Starting a business in Japan is an exciting step—but navigating the tax system can be a challenge, especially for foreign entrepreneurs. This guide covers the key tax basics you need to understand when running a company in Japan.
1. Corporate Tax: National and Local Breakdown
If you establish a company (like a Kabushiki Gaisha or Godo Gaisha), you’ll be subject to corporate income tax, which includes several layers:
- National corporate tax:
- 15% on the first ¥8 million of taxable income (for small and medium-sized enterprises).
- 23.2% on income above that threshold.
- Local inhabitant tax:
- A combination of a fixed amount and a percentage (typically about 10%) of your national corporate tax.
- The fixed amount ranges from ¥50,000 to ¥800,000, depending on your capital and location.
- Enterprise tax:
- Based on your taxable income and capital.
- Progressive rates from approximately 3.4% to 6.7% for SMEs.
Combined, these bring the effective corporate tax rate to roughly 30–34% for profitable businesses.
2. Consumption Tax (Japan’s Version of VAT)
Japan’s consumption tax is a value-added tax applied to most goods and services at a rate of 10%.
Key points for startups:
- You usually don’t have to charge or pay consumption tax during your first two fiscal years, unless your capital exceeds ¥10 million.
- From October 2023, Japan introduced a new invoice system. If your clients want to claim tax credits on what they pay you, you must register as a qualified invoice issuer.
Be sure to plan ahead if you’re selling to B2B clients—they may prefer to work with registered suppliers.
3. Payroll Withholding: Employee Income Tax
If you pay salaries—including your own as a representative director—you’re responsible for withholding income tax from your employees’ pay and remitting it to the tax office.
- The amount withheld depends on the employee’s salary, dependents, and insurance contributions.
- Withholding must be done each month and paid by the 10th of the following month.
- In January each year, you must complete a year-end adjustment (nenmatsu chosei) to reconcile tax withholdings for each employee.
This system ensures employees don’t need to file their own tax returns unless they have additional income.
4. Tax on Payments to Non-Residents
If your company makes certain payments to overseas parties—such as service fees, royalties, or dividends—you may be required to withhold tax at source and submit it to the Japanese government.
- The standard withholding rate is 20.42%, but this can be reduced or exempted under a tax treaty.
- Proper forms must be filed in advance to apply treaty benefits.
Make sure to check Japan’s tax treaty with the recipient’s country before making international payments.
5. Personal Income Tax: If You Draw a Salary
If you’re working in your own company and receiving a salary, Japan taxes your worldwide income (if you’re considered a resident).
- The income tax rate is progressive, ranging from 5% to 45%.
- You’ll also pay local inhabitant tax (about 10%) to your municipality, based on your prior year’s income.
If you’re classified as a non-resident, only Japan-sourced income is taxed, usually at a flat rate.
6. Social Insurance and Payroll Taxes
When paying yourself or hiring employees, you’re required to enroll in Japan’s social insurance system, which includes:
- Health insurance
- Pension
- Unemployment insurance
- Workers’ compensation
Both employers and employees contribute. For employers, the total cost usually comes to 15%–20% of gross salary.
Even a one-person company must enroll if the representative director is on payroll.
7. Tax Filing and Payment Deadlines
Here are key deadlines you’ll need to keep in mind:
- Corporate tax return: Due within 2 months after your fiscal year ends (extensions may be possible).
- Consumption tax: Usually filed annually, but some businesses must file quarterly or monthly.
- Payroll withholding: Payments are due by the 10th of the following month.
Missing deadlines can lead to penalties and interest, so timely filing is crucial.
8. Work with a Bilingual Tax Advisor (Zeirishi)
Japan’s tax and payroll systems are complex, and much of the paperwork is only in Japanese. To avoid costly errors or delays, work with a bilingual tax accountant (zeirishi)—ideally someone experienced with foreign-owned businesses.
They can help with:
- Optimizing your tax structure
- Ensuring correct payroll and insurance filings
- Communicating with the tax office on your behalf
Final Thoughts
Understanding Japan’s tax system is key to running a compliant and successful business. While this guide offers a strong overview, your specific situation may require tailored advice.
Stay proactive: keep detailed records, know your deadlines, and work closely with a trusted accountant. Doing so gives you more time and headspace to grow your business with confidence.