation of gain or loss on the transferred assets.

3.3.10 Filing of tax return and payment of corporate taxes

  1. (1)

    Final tax return and tax payment

    Corporations must file a final tax return for corporate tax, local corporate tax, corporate inhabitant tax, enterprise tax, and special corporate enterprise tax on their income within two months from the day following the last day of each taxable year. However, an extension of the deadline for filing a final tax return may be requested, with approval from the director of the taxation office, when a corporation is unable to file a final tax return because of the situation where the annual shareholders meeting is not called within two months pursuant to the provisions of articles of incorporation or due to an exceptional circumstance of the corporation or because accounts remain unsettled for other unavoidable reasons. The income and tax amounts to be entered in the final tax return must be calculated in accordance with the statement of accounts approved by the general meeting of stockholders.

    The calculated tax must also be paid within this period. The payment deadline will not be extended even if the deadline for filing of a final tax return is extended as described above. Therefore, interest tax and overdue tax for the extended period are imposed (as deductible expenses) if the tax payment is made during the extended period. Any interim payment made in advance on the amount of tax owed shall be deducted from the total amount to be paid.

  2. (2)

    Interim tax return and tax payment

    Corporations whose taxable years exceed six months must file an interim return, within two months from the day following the end of the first six months of the taxable year, an interim tax return for the period starting on the first day of that taxable year and ending on the day six months thence, and must pay the interim amount of tax owed (excluding instances where the amount of tax calculated using the prescribed formula does not exceed a certain amount).

    For corporations (other than foreign corporations) with share capital or contributed capital exceeding 100 million yen, from the fiscal year beginning on or after April 1, 2020, it became mandatory for corporations to submit final returns and interim returns for corporation tax, local corporation tax, consumption tax, corporate inhabitants tax, enterprise tax, special corporate enterprise tax, etc. via electronic filing. Corporations that are subject to the obligation are required to submit certain notifications and file tax returns by e-tax, eLtax for the applicable fiscal year and thereafter.

  3. (3)

    Blue form returns

    Tax return forms for corporations come in two formats: white form and blue form. A corporation may file a blue form tax return with approval from the appropriate national tax office. Corporations filing blue form tax returns enjoy a variety of tax benefits. To receive approval from the tax office to file a blue form tax return, a corporation must submit an application for approval prepared in the prescribed format no later than the day prior to the starting day of the taxable year. Newly established subsidiary companies and foreign corporations establishing new branch offices in Japan must submit the application for approval no later than the day prior to either the day following three months since and including the date of the establishment of the corporation/branch or the last day of the corporation’s/branch’s initial taxable year after establishment, whichever comes first, if intending to file a blue form tax return from the taxable year in which the date of establishment occurs.

3.3.11 Remittances to home country

Remittances made by subsidiary companies to their parent company arise from business-to-business transactions, and so are generally regarded as payments of costs/expenses, distributions of profits, loans (or repayments of loans), and so forth depending on the nature of the transaction concerned. Certain of these costs/expenses are deducted when calculating the income of the payer subsidiary companies. Some of the payments regarded as income of the parent company (e.g., payments of interest, dividends or usage fees) require withholding of income tax at the source at the time of payment (see 3.4.4).

On the other hand, in tax treatment on the remittances made by a branch of a foreign corporation to its head office as mentioned in 3.1.1, the profits/losses from the internal transactions are to be recognized based on the presumption that the Japanese branch is a corporation which is independent from the head office. Please note that funding for opening a branch from the head office to the branch and repatriation of profit, etc. to the head office are categorized as capital transaction, and profits/losses do not occur. In addition, internal transactions are not subject to withholding income tax.