Taxation of individuals

In Japan, permanent resident taxpayers are taxed on their worldwide income. Non-resident taxpayers are taxed only on their Japan-sourced income. Non-permanent resident taxpayers are taxed on their income other than foreign-source income (in particular, potentially, on certain capital gains) that are not remitted into Japan plus potentially part of their foreign-sourced income that is paid in or remitted to Japan.

The current national income tax rates are:

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The tax liability is determined by multiplying the excess taxable income for each bracket by the percentage above and adding the cumulative tax figure.

Surtaxes

A surtax took effect 1 January 2013. The surtax consists of a 2.1% tax that is assessed on an individual’s national income tax.

Local income taxes

Generally, in Japan, the local inhabitant’s tax is imposed at a flat rate of 10%. Japanese local governments (prefectural and municipal governments) levy local inhabitant’s tax on a taxpayer’s prior year income. This applies when the taxpayer is a resident of Japan as of January 1 of the current year. For local inhabitant’s tax purposes, an equalisation per capita tax is also assessed. The standard annual amount is JPY 5,000, although this may vary based on the prefecture and municipality in which the taxpayer resides. Local inhabitant’s tax is not deductible.

Non-residents

A non-resident taxpayer’s Japan-source compensation (employment income) is subject to a flat 20.42% national income tax on gross compensation with no deductions available. This rate includes 2.1% of the surtax described above (20% × 102.1% = 20.42%). A non-resident taxpayer may be subject to the local inhabitant’s tax at a rate of 10% if they are registered as a resident on the local municipality ledger as of 1 January of the following year.

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Social Contribution 

An employee whose salary or bonus, including fringe benefits, is paid in Japan by a local employer (including a Japanese branch of a foreign corporation) is generally liable to pay a share of social insurance premiums. The employee’s share consists of the following contributions:

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Taxation of legal persons

A domestic corporation in Japan is taxed on its worldwide income, including foreign branch income. However, 95% of dividends received by a domestic corporation from a foreign company in which it has held at least 25% (or lower, depending on the relevant tax treaty) of the outstanding shares of that foreign company for a continuous period of six months or more can be excluded from the company’s taxable income. 

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National local corporate tax

National local corporate tax for fiscal years beginning on or after 1 April 2023 is a fixed rate of 10.3% of the corporate tax liability.

Enterprise tax (and special corporate business tax)

Enterprise tax is calculated in different ways depending on the capital base of the taxpayer. For small and medium sized enterprises, enterprise tax is calculated based on the taxpayer’s income only. However, for large enterprises, the calculation will also refer to the taxpayer’s capital base and its 'value added base' (which will include items such as personnel costs and rent). Therefore, loss-making large enterprises may still be liable to pay enterprise tax.

The standard enterprise rates for fiscal years beginning on or after 1 April 2023 are shown in the table below. Rates for Tokyo, which applies a higher-than-standard rate are shown in parentheses. Note that special enterprise tax rates are applicable to corporations engaged in energy or gas supply and in insurance, which are not provided here.

Special corporate business tax is a national tax but is collected through the enterprise tax return.

Effective statutory tax rate

The total corporate income tax burden (i.e. effective tax rate) varies depending upon the size of a company’s paid-in capital. Since enterprise tax is deductible, the effective tax rate is less than the total of the statutory rates of national and local corporate tax, enterprise tax, and inhabitants’ tax.

The following is the summary of the effective statutory tax rates in the case of corporations operating in Tokyo (without consideration of value-based and capital-based enterprise tax):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value Added Tax - VAT - Consumption Tax

Japan’s consumption tax (value-added tax or VAT) is levied when a business enterprise transfers goods, provides services, or imports goods into Japan. The general rate is 10%; however, a lower rate of 8% applies to food and beverages (excluding when purchased in restaurants and alcoholic beverages) and to newspaper subscriptions that meet certain criteria. Exports and certain services to non-residents are taxed at a zero rate. Specified transactions, such as sales or lease of land, sales of securities, and provision of public services, are not subject to taxation.

Consumption tax paid by a corporation that is attributable to taxable revenue shall be creditable/refundable by filing a consumption tax return to the extent that such transaction is recorded in the accounting books and relevant invoices are kept.

A new Qualified Invoice System (QIS) was introduced as part of Japan’s 2016 Tax Reform, which will be effective from 1 October 2023. Under the QIS, a consumption taxpayer (a ‘taxpayer’ who files consumption tax returns and pays or receives a refund of consumption tax) can in principle only take an input tax credit if such taxpayer receives a ‘qualified invoice’ from a seller that is registered as both (i) a consumption taxpayer and (ii) a qualified issuer (QII). Effectively, the new system will require sellers to include their QII number in invoices so that the purchaser receiving such invoice will be able to take the input credit for the consumption tax included in the invoice. The requirement is similar to that of a seller to include its VAT number on an invoice in the European context.

Businesses (other than exempt entities) will need to have filed an application with their tax office to become a QII no later than 30 September 2023 in order to be able to issue qualified invoices from 1 October 2023.

Note that consumption tax is also imposed on the cross-border provision of digital services (e.g. e-books, music, and advertising) by foreign service providers. In this respect, a reverse-charge mechanism is applicable for business-to-business (B2B) transactions, and foreign service providers may need to register for consumption tax purposes with regard to business-to-consumer (B2C) transactions.