Introduction
For foreign companies doing business in Japan, one of the tax items that is often overlooked in practice, despite having lower recognition compared to corporate tax and consumption tax, is "depreciation asset tax."
Property tax on depreciable assets is a local tax imposed on business assets other than land and buildings, and regardless of the size of the corporation, there is an obligation to file if certain assets are held.
Especially right after establishing a subsidiary in Japan or during the stages of a branch office or representative office in Japan, it is not uncommon for there to be a misunderstanding that "not subject to corporate tax = no local tax required." However, it is important to note that the property tax is taxed based on a completely different logic than corporate tax, and therefore, even foreign corporations are subject to this tax.
This article organizes the basic structure, declaration targets, and practical considerations of Japan's fixed asset tax for personnel in charge of foreign companies entering Japan and for financial and tax officers.
1. Basic Mechanism of Depreciable Asset Tax
The depreciation asset tax is a type of property tax based on the Local Tax Act, with municipalities (the 23 wards of Tokyo being part of Tokyo Metropolis) as the taxing authority.
The subject matter is "depreciable assets," which are tangible fixed assets used for business purposes, excluding land and buildings.
The tax rate is generally a uniform 1.4%, as determined by local ordinances. The assessed value is calculated based on the acquisition cost using a declining balance method according to the useful life. This calculation method differs from that of depreciation expenses for corporate tax purposes, and even assets that have already been fully expensed for accounting purposes may still remain taxable under the property tax for depreciable assets.
The tax assessment date is January 1st of each year, and for depreciable assets held at that time, it is generally required to file a declaration by January 31st.
2. Reasons Why Foreign-affiliated Companies Are Subject to Taxation
The property tax on depreciable assets is levied based on the existence of "assets used for business purposes within Japan," rather than on "the residence of the corporation" or "the location of the head office."
Therefore, the following cases are also subject to taxation.
・Business equipment owned by the Japanese subsidiary
・Machines and equipment used by foreign corporations' branches in Japan
・Even if it is claimed that there is no PE (permanent establishment) in Japan, business assets established within Japan
The point that the recognition of permanent establishment (PE) for corporate tax and tax relations are judged separately is the most likely source of misunderstanding for foreign-affiliated companies.
3. Main depreciable assets subject to taxation
Typical depreciable assets that become problematic at foreign-affiliated companies' bases in Japan include the following.
Office furniture, partitions, fixtures and equipment
Servers, network equipment, business PCs
Manufacturing equipment, inspection devices, measuring instruments
Interior construction work that does not constitute a building
Tools, jigs, molds (above a certain amount)
On the other hand, it is important to note that assets valued at less than 100,000 yen that are immediately depreciated for corporate tax purposes, as well as lump-sum depreciable assets valued at less than 200,000 yen, are generally included as reportable items for property tax purposes.
4. Tax Filing Practices and Common Mistakes
The property tax on depreciable assets is a "self-assessment tax system" in which taxpayers declare the details of their assets before receiving a tax notification from the municipality.
In the Japanese branches of foreign companies, the following types of mistakes frequently occur.
They mistakenly believe that no declaration is required in the first year of establishment.
The fixed asset ledger in the accounting books does not match the declaration contents.
Despite using assets purchased by the headquarters at the Japan location, there has been a failure to report them.
Exclusion omission of disposed or sold assets
In particular, when equipment purchased in bulk by the overseas headquarters is brought to Japan for use, it is often the case that the Japanese side cannot accurately grasp the acquisition cost and acquisition date, leading to evaluation errors.
5. Practical Points for Tax Audits and Local Government Responses
Regarding the property tax on depreciable assets, on-site investigations and written inquiries will also be conducted by local governments.
Although not as frequent as corporate tax audits, foreign companies with significant capital investments or those with past periods of non-filing are more likely to be subject to investigation.
In practice, it is important to establish the following system.
Regular reconciliation of fixed asset ledgers and depreciation asset tax returns
Clarification of asset management rules between the headquarters and the Japan office
Preliminary Organization of Taxable Status Determination for Interior Construction and IT Investments
Record Keeping During Dismantling and Relocation
By preparing these in advance during normal times, the burden on local governments can be significantly reduced.
6. Positioning from the Perspective of International Taxation
The property tax on depreciable assets is not directly linked to transfer pricing regulations or PE taxation; however, it cannot be denied that it may serve as supplementary information for understanding "business substance" in Japan and could potentially impact other tax categories.
In particular, the installation status and actual use of equipment require consistency with the factual determinations of PE recognition and functional and risk analysis, making it a tax item that cannot be ignored in the context of international taxation.
7. Property Tax for Non-Residents - Tax Notification, Payment, and Tax Agent
Even if you reside outside of Japan, if you own land or buildings in Japan, you are generally subject to property tax in the same way as domestic owners. The basic taxation method for property tax does not change simply because the owner is a foreign national or resides overseas.
On the other hand, for non-residents, practical issues tend to arise more regarding where to receive the tax notification and how to make payments from abroad, rather than the tax amount itself. Property tax notifications are usually sent from the municipality that has jurisdiction over the property location, and payments are made based on that notification. Deadlines, payment frequency, and payment methods available from abroad vary by municipality, so it is necessary to confirm for each property location.
In addition, for real estate owners residing outside Japan, it may be required to appoint a tax representative within Japan based on local government ordinances and procedures. The tax representative receives tax notices and other documents on behalf of the owner and handles matters related to tax payments. However, the requirements for appointment, notification forms, and handling of mailing addresses may vary by municipality.
Therefore, when continuing to own real estate while leaving Japan or acquiring Japanese real estate from abroad, it is important to ensure that you can reliably receive the property tax and city planning tax notices and make payments within the deadline.
8. Local Tax Tax Representatives and National Tax Tax Representatives - When Owning Rental Real Estate
A point that overseas residents should pay particular attention to is that the local tax tax representative for property tax and the national tax tax representative for income tax, etc., are separate systems.
The tax representative for property tax is for receiving tax notices and making payments in relation to the local government where the property is located. On the other hand, if it becomes necessary to file income tax returns in Japan due to renting out real estate within Japan, it is necessary to establish a separate tax representative for national tax and consider notifications to the relevant tax office.
Income earned by overseas residents from renting out real estate in Japan may be considered domestic source income in Japan, and it may be necessary to file income tax returns in Japan. Real estate income is generally calculated by deducting necessary expenses from rental income, and property tax related to rental real estate may also be treated as necessary expenses in certain cases.
Additionally, when a non-resident receives rental income from real estate in Japan, a withholding tax of 20.42% for income tax and special reconstruction income tax may be withheld, except for certain exceptions. This withheld tax amount is not necessarily the final tax amount, and adjustments may be made by filing a tax return in Japan.
Therefore, if you own Japanese real estate from abroad, it is important to separately confirm the local tax issue of "who manages the notification and payment of property tax" and the national tax issue of "who files the real estate income declaration."
9. Tax Management for Owning Japanese Real Estate from Overseas
For overseas residents, property tax is only a part of the tax matters related to owning real estate in Japan. If renting, income tax returns are required; if selling, capital gains tax and withholding in certain cases may apply; and in cases of inheritance or gifts, inheritance tax and gift tax may arise, depending on how the real estate is used and the nature of the transactions.
Therefore, when owning Japanese real estate from abroad, it is necessary to first check the owner information registered with the local government where the property is located and the mailing address for tax notices, ensuring that property tax and city planning tax can be reliably paid. After that, confirm whether it is necessary to appoint a local tax tax representative, whether income tax returns for rental income are needed in Japan, and whether a tax representative for national tax is required.
Furthermore, if a future sale is planned, it is advisable to confirm in advance about acquisition costs, depreciation, capital gains, and withholding from the sale proceeds.
Property tax may seem like a relatively simple holding tax, but for overseas residents, it can be considered an entry point to understanding the overall real estate taxation in Japan. It is important not to think of property tax management in isolation, but to continuously manage it along with real estate income declarations, adjustments of withholding tax amounts, and future sales.
Summary
The Japanese property tax on depreciable assets is often not as large in amount as corporate tax, but it is a tax category that is prone to long-term reporting omissions, making subsequent corrections complicated.
For foreign-affiliated companies, it is important to correctly understand it as a "local tax separate from corporate tax" and to establish an appropriate management system from the early stages of entering the Japanese market.
Because it is a system unique to Japan, organizing it early with the involvement of experts will be a shortcut to avoiding unnecessary tax risks.
Related Content:
- Tax Guide for Foreign Corporations on Japanese Real Estate
- Tax Considerations for Foreign Owners of Japanese Real Estate
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