Introduction
For foreign-invested companies conducting business in Japan, understanding the corporate tax system is important not only for proper tax filing but also for considering the establishment of a Japanese corporation, fundraising, profit planning, and inter-group transactions.
Japan's corporate taxation is not simply a system where you multiply the "corporate tax rate" by profits. In addition to the national corporate tax, local corporate taxes are imposed, and further local taxes such as corporate inhabitant tax and corporate business tax are also levied. Therefore, when considering the actual tax burden, it is necessary to consider these comprehensively.
Additionally, from the business year starting on or after April 1, 2026, a special defense corporate tax will also be introduced. For foreign companies operating a Japanese corporation, it is important to understand the tax burden, including not only the traditional corporate and local taxes but also the new system.
This article explains the basic structure of Japan's corporate tax, local corporate tax, corporate inhabitant tax, and corporate business tax, focusing on Japanese corporations, as well as points that foreign-invested companies should pay particular attention to.
1. Basic Structure of Japan's Corporate Tax
When a Japanese corporation earns income from business activities, the following taxes are primarily involved.
As national taxes, there are corporate tax and local corporate tax. Additionally, from the business year starting on or after April 1, 2026, a special defense corporate tax will also be imposed in certain cases.
On the other hand, as local taxes, there are corporate inhabitant tax and corporate business tax.
Corporate inhabitant tax includes a "corporate tax portion" calculated based on the corporate tax amount and a "per capita portion" that is imposed regardless of income.
Corporate business tax is, in principle, a local tax paid to the prefecture where the business office is located and is calculated based on income, etc. For certain large corporations, an external standard taxation that uses not only income but also the amount of added value and capital as the tax base is also relevant.
Therefore, simply stating that "the corporate tax rate in Japan is 23.2%" does not accurately explain the taxes that Japanese corporations actually bear.
2. What is corporate tax?
Corporate tax is a national tax imposed on the income of corporations.
In the case of Japanese corporations, the corporate tax amount is calculated based on the income of each business year as a principle. Here, "income" is calculated based on the rules of corporate tax law, not simply the pre-tax profit in accounting.
Even items recorded as expenses in accounting may not be recognized as deductible expenses for corporate tax purposes. For example, certain entertainment expenses, donations, and executive salaries have limits and requirements set for tax purposes.
Therefore, for Japanese subsidiaries of foreign companies, it is necessary to confirm not only the accounting treatment but also the corporate tax treatment for payments to overseas parent companies and inter-company transactions.
3. Corporate tax rates
For ordinary corporations, the corporate tax rate is generally 23.2%.
On the other hand, for certain small and medium-sized corporations with a capital of 100 million yen or less, a reduced tax rate of 15% applies to the portion of income up to 8 million yen per year. However, this reduced tax rate does not apply in certain cases, such as for exempt businesses.
For income exceeding 8 million yen per year, the rate is generally 23.2%.
Therefore, the understanding that "if the capital is 100 million yen or less, the corporate tax rate is 15%" is not accurate. The 15% applies only to the portion of income up to 8 million yen for corporations that meet certain requirements.
Additionally, whether a corporation qualifies as a small or medium-sized corporation may change based on factors such as the amount of capital and relationships with group companies, so foreign companies need to be particularly careful.
4. What is local corporate tax?
Local corporate tax may seem like a local tax from its name, but it is actually a national tax.
Local corporate tax is calculated based on the corporate tax amount and is generally declared and paid together with the corporate tax declaration.
The current local corporate tax rate is 10.3%, and it is calculated by multiplying it by the corporate tax amount. For example, if the corporate tax amount is 10 million yen, simplified, the local corporate tax would be 1.03 million yen.
It is important to note that the 10.3% local corporate tax is not directly applied to corporate income.
Corporate tax and local corporate tax are separate taxes, but for practical purposes, they are processed together in the corporate tax return, so it is necessary to accurately calculate local corporate tax when filing the corporate tax return.
5. Differences from corporate inhabitant tax
Local corporate tax and corporate inhabitant tax are often confused by foreign companies due to their similar names, but they are different taxes.
While local corporate tax is a national tax, corporate inhabitant tax is a local tax.
Corporate inhabitant tax mainly consists of corporate tax allocation and per capita tax.
Corporate tax allocation is generally calculated based on the corporate tax amount. On the other hand, the per capita tax is imposed on corporations that meet certain requirements, even if their income is in the red and no corporate tax is incurred.
As a result, even if a Japanese corporation is in the red, there is a possibility that local tax burdens such as the per capita corporate inhabitant tax may arise.
When foreign companies establish a Japanese corporation, it is not appropriate to think that "if there is a loss, no taxes will be incurred at all."
6. What is corporate business tax?
Corporate business tax is a local tax imposed on the business activities of corporations.
For general corporations, the business tax amount is calculated based on income, but certain ordinary corporations with a capital of over 100 million yen are subject to the standard taxation based on external appearance.
Under the standard taxation based on external appearance, not only income but also the amount of added value and capital are subject to taxation.
Therefore, even in cases of low profits or losses, certain corporations may incur a burden of corporate business tax.
In addition, unlike corporate tax, corporate business tax is generally recognized as a deductible expense, which also affects the taxable income for corporate tax. This point is important when calculating the effective tax rate.
7. It is important to consider the "effective tax rate"
When foreign-affiliated companies consider the tax burden in Japan, it is necessary to think comprehensively about corporate tax, local corporate tax, corporate resident tax, corporate business tax, etc., rather than just looking at the corporate tax rate of 23.2%.
However, simply adding these tax rates together to represent the "Japanese corporate tax rate" is not accurate.
In particular, since corporate business tax is deductible, when calculating the actual tax burden rate including corporate business tax, it is necessary to consider the effect of that deductibility. Additionally, the tax rate for corporate resident tax varies by municipality and corporate classification.
Therefore, when considering the effective tax rate of Japanese corporations, it is important to calculate based on factors such as location, capital, income amount, corporate classification, and whether they are subject to standard taxation based on external appearance.
8. Pay attention to the "Defense Special Corporate Tax" starting from the business year beginning in April 2026
A particularly important change in considering corporate taxation for Japanese corporations after the 2026 fiscal year is the Defense Special Corporate Tax.
The Defense Special Corporate Tax is a new additional tax that will apply from the business year starting on or after April 1, 2026.
In principle, the tax amount is calculated by multiplying the amount obtained by deducting a basic deduction of 5 million yen from the standard corporate tax amount for each business year by 4%.
For example, if the standard corporate tax amount is 5 million yen or less, the simplified calculation shows that the Defense Special Corporate Tax does not occur. On the other hand, if the standard corporate tax amount exceeds 5 million yen, the excess portion will be calculated by multiplying it by 4%.
It is important to note that even if the tax amount for the Defense Special Corporate Tax is 0 yen, a declaration is still required.
For foreign-affiliated companies, if the Japanese corporation is liable for corporate tax, it is necessary to confirm the applicability of this system.
9. "Intergroup Transactions" that foreign-affiliated companies should pay particular attention to
Japanese corporations of foreign-affiliated companies often engage in transactions with overseas parent companies and group companies.
For example, this includes interest payments on loans from the parent company, compensation for management services, royalties, system usage fees, and brand usage fees.
For these transactions, simply having a contract and invoice does not guarantee that there are no tax issues.
In particular, for transactions with foreign related parties, it is necessary to examine whether the transaction prices are based on arm's length prices from the perspective of transfer pricing regulations.
Additionally, depending on the payment details, it is also necessary to consider the applicability of Japan's withholding income tax, consumption tax, and tax treaties.
Therefore, for Japanese corporations of foreign-affiliated companies, it is important to comprehensively confirm intergroup transactions not only for corporate tax filings but also from the perspective of international taxation.
10. Corporate tax in the case of losses
If a Japanese corporation incurs a loss, there may be no corporate tax for that business year.
However, being in the red does not mean that all tax burdens are eliminated. This is because there are taxes that are levied based on criteria other than income, such as the flat-rate corporate resident tax.
In addition, there is a system that allows corporations meeting certain requirements to deduct losses related to blue return filings from future income.
In the case of foreign-affiliated companies, it is not uncommon to incur losses during the initial establishment phase due to investments in the Japanese market, personnel costs, and marketing expenses. Therefore, it is important to establish a medium- to long-term tax plan that includes the handling of losses.
11. Corporate Tax Filing and Payment for Japanese Corporations
Japanese corporations are required to file and pay corporate taxes, etc., after the end of the business year.
For certain corporations, interim filings and interim payments are also required.
Corporate tax, local corporate tax, and special defense corporate tax are processed collectively on the tax return.
On the other hand, for corporate inhabitant tax and corporate business tax, it is necessary to file with the prefectures and municipalities as local taxes, so it is important to manage national and local taxes separately.
Particularly for foreign-affiliated companies establishing a corporation in Japan for the first time, it is important to be aware that tax filing destinations may be divided and that the calculation methods for corporate tax and local tax differ.
12. Important Points in Tax Management for Foreign-Affiliated Companies
In tax management for Japanese corporations, it is not sufficient to simply prepare financial statements and file corporate tax returns.
If there are transactions with overseas parent companies, international tax issues such as transfer pricing regulations, withholding tax, tax treaties, and foreign tax credits may arise.
Additionally, the treatment of local taxes and standard taxation may vary depending on the location, capital, number of employees, and scale of the business of the Japanese corporation.
Furthermore, since the special defense corporate tax will also be added starting from the business year beginning on April 1, 2026, it is important to check the latest system rather than using the existing tax calculations as they are.
In conclusion
Japan's corporate taxation system is not solely completed by corporate tax.
In addition to corporate tax, local corporate tax is imposed, and further local taxes such as corporate inhabitant tax and corporate business tax arise. Additionally, starting from the business year beginning on April 1, 2026, confirmation regarding the special defense corporate tax will also be necessary.
Especially for foreign-affiliated companies, it is important to consider not only the tax of the Japanese corporation but also transactions with overseas parent companies, transfer pricing, withholding tax, tax treaties, and foreign tax credits as an integrated approach to international and domestic taxation.
Companies considering entering Japan or foreign-affiliated companies already operating a Japanese corporation should not only look at the tax rates but also confirm the actual tax burden and filing obligations in Japan based on their business scale, capital, location, and inter-group transactions.
At MOCHIZUKI & associates, we provide flexible support tailored to the circumstances of companies, from accounting and tax support for foreign-affiliated companies and foreign corporations entering Japan to corporate tax and consumption tax filings, international taxation, and tax advice on inter-group transactions, in languages such as Japanese, English, and Chinese. If you require our support, please contact us Here.