Doing Business Guide
Japan

Table of Contents
Part I-General Business Environment
Chapter 1: Introduction-Japan (pg. 6-8)
1.1
Why Japan? (pg. 6)
1.2
Population (pg. 6)
1.3
Government (pg. 7)
1.4
Economy (pg. 7-8)
Part II- Business Entities and Legal Requirements
Chapter 2: Types of Business Enterprises in Japan (pg. 10)
2.1
List of the Types (pg. 10)
Chapter 3: Kabushiki Kaisha (pg. 10-19)
3.1
Formation Procedures (pg. 10)
3.2
Articles of Incorporation (pg. 10-11)
3.3
Execution of Capital Injection (pg. 11)
3.4
Organs (pg. 11-12)
3.5
Shareholders’ Meetings (pg. 12)
3.6
Directors and the Board of Directors (pg. 12-14)
3.7
Auditor (pg. 14-15)
3.8
Accounting Advisors (pg. 16-17)
3.9
Accounting Auditors (pg. 17)
3.10
Companies with Committees (pg. 17-19)
Chapter 4: Branch Offices (Shiten) (pg. 20)
4.1
Branch Offices (pg. 20)
4.2
Formation (pg. 20)
4.3
Representative (pg. 20)
4.4
Registration (pg. 20)
4.5
Requirements (pg. 20)
Chapter 5: Representative Office of a Foreign Company (pg. 21)
Chapter 6: Partnerships (pg. 21-25)
6.1
Partnership (Nin-i-kumiai) (pg. 21-22)
6.2
General Partnership Company and Limited Partnership Company (pg. 22)
6.3
Limited Liability Business Partnership (LLP) (pg. 22-23)
6.4
Limited Liability Company (LLC) (pg. 24-25)
6.5
Differences between an LLP and an LLC (pg. 25)
Chapter 7: Joint Ventures (pg. 25-26)
Chapter 8: Non-Profit Making Organizations (pg. 26)

2

Part III- Accounting and Taxation
Chapter 9: Accounting and Reporting Requirements (pg. 28-42)
9.1
Governing Laws and Bodies (pg. 28)
9.2
Form and Content of Financial Statements (pg. 29)
9.3International Harmonization of Accounting Standards (pg. 30)
9.4
Public Filing Requirements (pg. 30)
9.5
Audit Requirements (pg. 30-32)
9.6
Fundamental Accounting Concepts (pg. 32-33)
9.7
Consolidated Financial Statements (pg. 33-34)
9.8
Financial Instruments (pg. 34-35)
9.9
Inventories (pg. 35-36)
9.10
Tangible Assets and Depreciation (pg. 36)
9.11
Intangible Assets and Amortization (pg. 36)
9.12
Research and Development Expenses (pg. 36-37)
9.13
Deferred Charges (pg. 38)
9.14
Taxation (pg. 38)
9.15
Retirement Benefit Plans (pg. 38-39)
9.16
Leasing (pg. 39)
9.17
Capital and Reserves (pg. 39-40)
9.18
Foreign Currency Transactions (pg. 40)
9.19
Treatment of Government Grants (pg. 40)
9.20
Unusual Prior Period Items (pg. 40)
9.21
Related Party Transactions (pg. 40-41)
9.22
Segmental Reporting (pg. 41)
9.23
Commitments and Contingencies (pg. 41)
9.24
Price Level Changes (pg. 41)
9.25
Accounting for Smaller Entities (pg. 42)
9.26
Accounting for Asset Retirement Obligations (pg. 42)
Chapter 10: Company Taxation (pg. 42-57)
10.1
Corporate taxes (pg. 42-43)
10.2
Tax Rates (pg. 43-46)
10.3
Income Subject to Tax (pg. 46-48)
10.4
Deductions (pg. 48-50)
10.5
Specifically Non-Deductible Expenses (pg. 50)
10.6
Net Losses (pg. 51)
10.7
Taxation on Transactions within a 100 Percent Group (pg. 51-52)
10.8
International Aspects (pg. 52-57)
Chapter 11: Taxation of Individuals (pg. 57-66)
11.1
Taxable Individuals (pg. 57-58)
11.2
Taxes on Income (pg. 58-63)

3

11.3
Personal Allowances and Deductions (pg. 63)
11.4
Tax Rates (pg. 64-65)
11.5
Payment of Taxes (pg. 65-66)
Chapter 12: Indirect and Other Taxes (pg. 66-67)
12.1
Consumption Tax (pg. 66)
12.2
Stamp Tax (pg. 67)
12.3
Fixed Assets Tax (pg. 67)

4

PART I
GENERAL BUSINESS ENVIRONMENT

5Chapter 1 Introduction - Japan
1.1

Why Japan?

The "3 Windows on Japan" describes the value of setting up new businesses in Japan.
Discover the three advantages Japan offers foreign companies when investing in Japan:(1) Innovation Hub, (2) Business Platform, and (3) Trendsetter.
Currently, the world's eyes are on Asia. Japan is full of business opportunities due to its
strong ties with this rapidly developing region.
Japan(1) is recognized as a leading center for innovation and,(2) boasts highly attractive business and living environments in terms of safety, medical
services, etc.
(3) is one of the world's largest economies, and is also attracting increasing global
attention for its "soft power," i.e. a positive view of Japan in the areas of fashion,
content, food and more.
Japan has great potential to become a regional hub and R&D center in Asia as exchangesof personnel, goods and money accelerate within Asia.

1.2 Population
・ Total Population: 125.552 million (1 February 2021)
・ Composition by age group
Age

Composition

0- 9

8%

10 - 199%

20 - 29
30 - 39
40 - 49
50 - 59
60 - 69
70 - 79
80 - 89
90 -

10%
11%
15%
13%
12%
13%
7%
2%

17%

・ Life expectancy: male 81.41; female 87.45 (2019)
・ Birthrate: 1.36 (2019)

6

49%

34%

1.3 Government
・ Type: A parliamentary government with a constitutional monarchy
・ Capital: Tokyo・ Administrative divisions: 47 prefectures
・ Legal system: civil law system based on the German model; system also reflects
Anglo-American influence and Japanese traditions; judicial review of legislativeacts in the Supreme Court
・ Suffrage: 18 years of age
・ Executive branchi)Chief of state: Emperor Naruhitoii)

Head of government: Prime Minister Yoshihide Sugaiii)

Cabinet: the cabinet is appointed by the prime minister

iv)

Elections: the Diet designates the Prime Minister; the constitution
requires that the Prime Minister commands a parliamentary majority,
following legislative elections. The leader of the majority party or leaderof the majority coalition in House of Representatives usually becomesthe Prime Minister; the monarchy is hereditary.

・Legislative branches: the bicameral Diet (Kokkai) consists of the House ofCouncillors (Sangi-in) and the House of Representatives (Shugi-in); the Prime
Minister has the right to dissolve the House of Representatives at any time withthe concurrence of the Cabinet.

・ Judicial branch: the Supreme Court (the Chief Justice is appointed by themonarch after designation by the Cabinet; all other justices are appointed by the
Cabinet)・ Major political parties and the leaders: Liberal Democratic Party or LDP[Yoshihide Suga]; The Constitutional Democratic Party [Yukio Edano]
・ Political pressure groups and leaders: business groups; trade unions

1.4 Economy
Economy・ GDP (purchasing power parity):i)

USD 5.313 trillion (2020 estimate)ii)

USD 5.515 trillion (2019 estimate)iii)

USD 5.404 trillion (2018 estimate)・ GDP - real growth rate:7i)0.89% (2019)ii)

0.81% (2018)iii)

1.94% (2017)

・ GDP - per capitai)

USD 38,343 (2017)

ii)

USD 38,917 (2016)

・ Unemployment rate:i)

2.8% (2020)ii)

2.4% (2019)iii)

2.4% (2018)

・ Inflation rate:i)-0.02% (2020)

ii)

0.48% (2019)

・ Commercial bank prime lending rate: 1.00% (11 July 2017 estimate )・ Exports: USD 705.6 billion (2019)・ Imports: USD 720.8 billion (2019)
・ Exchange rates: Yen (JPY) per USDi)109.01 (2019)ii)

110.42 (2018)iii)

112.17 (2017)8

PART II
BUSINESS ENTITIESANDLEGAL REQUIREMENTS

9

Chapter 2 Types of Business Enterprises in Japan
2.1 List of the Types
The common types of business enterprises in Japan are:
1. Joint Stock Company (Kabushiki Kaisha, abbreviated K.K.)
2. Branch Office (Shiten)
3. Representative office of a foreign company
4. Partnership
5. Joint Venture
6. Non-Profit organization

Chapter 3 Kabushiki Kaisha
3.1 Formation Procedures
There are two methods for the incorporation of a Kabushiki Kaisha. One is “Promotive
Incorporation”, where the promoters subscribe all of the shares to be issued atincorporation. The other is “Incorporation by Offering”, where only a portion of theshares are issued to promoters and the remainder are offered to private or public
subscribers.
“Incorporation by Offering” is an appropriate method to make the scale of the entity large.
However, the procedures are complex compared with a “Promotive Incorporation” since
this method requires advertising for subscribers, an inaugural meeting to be held to electthe directors, etc.

3.2 Articles of Incorporation
The Articles of Incorporation are the basic rules of a company, and are sometimes called
the constitution of the company.
The Articles of Incorporation of a Kabushiki Kaisha must include the following
information:
・ Objective(s)・ Trade name・ Location of the head office・ Value of the property to be contributed at the time of incorporation or the lower limit
thereof・ Name and address of each promoter
・ Total number of Authorized Shares10It used to be prohibited to use of the same name or a name that could be confused with
the name of another company that already exists in the same municipality. Now, it ispossible to set up a company if its address is not the same. However, the Company Codeprohibits the use of a name that may be mistaken for another company if the purpose ofthis is dishonest.
The Articles of Incorporation must be signed by the promoters and attested to by aJapanese notary public.

3.3 Execution of a Capital Injection
Execution of a capital injection
In the case of a “Promotive Incorporation”, the promoter has to pay the full amount of
the subscribed shares without delay. In the case of “Incorporation by Offering”, thesubscribers of the shares have to pay the full amount of the subscribed shares by thedeadline or during a period that the promoter determines.

3.4 Organs
a. Shareholders' meetings and the Directors
Every Kabushiki Kaisha must hold shareholders’ meetings since this is the decisionmaking body of the company. Shareholders’ meetings cannot execute decisions onbehalf of the K.K. Thus, directors are also necessary for every K.K.
b. Board of Directors
An open corporation1 is a company with a board of company auditors. A company
with committees2 must have a Board of Directors. It is possible to have a Board of
Directors, even though it is not necessary to set it up.
If a Board of Directors is set up, it needs to have at least one auditor, audit
committee, or accounting advisor. However, if the company is a large company,3 itshould have an auditor or audit committee.
The Board of Directors must be composed of at least three directors.
If a Board of Directors is not set up in a company, the shareholders’ meetings candecide on all matters concerning the company. However, if a Board of Directors is set
up, a shareholders’ meeting can only decide on those matters that the Commercial
Code of Japan and the Articles of Incorporation define.
1 An open corporation is a company that has no restrictions on stock transfers.
2 A company with committees is a company that has a nominating committee, audit

committee and compensation committee. Each commissioner is appointed from theBoard of Directors. Thus, each committee is set up as an organ of the Board of
Directors.
3 A large company is one whose capital is over 500 million JPY or whose liabilities
are over 20 billion JPY.
11

Each director has authority to execute business in a company without a Board of
Directors. On the other hand, in a company with a Board of Directors, the Board of
Directors makes the decisions and a representative director or an executive director
executes the company business.
c. Auditors
A company with a Board of Directors and a company with an accounting auditor
should have an auditor, in principal. However, if this company is a company withcommittees, it is prohibited from having an auditor. This is because a company withcommittees has an audit committee that supervises the company business, and its
function is the same as that of an auditor.
d. Other organs
An open corporation formed out of a large company that is not a company withcommittees should have a Board of Auditors or an accounting auditor. A company
with committees and a large company that is not an open company should have an
accounting auditor.

3.5 Shareholders’ Meetings
There is a difference in the authority of a shareholders’ meeting between a company
with a Board of Directors and other companies.
In a company with a Board of Directors, the shareholders’ meeting can decide only on
matters that the regulations and the Articles of Incorporation determine.
On the other hand, in a company that has no Board of Directors, the shareholders’meeting can decide on all matters concerning the company’s business.
A shareholders’ meeting is called by a director, but can also be called by a minority
stockholder.
In a company that has no Board of Directors, the directors determine the date, place,etc. In a company with a Board of Directors, the Board of Directors decides on the details
and the representative of director calls the meeting.
There are two kinds of shareholders’ meetings. One is an annual meeting and the otheris an extraordinary general meeting. An annual meeting should be called within threemonths after the end of the business year. An extraordinary meeting may be called
whenever it is required.

3.6 Directors and the Board of Directors
a. Authority of a director
In a company that has no Board of Directors, a director executes the company
business unless there is a special provision in the Articles of Incorporation. In cases

12where there are two or more directors, the company business is decided by a majorityof the directors unless there is a special provision in the Articles of Incorporation.
Each director has the authority to represent the company and to act on everything
related the company’s business, regarding both legal and non-legal matters.
In a company with a Board of Directors, no director has the authority to be therepresentative. The Representative Director has rights of representation and can act
on anything related to the company business, regarding both legal and non-legal
matters. Decisions on the company’s business are made by the Board of Directors
but are actually executed by the Representative Director or Executive Director. Eachdirector, as a member of the Board of Directors, supervises the execution of businessby the other directors through the board,b. Appointment and dismissal of a director
・ In a Kabushiki Kaisha, it is necessary to appoint at least one director and in acompany with a Board of Directors, it necessary to appoint at least three directors.
The number of directors can be determined by looking at the Articles of Incorporation.
It is possible to set a fixed number or a lower limit, but it is more common to set an
upper limit.
・ Corporate bodies, adult wards, persons under curatorship and persons who have acertain criminal history cannot be appointed as a company director. On the other
hand, minors2 or bankrupts can be appointed. In addition, it is possible to impose
conditions that a director should have certain qualifications.
It is prohibited to act as both a director and as an auditor of the same company or
its parent company. An auditor supervises the company business and has a right tosurvey any subsidiary company. It is inappropriate for someone to be both an auditor
performing an audit and a person who is subject to the auditing at the same time.
It is also prohibited to simultaneously be both a director and an accounting adviserof the same company or its parent company in order to protect the independence of
the accounting adviser.
It is possible to be both a director and an employee except in a company withcommittees. This is to ensure that a company with committees makes a distinction
between the execution of the company business and the supervision of it.
・ The directors are appointed by a decision of the shareholders’ meeting.
・ The term of a director’s duties is until its determination at an annual shareholders’meeting for the last accounting year of a period within two years after theappointment, in principle. However, the Articles of Incorporation or a decision of a2A person under 20 years old

13shareholders’ meeting can determine a shorter period. In a company that is not an
open company or a company with committees, the period can be extended to a
maximum of ten years.
・ The relationship between a company and a director is a mandate. Directors can resign
at any time. However, if the termination of the term or resignation causes a shortfall in
the number that is determined by the Companies Act or the Articles of Incorporation,
the directors still have the duties and rights of a director until a new director is elected.
・ A shareholders’ meeting can dismiss the directors at any time. A director who isdismissed can claim for losses unless there are justifiable grounds.

3.7 Auditora. Installation of an auditor and a Board of Auditors.
An auditor is an agent who audits the execution of the company business by the
directors (if there is an accounting adviser, the auditor also audits the accounting
adviser.)
In a Kabushiki Kaisha, it is necessary to have a director, but an auditor or a Board
of Auditors is not necessary. This can be determined by the Article of Incorporation.
It is prohibited to appoint an auditor to a company with committees.
In a company with a Board of Directors, it is necessary to appoint an auditor inprinciple, unless it is a company with committees or a company with an accounting
adviser that is not an open company. In a company with an accounting auditor, it
necessary to appoint an auditor unless it is a company with committees.
In a large company, it is necessary to appoint a Board of Auditors if it is not an open
company or is a company with committees.

AuditorIt is necessary, in principal

Company with a Board of Directors
・Company with a Board of
Directors that is a company withcommittees

It is not necessary
・Company that is not open and withan accounting adviser.

14

Board of Auditors

Company with an accounting auditor Large company

Company with an accounting
auditor that is a company withcommittees

・Company that is not open・Company with committees

b. Appointment of an auditor
・ Corporate bodies, adult wards, persons under curatorship and persons who have acertain criminal history cannot be appointed as the auditor. On the other hand,minors or bankrupts can be appointed. In addition, it is possible to establish acondition than the auditor should have certain qualifications.
・ The auditor is elected by a decision of the shareholders’ meeting.
c. Right to agree to the agenda for a new appointment
・ Directors should obtain the auditor’s consent (if there are more than two auditors,
then the majority of them. If it is a company with a Board of Auditors, then its
consent), before proposing the agenda item related to the appointment of auditors at
a shareholders’ meeting.
・ The auditor (or the Board of Auditors, if it is a company with such a board) can ask
the directors to make the appointment of an auditor the purpose of the shareholders’meeting.
・ Auditors can comment on the appointment of auditors at a shareholders’ meeting.
d. Prohibition on holding concurrent posts
It is prohibited for auditors to at the same time also hold the post of a director in thesame company or a subsidiary company, or be an employee of the company or
employee of a subsidiary company.
e. Number of auditors and outside company auditors
In a company with a Board of Auditors, the number of auditors should be three ormore and the majority of them should be auditors from outside the company.
f. Term of the duties
The term of the duties of an auditor is, in principle, until its determination at anannual shareholders’ meeting for the last accounting year of a period within four
years after the appointment. In contrast to directors, it is not permitted to shorten
the term of the duties of auditors in order to protect their status and enable them toproperly execute their duties.
On the other hand, except for open companies, it is possible to extend the term until
its determination at the annual shareholders’ meeting of the last accounting year ofa period within ten years after the appointment.

15

g. Dismissal of an auditor
The dismissal of an auditor may be caused by the termination of duties, resignationfrom the duties, the loss of the qualification to perform as an auditor or a change in
the Articles of Incorporation.
If the number of auditors is less than the required number after the termination ofduties, the dismissed auditor still has duties and rights until a new auditor is elected.
A shareholders’ meeting can dismiss the auditors at any time. Any auditor who isdismissed can claim for losses unless there are justifiable grounds for the dismissal.

3.8 Accounting Advisors
a. Functions of an accounting advisor
Any Kabushiki Kaisha can appoint an accounting advisor based on the Articles ofIncorporation. An accounting advisor is one of the company entities that a CPA(including an Audit Corporation) or a Certified Public Tax Accountant (including a
Tax Accountant Corporation) can assume. An accounting advisor makes financial
statements in collaboration with the directors.
It is necessary for a company with a Board of Directors (that is also a company withcommittees) to not have an auditor. If a company is an open company, then it also
should not have an accounting advisor.

Functions of the Accounting Advisor
Directors

Cooperate to Prepare Financial Statements

Accounting Advisor(Board of Directors)
Appointment

Appointment

ReportExplanation

Business
ReportDisclosure of
Financial
Statements

Shareholders'Meeting
Shareholders
Creditors

16

b. Relationship between the Company and the Accounting Advisor
The relationship between a company and its accounting advisor is mandatory.
The charges for the accounting advisor are based on the Articles of Incorporation. If
there is no description concerning the fees in these articles, they are determined bya shareholders’ meeting.
c. Appointment of an Accounting Advisor
Only a CPA (including an Audit Corporation) or a Certified Public Tax Accountant(including a Tax Accountant Corporation) can be appointed as an accounting
advisor.

3.9 Accounting Auditors
・ An accounting auditor has a duty to audit the financial statements. Large companies(unless it is not an open company) or companies with committees should have an
accounting auditor.
The qualifications of an accounting auditor are limited to Certified Public
Accountants (CPAs) or auditing corporations (Kansa Houjin).
To maintain the independence of the accounting auditor, the participation of an
accounting auditor (the Board of Directors in the case of a company with a Board of
Directors) in the appointment, dismissal, fees, etc., is required.

3.10 Companies with Committees
a. Purpose
A company with committees is a company that has a nominating committee, an audit
committee, and a compensation committee according to the provisions of the Articles
of Incorporation.
To be a company with committees, the size of the company is not relevant, whether
or not it is an open company. However, it is necessary to be a company with a Boardof Directors. A company with committees has an Audit Committee, so it should nothave an Auditor.
Members of the committees are appointed from the Board of Directors by a resolutionof a Board of Directors meeting. The number of members of each committee needs tobe three or more. The majority of the members of each committee should be outside
directors.

17

Relationship between the Board of Directors and the committees

Shareholders' meeting

Election, Dismissal

Approve of the proposal for an appointment or dismissal

Accounting Auditor
Election, Dismissal

Committee of Appointment

Appointment, Removal

Directors

Committee of Audit

Board of Directors
Committee on Fees
Appointment, Dismissal

Executive Officer

Appointment , Dismissal

Representative
Executive Officer

b. Directors and the Board of Directors
I.
Appointment and term of the duties of a director
In a company with committees, the directors are appointed by a shareholders’meeting. The shareholders’ meeting makes decisions concerning proposals thata nominating committee brings to it.
The term of a directors’ duties is until the determination of the annual
shareholders’ meeting for the last accounting year of a period within a year
after the appointment.
II.

Authority of a director
In a company with committees, the Board of Directors has the authority tomake decisions concerning all of the company’s business. In addition, certain
affairs can only be decided by the Board of Directors.
The Board of Directors in a company with committees supervises the executionof the business by the executive officers.
In a company with committees, each committee makes the decisions andexecutes the company business concerning matters determined by a decisionof the Board of Directors.

c. Duties and fees of directors
In a company with committees, the directors are not allowed to execute the company

18

business, in principal.
A director can also be an executive officer, but cannot be an employee.
The fees for directors are determined by the compensation committee.
d. Committees
In a company with committees, a Nominating Committee, an Audit Committee anda Compensation Committee should be appointed.
A committee can call on each of the directors to perform as committee members. It
is necessary to assure the right to call on outside directors. Therefore, it is notallowed to concentrate on the right to call only on certain directors for membership.
The Executive Director, directors and accounting advisors are required to explain
affairs whenever a committee requests them to do so.
A member of a committee that is selected by the committee is required to explain thesituation of the performance of the committee to the Board of Directors.
e. Nominating Committee
A Nominating Committee has the authority to determine the agenda of the election
and dismissal of the directors.
f. Audit Committee
In a company with committees, an Audit Committee must be appointed. Auditors
cannot be appointed in place of such a committee. More than half of the committee
members should be outside directors.
The Audit Committee has the authority to supervise the execution of business by the
Executive Officer, etc.
g. Compensation Committee
A Compensation Committee shall prescribe the policy regarding the contents of the
remuneration for individual executive officers, etc.
h. Executive Officers
In a company with committees, one or more Executive Officers are elected by aresolution of the Board of Directors. An Executive Officer cannot simultaneously act
as a director, a member of an audit committee, or accounting adviser.

19

Chapter 4 Branch Offices (Shiten)
4.1 Branch Offices
A branch office is referred to as a “place of business” (eigyo sho) under the Companies
Act. It is the simplest form of vehicle through which a foreign company may fully conduct
its business in Japan with a physical presence.

4.2 Formation
If a foreign company intends to establish a branch office in Japan, it must first appoint
one or more representatives in Japan. Then, the foreign company must file a registration
application with the relevant local legal affairs bureau (Houmu Kyoku) within three
weeks of the appointment of the representative. After such commercial registration, theforeign company may engage in business transactions on a continuing basis.

4.3 Representative
The appointed representative in Japan is deemed to have the full statutory powers andauthority to represent and bind the foreign company in all transactions and in any court
proceedings in connection with the business of the foreign company in Japan. Any
restrictions on such powers and authority under a contract or other methods cannot be
asserted against bona fide third parties. The foreign company shall be liable for any
damage incurred by third parties that was caused by the representative in Japan inconnection with the performance of his/her duties.

4.4 Registration
Once the local representatives have been appointed, the company must then file aregistration application with the relevant local legal affairs bureau.

4.5 Requirements
When a foreign company first appoints its representative in Japan in order to engage
in transactions on a continuing basis in Japan, it must apply for registration with therelevant legal affairs bureau within three weeks of the appointment.
The application must be submitted to the legal affairs bureau having jurisdiction overthe location of the branch office if a branch office is established, or the residential addressof the representative in Japan if no branch office has been established.

20

Chapter 5 Representative Office of a Foreign
Company
The activities of a Representative Office are limited to the collection and disseminationof information on behalf of a foreign company and no business transactions may beundertaken within Japan. A representative office is therefore not taxable in Japan,
provided it only operates in its representative capacity. Permission to establish a
Representative Office is normally only required with respect to foreign banks, securities
and investment management companies.

Chapter 6 Partnerships
The following four types of partnerships exist in Japan(ⅰ) a partnership (nin-i-kumiai)(ⅱ) a general partnership company(ⅲ) a limited partnership company(ⅳ) a limited liability business partnership

6.1 Partnership (Nin-i-kumiai)
A Nin-i-kumiai(“NK”) is formed through a partnership agreement in which two or
more persons agree to jointly conduct business. The NK does not have any corporate
veil.
The establishment of an NK requires two or more partners. If the number of partners of
the NK decreases to one, it will be dissolved.
Unless otherwise provided for in the partnership agreement, each partner of the NK
has unlimited liabilities and obligations in relation to the NK in proportion to the ratioof their contributions. Contributions by partners may be made by credit or by theprovision of labor.
Each partner may assign their partnership interests in the NK pursuant to an
applicable partnership agreement or with the consent of all the partners. Any memberof a partnership may withdraw from the NK for unavoidable reasons.
The formation of an NK is accomplished by the execution of a partnership agreement.
There is no registration requirement with respect to the formation of an NK.
The properties and assets of an NK are subject to joint ownership among its partners.
However, the partners of an NK may not request a break-up of the property if the NK
remains in existence and is restricted from the disposal of the partner’s interests in theproperties and assets of the NK.
21

Unless otherwise provided for in the partnership agreement, the business affairs of an
NK are operated based on the consent of the majority of the partners.

6.2 General Partnership Company and Limited Partnership Company
A general partnership company (Gomei gaisha) consists of unlimited liability members
only. Any member of a general partnership company is directly liable for the fullamount of debts and obligations of the general partnership company to creditors of thecompany (direct unlimited liability).
A limited liability company (Goshi gaisha) consists of unlimited liability members andmay have limited liability members. Each unlimited liability member is directly liable
for the debts of the company to creditors.

6.3 Limited Liability Business Partnership (LLP)
a. LLPAn LLP is a partnership under the Law concerning Limited Liability Business
Partnership Contracts (The LLP Law).
Each partner is responsible for the liabilities of the partnership only to the extent
of the amount of the contribution that they provided. However, if one of the partners
behaves with malicious intent or is grossly negligent in their duties, then his/her
liability may exceed the amount of such a contribution.
The distribution of profits and the allocation of losses may be made without regard
to the ratio of the contribution by any partner, pursuant to the partnershipagreement.
Unless otherwise provided for in the applicable partnership agreement, a partner
may assign its partnership interests in the LLP to third parties only with the consent
of all the other partners. Any partner may withdraw from the LLP without theconsent of the other partners if there are any unavoidable reasons, unless otherwise
provided for in the applicable partnership agreement.
b. Formation of an LLP
An LLP is formed effectively upon the execution of a contract (Partnershipagreement) between or among individuals/companies (partners) by which it ispossible to jointly carry on a business for commercial purposes, and the making of acontribution (in cash or other types of property only, not credit or labor) by eachpartner.
c. Residency requirement
At the time of the formation of an LLP and thereafter, the LLP must have at least
two partners and at least one partner must either be an individual who has an22

address in Japan or has had a domicile in Japan for a consecutive period of one year
or longer, or a company having a head office or principal office in Japan.
d. Operations
Since the LLP does not have any separate corporate existence, it does not haveany corporate organization, such as a shareholders’ meeting or a board of directors.
The operation of the business affairs of the LLP are decided by the unanimous
consent of all the partners, unless otherwise stated in the partnership agreement.
One of the most important characteristics of the LLP is that each partner of the
LLP must be involved in the operations of the LLP.
e. Property of the LLP
Since the LLP does not have a separate corporate existence, any property or assetsof the LLP are legally considered to be jointly owned by all the partners. However,since the disposal and break-up of the property of an LLP is restricted, its property
is independent of each partner to this extent.
The registration of real estate and industrial property rights of the LLP may bemade in the name of all the partners in a description of the LLP. If the business tobe conducted by the LLP requires government permits and licenses, each partner
may need to obtain them.
The property of the partnership cannot be distributed beyond the net assets after
the deduction of three million yen or the total amount of the contributions, whicheveris the lesser.
f. Financial statements
Financial statements such as a balance sheet and income statement of profits orlosses must be prepared and made available to any creditors. However, unlike a joint
stock corporation, an LLP is not obliged to publicly disclose these documents.
g. Tax treatment
Since the LLP does not have any separate corporate existence, it is eligible as a“pass-through” entity for tax purposes. However, any losses of the LLP beyond theamount calculated based on the capital contribution of any corporate partner may
not be deductible from the taxable income of such a corporate partner.

23

6.4 Limited Liability Company (LLC)
a. LLCA limited liability company (“LLC”) is a new type of company in Japan, modeled
after the limited liability company in the US.
An LLC can be established and survive with a sole shareholder. The LLC isconstituted by the “limited liability members” only. Each limited liability member ofthe LLC is liable for the debts and obligations of the LLC to the extent of the amountof their contribution as stated in the Articles of Incorporation.
However, since each member has a duty to operate the business affairs of the LLC,
if they fail to perform such duties, they may be liable for the payment ofcompensation in the event of damage caused to the LLC or third parties.
b. Formation
An LLC is legally formed upon the registration of incorporation at the location of
its principal office, after going through the preparation of the Articles ofIncorporation and a capital contribution by the persons considered to be its initial
members.
Any contribution to the LLC must be in property such as cash. No credit or labor
services can be contributed for the formation of an LLC.
c. Operations
Any fundamental issues must be determined with the consent of all the members.
Unless otherwise provided for in the articles of incorporation, each member has theduty and authority to operate the LLC’s business affairs and to represent the LLC.
If any member with the duty to operate its business affairs is not a natural person,then that member must appoint a person who will actually perform the relevant
duties.
A shareholders’ meeting and a board of directors as required in a joint stock
corporation are not required for an LLC. No accounting auditor can be appointed byan LLC, even if its size is the same as a “large corporation” of a joint stock corporation.
In addition, no LLC is obliged to facilitate an internal control system or to disclose
its balance sheet to the public, as is required for a joint stock corporation. Accounting
and the dividend distribution of the surplus of the LLC shall comply with similar
rules as are applicable to a joint stock corporation.

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d. Tax treatment
During the course of preparing the bill on the Companies Act, the LLC was intended
to be a pass-through entity in terms of tax treatment, as it is in the US. However,under the current Companies Act, an LLC is not eligible to be a pass-through entity
for Japanese tax purposes.
e. Assignment of an LLC’s interests and withdrawal
The assignment of an LLC’s interests by a member requires the consent of all theother members, unless otherwise provided for in the Articles of Incorporation.
However, the assignment of an LLC’s interests by a limited liability member having
no duty to operate the business affairs of the LLC will require only the approval ofother members having the duty to operate its business affairs.
Nonetheless, a member may at any time withdraw from the LLC for any“unavoidable reason”, even if his or her withdrawal is restricted in the Articles ofIncorporation. Withdrawing members are entitled to receive a refund in cash fortheir contribution.
The name, address and amount of the LLC interests of each member of an LLC
must be set out in its Articles of Incorporation, and the name of each member
authorized to operate the business affairs or to represent the LLC must be recordedin the commercial registry. Accordingly, any change to these matters as the result of
the assignment of LLC interests requires an amendment to the articles andapplication for registration, as applicable.

6.5 Differences between an LLP and an LLC
・ An LLC can be incorporated and exist with only one member. However, an LLP always
requires two or more partners.
・ Every partner of an LLP must be involved in the operations of the LLP. The membersof an LLC are not necessarily involved in the operations.
・ An LLC may obtain any necessary business permit, license or approval in its own
name. On the other hand an LLP may not obtain them in its own name, and thus
each partner of the LLP needs to obtain these.
・ The members of an LLP may be entitled to the benefit of pass-through tax treatment,
but the members of an LLC may not be eligible for this.

Chapter 7 Joint Ventures
Many foreign companies wishing to start a business in Japan form a joint venture
operation (usually a joint stock company) with a Japanese company. Such agreements

25

can sometimes facilitate the provision of manufacturing bases and patents, therecruitment of suitable personnel, negotiations with distributors and market
penetration. However, great care must be taken over the selection of a Japanese
partner, particularly in the areas of business philosophy and long-term corporate
objectives, and in the drafting of the joint venture documentation.

Chapter 8 Non-Profit Making Organizations
In addition to ordinary business entities as described above, there are other legal
entities for non-profit making or charitable organizations.

26

PART IIIACCOUNTING AND TAXATION

27

Chapter 9 Accounting and Reporting
Requirements
9.1 Governing Laws and Bodies
The Kabushiki Kaisha (“KK”), or stock company, is the most common type of company in Japan.
For historical and regulatory reasons, there are two relevant laws related to accounting andreporting requirements: the Companies Act, as promulgated in 2005 by the Ministry of Justice
and which went into effect on May 1, 2006, replacing a portion of the Commercial Code, and the
Financial Instruments and Exchange Act, promulgated in 2007 by the Ministry of Finance.
The emphasis of accounting and reporting under the Companies Act has been towards the needsof creditors as much as shareholders and, as a consequence, great importance is placed on rules
for valuing assets in a conservative manner, rather than for the measurement of earnings. The
Financial Instruments and Exchange Act applies to public corporations that offer their own sharesor bonds to the public in Japan either through a public offering or through a listing on a stock
exchange. Disclosure requirements under the Financial Instruments and Exchange Act are moredetailed than those required under the Companies Act in order to protect the interests of bothpublic creditors and shareholders. Any corporation regulated by the Financial Instruments andExchange Act, therefore, has to prepare two different sets of financial statements, although the net
income and shareholders' equity will be identical under both sets of regulations.
Since 1949, the Business Accounting Deliberation Council (“BADC”), an advisory body of the
Minister of Finance, has issued Financial Accounting Standards for Business Enterprises and otherpronouncements, which are regarded as generally accepted accounting principles in Japan. In
addition, the Japanese Institute of Certified Public Accountants (“JICPA”) has published manystatements that provide guidelines for the interpretation and application of various accounting
principles and requirements under the Companies Act and the Financial Instruments andExchange Act.
Japanese tax laws and regulations have a strong impact on accounting practices, because certain
accounting practices have to be followed in order to obtain tax benefits. The tax laws now allow
more flexible treatment, or have been amended to comply more appropriately with commercial
accounting principles and practices. However, they still have a significant influence on accounting
practices in general.
The JICPA is a key member of the International Accounting Standards Board (“IASB”), theInternational Federation of Accountants (“IFAC”), and the Confederation of Asia and PacificAccountants (“CAPA”) and has contributed to establishing international accounting and auditing
standards. The current accounting principles and practices generally accepted among Japanesecompanies are, with certain exceptions, similar to those prescribed in International AccountingStandards. Some larger corporations whose shares are traded on foreign stock exchanges disclose
financial information in accordance with accounting principles generally accepted in the UnitedStates of America.

28

9.2 Form and Content of Financial Statements
Under the Companies Act, all stock companies must prepare statutory financial statements
consisting of a business report, balance sheet, income statement, statement of changes in net assets,
notes to non-consolidated financial statements, and supplementary schedules. Accounting periods
may not be in excess of 12 months and the statutory financial statements must be submitted to theannual general meeting of shareholders within three months of the end of the financial year. ManyJapanese companies have financial years ending on 31 March, which is also the end of thegovernment fiscal year.
The form and contents of financial statements required under the Companies Act are dictated by
the Ordinance for Companies Accounting. Large companies whose financial statements are filedwith the FIEA should prepare consolidated financial statements.
Public corporations under the Financial Instruments and Exchange Act are required to prepare anannual financial report (Yuka Shoken Hokokusho), which must be submitted to the Minister ofFinance within three months of the end of the fiscal year. The annual report includes the audited
financial statements consisting of:••••Balance sheet
Income statement
Statement of changes in net assets
Statement of cash flows (non-consolidated basis is not required if a consolidated statement isprepared), and•Supporting schedules

These are prepared in accordance with the “Ordinance on the Terminology; Forms and Preparation
Methods of Financial Statements”. The statements prepared under the Financial Instruments andExchange Act rules disclose much more financial information than those prepared under theCompanies Act rules, including comparative figures from the previous year, notes aboutaccounting policies and other matters,.
In addition, a quarterly report (Shihanki Hokokusho), which includes the balance sheet, income
statement, and statement of cash flows, is required to be submitted to the Minister of Financewithin 45 days from the last day of each quarter.
A quarterly report with an independent auditor’s review is required under the Financial
Instruments and Exchange Act.
If a corporation reporting under the Financial Instruments and Exchange Act has significant
subsidiaries and affiliated companies, consolidated financial statements are required.
Consolidation accounting practices prevailing in Japan are similar to international practices ingeneral, but detailed reporting regulations are set by the Minister of Finance. Annual consolidated
statements include comparative figures and are published within three months of the end of the
year.

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9.3

International Harmonization of Accounting Standards

After collapses among larger public companies in the late 1990s, including banks, securities
houses and general construction companies, there was strong criticism of Japanese accounting
standards. It is true that the BDAC had not been keen on the implementation of new and recentchanges in the International Accounting Standards. Under pressure from the financial sector andgeneral investors and at the urgent request of corporate associations, the Japanese Institute of
CPAs is now playing a key role in the amendment and implementation of new principles in thegenerally accepted accounting principles, the Financial Instruments and Exchange Act, theCompanies Act and the Corporate Tax Law. It is further expected that the BDAC can bereorganized so that the accounting principles and standards in Japan are updated at least inaccordance with the IAS and will proactively respond to recent changes in financial technologies.

9.4 Public Filing Requirements
Under the Companies Act and its related regulations, a stock corporation falls into one of two
categories depending on its size. Auditing and reporting requirements are dependent on theseclassifications:• Large corporations - Capital stock of not less than 500 million yen or total liabilities of not lessthan 20 billion yen.
• Other corporations
The audited statements are approved by the Board of Directors and are simply reported to theshareholders, although the appropriation of retained earnings has to be approved by theshareholders.
The financial statements together with a statutory auditor's report must be maintained at thecorporation's principal office and copies made available for inspection by shareholders andcreditors at major branch offices for three years. A condensed balance sheet and income statement
for large corporations and only a balance sheet for medium-sized and smaller corporations mustbe published in newspapers or the official gazette immediately after approval by the shareholders.
The annual financial report, including the consolidated and parent only financial statements withan independent auditor’s report, is required to be filed with the Minister of Finance within threemonths of the fiscal year end. At the same time, copies of the report of listed corporations are also
submitted to the stock exchange or to the governing securities association if a corporation's sharesare traded on the over-the-counter market. These copies are then available for public inspection.
The semi-annual report is filed with the same bodies as the annual report.

9.5 Audit Requirements
There are varying audit requirements, which are dependent upon a corporation's size and status.
In Japan, the financial statements of the company must be approved by the regular shareholders’meeting.
The companies that must be audited by an independent CPA under the Companies Act are as
follows:30

Large Companies: Capital stock of ¥500 million or more or liabilities of ¥20 billion or more as ofthe latest fiscal year-end;
Companies that adopt a “company with committees” corporate governance system and othercompanies that appoint an accounting auditor (kaikeikansanin) on a voluntary basis.
The companies that must be audited by independent CPAs under the FIEA are as follows:
Companies that issue shares listed on a financial instruments exchange or are in the process oflisting, companies that filed a registration statement, and companies with a specified number ofshareholders.

a. General Rules
Under the Companies Act, a statutory auditor (“Kansayaku”) is a mandatory requirement for a
Small and Medium-sized Closed Company. On the other hand, once the statutory auditor iselected, he/she is responsible for not only accounting matters but also operational issues, unless
his/her responsibility is restricted to the accounting audit by the Articles of Incorporation.
There is also no external independent audit requirement for Small and Medium-sized Corporations.
b. Large Corporations
For large corporations, a CPA or Audit Corporation is elected as the independent auditor by theshareholders. The independent auditors are required to examine the statutory financial statements
and express their opinion on whether they give a true and fair view of the company's financial
condition and the results of its operations. The statutory auditors review the audit procedures andthe opinion of the independent auditors as far as accounting and financial reporting is concerned.
The statutory auditors are required to refer in their report to whether they are in agreement with
the independent auditor’s opinion.
c. Listed Corporations
Under the Financial Instruments and Exchange Act, the financial statements, consolidated andparent only, of public corporations are required to be audited by a CPA or Audit Corporation. Their
audit report is included in the annual financial report and describes their opinion as to whether thefinancial statements fairly present on a consistent basis, the company's financial conditions, theresults of operations and its cash flows in accordance with generally accepted accounting
principles and the Financial Instruments and Exchange Act’s reporting regulations. Audited
consolidated financial statements are treated as the principal financial information in the annual
report.
The financial statements for the first-half year are audited by the independent auditor’s report andsuch statements are included in the semi-annual report as required under the Financial Instruments
and Exchange Act. A quarterly financial report with the independent auditor’s review is disclosed31under the FIEA. Auditors express their opinion on these statements as to whether such statements
represent meaningful financial information about the company for the period.
The FIEA also requires listed companies to prepare an Internal Control Report and to have it
audited. This requirement is modeled after the one provided by Section 404 of the SarbanesOxley Act, though with modifications in consideration of the version in the US.
d. Foreign Corporations
Foreign corporations listed on the Tokyo Stock Exchange are also required to submit their annual
financial report, in Japanese, to the Financial Services Agency and the Stock Exchange typicallywithin three months of the end of the fiscal year. The reporting formats are fully regulated by the
Financial Instruments and Exchange Act and the financial statements together with an audit reportissued by a Japanese CPA or Audit Corporation are required to be included with the report.

9.6 Fundamental Accounting Concepts
Accounting principles and practices generally accepted among Japanese companies are based on
the following fundamental concepts:
a. True and fair reporting
Financial accounting for business enterprises should provide a true and fair report of the financial
position and of the results of operations and cash flows.
b. Orderly system of bookkeeping
Financial accounting for business enterprises should encompass the maintenance of accurate
accounting records of all transactions in accordance with the principle of an orderly system ofbookkeeping.
c. Distinction between capital surpluses and earned surpluses
Capital surpluses and earned surpluses should be kept separate.
d. Clear disclosure
Financial accounting for business enterprises should, through the financial statements, clearlypresent essential accounting facts to interested parties and in a manner that will not be misleadingin their interpretation of the financial status of the business enterprise.
e. Consistency
Accounting principles and practices should be consistently applied between fiscal periods andshould not be changed without justifiable reason.
f. Prudence
Financial accounting for business enterprises should include prudent accounting practices inproviding for possible unfavorable effects upon the financial condition of the business enterprise.

32

g. Accordance with reliable accounting records and facts
When several different forms of financial statements are required for such purposes asshareholders' meetings, credit ratings, tax reporting, etc., the content of the financial statements
should be prepared from reliable accounting records and the presentation of the facts should be
the same for each presentation.
h. Income Statement Principle & Balance Sheet Principle• Income and Expenses - The accrual principle is applied to the recognition of income andexpenses. Conservative methods are accepted for accounting for income from installment sales
or long term construction business. Smaller corporations are accustomed to applying cash
accounting in practice.
• Assets - The historical cost convention is followed in Japan. Revaluation of assets is strictly
prohibited (except for mergers and reorganizations) under the Companies Act in order to protect
creditors. If the market value of an asset is significantly less than its cost, the Companies Law
requires that the asset should be reduced to the market value. Inventories and marketablesecurities are normally valued at the lower of the cost or market value.
• Liabilities - All liabilities outstanding on the balance sheet date shall be provided for in theaccounts. Accruals for employee bonuses, after sales expenses, employee retirement benefits
and other similar future expenses are provided for at least in accordance with Japanese income
tax law and regulations. Some larger corporations, mainly listed companies, apply their own
established methods to calculate such items, which may be more theoretically accurate andconservative. The excess of these provisions over the tax-based amounts are disallowed forincome tax purposes.
Banks, insurance companies and other public interest corporations are regulated by specific lawsand different accounting principles are applied accordingly.

9.7 Consolidated Financial Statements
The Financial Instruments and Exchange Act requires large corporations to report consolidated
statements as principal information in their annual and semi-annual reports. Consolidation
Financial Statement Principles were set by the BADC in 1975 (Final revision 2011) and thedisclosure of consolidated financial statements under the Financial Instruments and Exchange Actcommenced in 1978.
All subsidiaries in which the parent company owns more than 50% of the voting shares should be
included in the consolidation, although they may be omitted where they are immaterial. A
subsidiary must be excluded from the consolidation if:• the control is intended to be temporary,• its activities are so dissimilar that its inclusion would make the consolidation misleading, or• severe restrictions over the operations of the subsidiary prevent effective control.
The FIEA regulations set out the reporting formats to be used and additional information required,
which includes details of the significant consolidation accounting principles followed. Audits by

33

a CPA or Audit Corporation are also required for consolidated financial statements. Multinational
companies may have the audit of their overseas subsidiaries and affiliated companies carried out
by other accountants.

9.8 Financial Instruments
Under the current accounting standards for marketable securities, each marketable security is
individually valued by the cost method. In the notes to financial statements, comparisons of theaggregated cost and market value for each class of financial instruments, including derivatives,
are disclosed.
In order to implement IAS related to the valuation of financial instruments, the BDAC issued an
opinion in January 1999 to make the new accounting rules effective for the years after April 1,
2001.
a. Definition of financial instruments
Financial instruments represent monetary assets and liabilities and derivative contracts. Bank
deposits, trade receivables, loans, bonds and equity securities are included in monetary assets.
In principle, financial instruments shall be valued at the current fair value, which are represented
by the market value at recognized exchanges or the fair value determined on a reasonable basis.
The evaluation standards for financial instruments are as follows:
Financial Instrument

Method of Valuation

Held for sale or Current price
trade

Presentation of Gain/loss
Gain or loss in P/L

Bonds held until Cost plus accumulation Interest income or
maturityor less discounts *1
expenses in P/LSecurities

Stocks ofaffiliates

Cost

N/A

Others held forthe long term

Current priceCharged to shareholders’equity *2

Monetary receivables

Cost plus accumulation Interest income oror less discounts *1
expenses in P/LInvestment trusts and funds

Current priceGain or loss in P/L

Derivatives

Current priceGain or loss in P/L*1 In the case of purchasing financial instruments at a higher or lower cost than the face value, the cost
shall be adjusted according to the difference between the purchase cost and face value over the periodof the investment.
*2 Alternatively, the aggregate loss will be charged to P/L.

34

b. Permanent devaluation
Where the devaluation of value is significant and permanent for each of the bonds held until
maturity, affiliated companies and securities held for the long term, the resulting loss should becharged to P/L. The original acquisition cost of such instruments is replaced by the new bookvalue.
c. Bad debts
The provision for doubtful accounts had been generally made in accordance with the tax law. A
more precise method for estimating losses due to bad debts has been newly enacted.
Essentially, receivables are classified into three groups according to the financial condition of the
debtors:
Normal debts - Based on the past experience of bad debt losses
Doubtful debts - Based on the estimated value of mortgages or collateral and financial conditions
including the cash flow of the debtor
Bankruptcy - Based on the estimated value of mortgages or collaterald. Recognition of derivative gains or losses
Gains and losses on derivative transactions have previously not been recognized prior to closing
the books. Under the new standard, gains or losses on derivative transactions should berecognized at each year end.
e. Derivatives used for hedging
On the condition that derivatives used for hedging purposes meet a specific requirement, such as
the relevance of a floating exchange rate or the effective measures for a hedge, the recorded gains
and losses on the derivatives should correspond to the profits and losses of the underlying asset
or liability of the hedge derivative.
Gains or losses on the derivatives can be recorded as deferred assets or liabilities on the balance
sheet until the closing of the underlying asset or liability of the hedge. Alternatively, both thederivatives and the underlying assets or liabilities are valued at their respective current price atevery year end.

9.9 Inventories
Inventories are normally stated either at cost or at the lower of the cost or market value. Companies
may not use the cost basis when there has been a substantial and permanent reduction in the market
value of the inventory.
Although the cost should be the actual cost of the purchase, approximations to the actual costderived from using FIFO or a weighted average method may be used. The actual cost of
production may include variable and fixed overheads based on a normal level of capacity.

35

Inventories should be separated in the financial statements into the following categories:• Supplies• Raw materials• Work in progress• Semi-finished goods• Finished goods
In the notes accompanying the accounts, the company should specify which method has been usedfor valuation purposes for each of the above categories.

9.10 Tangible Assets and Depreciation
Tangible assets are required to be capitalized at the acquisition cost of each asset, which may
include expenses associated with the acquisition. Minor assets with a cost of 100,000 yen or lessmay be charged to expenses in the year of acquisition. All assets other than land and leaseholdproperty must be depreciated over their useful lives and shown in the balance sheet at cost lessaccumulated depreciation.
For assets acquired on or after 1 April 2007, the limits on asset costs subject to depreciation andresidual values are no longer required. Depreciation may be taken on assets acquired on or after
1 April 2007 up to remainder value (bibo kagaku) of one yen.

The declining balance method is the most popular way of calculating the depreciation charge,
although the straight line, sum of digits and unit of production methods are all acceptable.
Disclosure of the aggregate depreciation for each category of fixed assets must be made in a
supplementary schedule to the financial statements, including the charge and any othermovements in the year. The major categories of fixed assets are land, buildings, leasehold
improvements, plant and machinery, furniture and equipment, vehicles and ships.

9.11 Intangible Assets and Amortization
Patents, trade and service marks, copyrights, software, know-how, goodwill, mining rights andother intangible assets are capitalized and then amortized under the straight line method. The
useful lives to be adopted, varying from three to fifty five years, are set out in the tax law.

9.12 Research and Development Expenses
a. Definition
The range of costs included in research and development expenses had previously been unclear,as there was no authorized accounting standard related to this subject. In March 1998, the BADC
issued a new standard that clarifies the definition of R&D expenses, the accounting method andthe presentation in the financial statements.
36

Research means activities under a certain program with the intention of conducting an
investigation or study of new technologies or materials. Development means the activities ofplanning or designing new products, services or production methods for the realization of theresults of research or other knowledge.
b. Accrual basis
R&D expenses, including all the related costs for personnel, materials, depreciation and indirect
costs must be recorded on the accrual basis. In the past, some R&D expenses, which may berecovered in a future period, have been recorded as deferred assets. Effective April 1, 1999, allR&D expenses are required to be charged to income during the current year and be disclosed in
the financial statements for the accounting period. The amount of research and development costs
charged to income in the accounting period should be disclosed in the financial statements.
c. Software Development
The new accounting standard for software development expenses is summarized as follows:
Client-contracted
software development
Development ofsoftware products to be
sold in the market

Development ofsoftware to be usedinternally

Production costs are charged to inventory until sales
recognition. Sales are recorded based on either the
progress or the completion standards.
Production costs of software up to completion of themaster program shall be recorded as an expense.
After the completion of the master program, it shallgenerally be recorded as an intangible fixed asset andshall be amortized based on the estimated production
copies within the useful life.
Production costs for software developed for internal
use may be recorded as an intangible fixed asset.

37

9.13 Deferred Charges
Company formation costs, pre-operating costs, capital stock issue expenses and other deferredcharges are also amortized under the straight-line method. Useful lives are generally three years,
but immediate write-off is also accepted. Details of additions, amortization charges and balanceson these accounts are shown in supplementary schedules.

9.14 Taxation
Japanese corporations pay national corporation tax, local inhabitant tax (which is levied as apercentage of the national corporation tax), and local enterprise tax. All these taxes are based on
the corporation's profits. Taxable income is derived from the book income with some additions
and deductions. Typical permanent differences are:• national corporation and inhabitant taxes• entertainment expenses (an allowance of ¥8 million is available to smaller corporations)• donations, except for approved charity contributions• director's bonuses and excessive director's salary
Temporary differences, which may reverse over time, are:• inventory write-downs that are only allowable when the inventory is sold• provision for bad debts in excess of tax limits• accelerated depreciation and amortization in excess of the tax limits• accrued expenses in excess of the tax limits• accrued enterprise tax that is only deductible when paid
• tax reserves provided as an appropriation of retained earnings
Tax effect accounting has also been applied in interim non-consolidated financial statements andinterim consolidated financial statements for interim accounting periods commencing on or after
1 April 2000.

9.15 Retirement Benefit Plans
It is customary in Japan for an employer to have a retirement benefits plan for its employees.
Under the plan, an employee is entitled to receive a lump-sum retirement benefits payment at the
mandatory retirement age or at the time of the employee’s voluntary severance. The amount ofthese benefits may be determined based on reason for retirement, length of service and basic salary
at retirement.
The Japanese GAAP takes a similar approach to recognizing and measuring retirement benefit
costs/obligations as IAS 19 (1998) Employee benefits. However, some differences in specifictreatments are noted. The following are the most significant:38(1) IAS 19 addresses various types of employee benefits, including short-term and long-term postemployment benefits; the Japanese GAAP specifically focuses on post-employment benefits.
In addition, IAS 19 deals with defined benefit plans as well as defined contribution plans. The
Japanese GAAP deals only with defined benefit corporate pension plans.
(2) As to accounting for actuarial gains and losses, IAS 19 adopts the “corridor approach” bysetting a permissible limit for the resulting calculation difference. The Japanese GAAP applies
the materiality rule to determine the basis of actuarial assumptions.
(3) Prior service costs for vested active employees and retirees are recognized immediately under
IAS. Under the Japanese GAAP, past service liabilities should be amortized over a certain
number of years, within the average remaining service period, and recognized as expenses ineach period.
(4) IAS 19 retires the use of a discount rate based on the current rate of return on high-quality
fixed-income investments (bonds); the Japanese GAAP requires that the discount rate be
determined by taking into consideration fluctuations in the yield of bonds over approximately
five years.

9.16 Leasing
There are several types of lease and hire-purchase transactions in Japan. They are classified into
three categories in accounting: operating lease, financial lease and purchase. An operating leaseis normally for a short period of time and is cancelable without any penalties. A financial lease isfor the period of the useful life of the asset and is non-cancelable so that the cost of the asset will
be fully paid out by lessee. The definition of financial lease is prescribed in the tax regulations.
Transactions other than operating or financial leases could be classified as a purchase.

9.17 Capital and Reserves
Capital accounts consist of the stated capital, additional paid in capital and retained earnings.
When new stocks are issued, then, as a minimum, their aggregate par values shall be recorded in
the stated capital. When new stocks are issued at above the par value, up to half the subscription
amount can be classified as additional paid in capital. The additional paid in capital is transferredto the stated capital in the event of stock splits or free share distributions (bonus issues).
A legal reserve must be set up as an appropriation of retained earnings. An amount equal to 10%
of cash dividends must be transferred to the legal reserve until the reserve balance reaches 25%of the stated capital. Both the legal reserve and the additional paid in capital may be used in order
to eliminate accumulated losses, if an appropriate resolution is passed by the shareholders.
Director's bonuses are accounted for as an appropriation of retained earnings rather than as an
operating expense, as this is not allowed for income tax purposes. Various tax reserves, such as

39

reserves for the special depreciation of assets, deferred capital gains and overseas investment
losses, are provided as an appropriation of earnings in accordance with the tax law.
Appropriations of retained earnings are subject to approval at the annual shareholders' meeting,although an interim dividend and the related transfer to the legal reserve is determined by the
Board of Directors.

9.18 Foreign Currency Transactions
Foreign currency transactions are recorded in the books using the exchange rate ruling at the timeof the transactions. At year-end, short-term monetary items are translated at rates ruling on thebalance sheet date, although long-term assets and liabilities may remain at historical exchange
rates. However, when there are significant exchange losses in connection with long-term assets
and liabilities, they should be translated at current rates ruling on the balance sheet date.
Differences arising from these transactions are recognized as exchange gains or losses in thecurrent period.
When the financial statements of foreign subsidiaries are consolidated, monetary assets andliabilities are translated at current rates although equity capital accounts are translated at historicalrates. Companies may choose average rates during a business term or closing rates for thetranslation of profit and loss accounts. Exchange differences arising in the consolidation arerecorded in the Foreign Currency Transaction Adjustment Account, which is shown in the balance
sheet.

9.19 Treatment of Government Grants
Although accounting principles suggest that government grants should be credited to income, theCompanies Act requires such grants to be deducted from the acquisition cost of the related assets.
The amount of the grants deducted is normally disclosed in the notes to the financial statements.

9.20 Unusual and Prior Period Items
A special gains and losses section is presented under the operating income section. Items to bereported in the section are not necessarily similar to extraordinary items reported under US, andother, accounting standards. Examples are:••losses on the closure of specific businesses or factories
extra depreciation charged due to a shortened useful life of the assets•

reversal of accruals in excess of the actual costs

9.21 Related Party Transactions
The accounting standards address related party disclosures from the viewpoint of ensuring theinternational convergence of accounting standards, taking into consideration such matters as acomparative analysis between the current rules associated with the Securities and Exchange Law
40

(the Regulation for Financial Statements and the Regulation for Consolidated Financial
Statements) and International Financial Reporting Standards and the US generally accepted
accounting principles.

Scope of Related parties
Jointly controlling investing entities of the entity preparing the financial statements (any entities
that jointly control the entity preparing the financial statements) and jointly-controlled entities(any entities that are controlled jointly by the entity preparing the financial statement (which, forconsolidated financial statement purposes, are included in its consolidated subsidiaries ) and anyother independent entities) are prescribed in the “Accounting Standard for Business Combinations”
and are, in accordance with the revised rules associated with the Securities and Exchange Law,
clearly specified as falling under “other related entities” and “affiliates,” respectively.
In the disclosure items under the current rules associated with the Securities and Exchange Act,the accounting standards also require information on the provision for the future credit losses andon actual credit losses, etc., as information concerning doubtful receivables and uncollectible
receivables in connection with transactions with related parties (refer to paragraph 10(8) of the
Accounting Standards).

9.22 Segmental Reporting
Since May 1988, segment information has to be disclosed in the Japanese GAAP.
The Standard and Guidance adopts the management approach adopted in IFRS and GAAP in the
United States as the segment reporting method.
Disclosures about the segments of an enterprise and related information are required to provide
proper information on the nature of various business activities in which it is engaged and theeconomic environments in which it operates, so that the users of financial statements canunderstand the enterprise’s performance and properly evaluate future cash flow predictions.

9.23 Commitments and Contingencies
Contingencies and commitments are required to be disclosed in the accompanying notes. These
include guarantees of indebtedness, letters of credit, notes discounted at banks, purchasecommitments and lease installment payments.

9.24 Price Level Changes
All financial statements must be prepared under the historical convention and there are no inflationaccounting requirements.

41

9.25 Accounting for Smaller Entities
There are no special accounting principles for smaller entities in Japan.

9.26 Accounting for Asset Retirement Obligations
There was no specific standard to guide the accounting treatment for the retirement(decommissioning) of fixed assets in the Japanese GAAP before 2008, though there were special
cases such as the accounting for nuclear power plant decommissioning costs by electric utilities
as provisions in practice. To improve the accounting standards for better information provision,
the Accounting Standards Board of Japan (ASBJ), taking into consideration the need forconvergence with the International Accounting Standards, initially issued accounting standards
for asset retirement obligations in March 2008.
The standards were applied to the fiscal years commencing on or after 1 April 2010.

Chapter 10 Company Taxation
10.1 Corporate Taxes
a. Taxable entities
Resident companies
Resident companies (those corporations that have their registered head offices in Japan) aretaxable on their worldwide income and capital gains.
Non-resident companies
Non-resident companies are basically taxable on income derived from sources within Japan.
These are subject to corporation tax on the aggregate of income from the above business. From
the utilization, sale or disposal of assets located in Japan, rental income arising in Japan, and suchparts of any income derived from interest, dividends, royalties, etc., as are attributable to theirbusiness in Japan. If they are not attributable, the gross income arising is subject to a flat 20%
withholding tax or such other rate as is laid down in the relevant tax treaty.
Any other non-resident companies are normally taxable only on the aggregate of the income fromthe utilization, sale or disposal of an asset in Japan, professional fees, occasional income and rent.
Income such as interest, dividends, royalties, etc., is subject to a flat 20.42% withholding tax,
unless the rate is reduced by tax treaty provisions.
The taxable income of non-resident companies is, in principle, subject to the same rules and tax
rates as those applied to resident companies.

42

b. Tax year and filing requirements
The financial year of a company may be any fixed twelve-month period provided in the company's
Articles of Incorporation. Tax returns shall be filed and taxes shall be paid within two months
after the financial year’s end and companies with fiscal periods exceeding six months are
generally required to file interim tax returns for the first half year and make provisional tax
payments within two months after such a period ends. A one-month extension for tax filing andpayment is normally granted.
c. Blue tax returns
A company that maintains a proper standard of accounting records may apply to the tax authorities
to use a blue tax return (as opposed to a white tax return). Certain privileges are then available,
including the net loss carried forward and other general tax-deductible provisions. Because of thenature of these privileges, the majority of corporations file blue tax returns.
d. Tax imposed
Taxes imposed on a corporation are the national tax and local taxes. Local taxes consist of theprefectural inhabitant tax, municipal inhabitant tax and enterprise tax. Corporation taxes arechargeable according to the tax year in which their accounting period ends.
Because Japan adopted a declaration system, companies should file tax returns and pay taxes intime by themselves. In the case of a failure to file and pay by the due dates, penalties are imposedby the tax authorities. Further, if any under-declaration of income is found by tax examinations,additional taxes and penalties are levied.

10.2 Tax Rates
a. National tax
The corporation tax rates currently payable are as follows:
From 1 April 2018 to 30 September 2019
Corporations with issued share capital of more than
100 million yen

23.2%

Corporations with issued share capital of 100 million yen or less
For a taxable income of more than 8 million yen

23.2%

For a taxable income not more than 8 million yen

15.0%

Local corporation tax
Tax base Corporation tax before credits such as the income tax credit or foreign tax credit
Tax rate

4.4%43

On or after 1 October 2019
Corporations with issued share capital of more than
100 million yen

23.2%

Corporations with issued share capital of 100 million yen or less
For a taxable income of more than 8 million yen

23.2%

For a taxable income not more than 8 million yen

15.0%

Local corporation tax
Tax base Corporation tax before credits such as the income tax credit or foreign tax credit
Tax rate

10.3%

b. Local taxes
Inhabitant tax
Per corporation tax levy
The tax base for the corporation tax levy is the amount of the national corporation tax.
Per corporation tax levy (Tax rate)
From 1 October 2014 to 30 September 2019,
The standard tax rate is as follows:
Prefectural inhabitant tax

Municipal inhabitant tax

Total

3.2%
(4.2%)

9.7%(12.1%)

12.9%(16.3%)The maximum rate is shown in ( ). Almost all prefectures apply the maximum tax rate inpractice.
For example, a Tokyo tax authority applied the following tax rate:
Capital amount is more than ￥100,000,000 or
Corporation tax amount is more than ￥10,000,000……………...16.3%
Other corporations…………………………………………………12.9%
On or after 1 October 2019,
The standard tax rate is as follows:
Prefectural inhabitant tax

Municipal inhabitant tax

Total

1.0%
(2.0%)

6.0%(8.4%)

7.0%(10.4%)

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Per capita tax levy
Additional local per capita tax is also payable, depending upon the amount of issued sharecapital and the number of employees.
Enterprise tax
Tax base and tax rate
From 1 October 2014 to 30 September 2019,
The standard corporate enterprise tax rates are as follows:(1) Corporations doing business as electric power suppliers,
insurers……………………………..0.9% of their gross proceeds

gassuppliers

Note: On or after 1 October 2019, the rate of 0.9% will be increased to 1.0%.
(2) Other corporations:(a) Ordinary corporations with capital amounts over 100,000,000 yen
The income up to 4,000,000 yen annually

0.3%

The income over 4,000,000 yen and up to 8,000,000 yen annually
The income over 8,000,000 yen annually
Per value added
Per capital

0.5%
0.7%
1.2%
0.5%

(b) Ordinary corporations with capital amounts of 100,000,000 yen or less
The income up to 4,000,000 yen annually
The income over 4,000,000 yen and up to 8,000,000 yen annually
The income over 8,000,000 yen annually

3.4%
5.1%
6.7%

(c) Special corporations
The income up to 4,000,000 yen annually
The income over 4,000,000 yen annually

3.4%
4.6%

On or after 1 October 2019, the following changes will take effect:(a) Ordinary corporations with capital amounts over 100,000,000 yen
The income up to 4,000,000 yen annually

0.4%

The income over 4,000,000 yen and up to 8,000,000 yen annually
The income over 8,000,000 yen annually
Per value added
Per capital

0.7%
1.0%
1.2%
0.5%

(b) Ordinary corporations with capital amounts of 100,000,000 yen or less
The income up to 4,000,000 yen annually
The income over 4,000,000 yen and up to 8,000,000 yen annually
The income over 8,000,000 yen annually

3.5%
5.3%
7.0%

(c) Special corporations

45

orThe income up to 4,000,000 yen annually
The income over 4,000,000 yen annually

3.5%
4.9%

Local special corporate tax
Local special corporate tax is levied on all corporations that are liable to pay corporationenterprise tax. The tax amount is computed on the basis of income or gross proceeds. Local special
corporate tax is separated from the specified portion of enterprise tax.

c. Effective corporation tax rate
The normal effective corporation tax rate combining the national and local taxes is approximately
30.62% in Tokyo for a corporation with more than 100 million yen of stated capital.

d. Extra taxes
For a specified family company, additional income taxes are levied on undistributed income lessallowances (the minimum 20 million yen).
Aggregate tax rates are:For undistributed taxable income of less than 30 million yen:

10%

For undistributed taxable income of 30 to 100 million yen:
For undistributed taxable income of more than 100 million yen:

15%
20%

A family corporation is defined as a corporation in which 50% or more of the entire capital stockis owned by one shareholder and person or corporations connected with them.

10.3 Income Subject to Tax
a. General rules
Corporation tax is levied on the net income of each accounting period (measured under generally
accepted accounting principles), as adjusted in accordance with the requirements of the general
tax laws.
Within specified limits, foreign taxation imposed on a domestic Japanese corporation is creditablefrom the Japanese national and local tax liabilities.
In order to be able to fully take advantage of certain tax concessions, corporations should register
under the Blue Tax Return Scheme. Once registration is obtained, subsequent renewal is not
required.

46

b. Taxable income
The tax base for taxable income is the corporation’s net income for each business year. Net
income is the excess of “gross income” over “total costs” for each business year.
Though the tax laws require or allow some adjustment of corporate profits calculated inaccordance with generally accepted accounting principles in reaching the taxable income, thecalculation of corporate net income generally follows normal accounting principles and practice.
c. Gross income
Transactions giving rise to gross income are follows:(1) Sales of assets (sales of goods, products, etc).
(2) Transfer of assets (transfer of assets such as securities and fixed assets, etc).
(3) Provision of services (contracts and the provision of the services).
(4) Free transfer of assets or the provision of services.
(5) Free reception of assets.
(6) Other transactions (interest on deposits, interest on loans and other sources).
d. Special stipulations
Those items of gross income that accrue from transactions by corporations and which are
stipulated to be excluded from the gross revenue by special provisions and regulations are notincluded in the gross income.
Examples of exclusions from the gross income include dividends received, increases in the bookvalue of assets, and tax refunds.
e. Dividends received (exclusion from gross income)
Dividends received by domestic corporations from other domestic corporations, less the interest
chargeable to the shares on which those dividends ((2) only) were paid, are excluded from grossincome in computing the amount of ordinary income.
The exclusion ratios from the dividends are as follows;(1) 100%, if it owns shares more than 1/3 of those issued by the corporation(2) 50%, in case other than (1) and (3)(3) 20%, if it owns shares 5% or less of those issued by the corporation
If dividends are received on shares which were acquired within one month prior to the end of thebusiness year of the issuing corporation and sold within two months after the end of the samebusiness year, those dividends are not excluded from gross income.
f. Revaluation profits (exclusion from gross income)
Profits from the revaluation of an asset are excluded from gross income, regardless of whether or
not the new book value of the asset is its fair market value.
However, the following types of revaluations are exceptions for tax purposes and the revaluation
profits are included in the gross income:47

(1) Revaluations of assets in accordance with the Corporation Reorganization Law or the Civil
Rehabilitation Law; and(2) Revaluations of stock by an insurance company, based on the Insurance Business Law.

10.4 Deductions
a. General rules
Costs and expenses incurred by corporations in the conduct of their business are generally
deductible for tax purposes. Some less business-related expenses are partly or entirely disallowed
as deductions.
b. Total costs (business expenses)
A corporation’s “total costs” (or business expenses) for a business year are used to determine thenet income. Total costs are categorized as follows:(1) Costs of acquisitions, costs of completed construction work, and other costs corresponding
to the gross income derived in the business year under review.
(2) Besides those mentioned above, sales expenses, general administrative expenses and otherexpenses accrued in the business year under review.
(3) Losses incurred in the business year under review accruing from transactions other thancapital transactions, etc.
c. Costs“Costs” include the outlays needed to derive gross income, such as the cost of buying
commodities sold, the cost of manufacturing products sold, fixed assets acquired, transfer costsof securities, the costs of construction work, contract costs, etc.
d. Expenses“Expenses” include various expenditures incurred in the business year including selling expenses,
etc. Expenses that have not become payable in that accounting period are not recognized as
expenses except for depreciation. Usually a corporation sets aside money to cover expenses if
the cause of a liability has come into being, even if the liability itself has not been established.
Under the tax law, amounts set aside as security for such expenses are not recognized except in
the case of *special stipulations, such as bad debt reserves, etc.
*Special stipulations
The above-mentioned costs, sales expenses and other expenses, as well as those that are notnormally regarded as expenses such as losses, or which have been specifically stipulated bylaws and regulations as deductible expenses, are included in expenses under the Corporation
Tax Law.

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e. Depreciation and amortization
1. Depreciable assets
The corporation tax law permits the deduction of a reasonable allowance for the exhaustion orwear and tear of depreciable assets, tangible or intangible, within the limits allowed as expenses
for the accounting purposes of the corporation.
Depreciable tangible assets include all kinds of tangible fixed assets (excluding land, objects ofart, etc.). For example, buildings structures, machinery and equipment, vessels, airplanes,
vehicles, tools, etc., are depreciable.
Depreciable intangible assets are enumerated in the laws and regulations. These include
intangible property such as patents, trademarks, mining rights, fishing rights, goodwill, etc.
Methods of depreciation are shown in 10-4-e-2. However, acquisition costs for minor assets(excluding those on a lease in a foreign country) may be simply deducted as follows:(1) In the case of an asset whose acquisition cost is less than ¥100,000 per unit, it may be
immediately deducted as expenses in the business year of acquisition(2) In the case of an asset whose acquisition cost is greater than ¥100,000 but less than ¥200,000
per unit, the total cost of the assets acquired in the business year may be deductible eachbusiness year in equal amounts over three years.
(3) Certain corporations** can deduct as expenses acquisition costs as a lump sum within alimit of ¥3,000,000 for depreciable assets of less than ¥300,000 at purchase during April 1,
2006 through March 31, 2021.
** Certain corporations; those whose capital is ¥100 million or less, etc.
2. Method of depreciation
The depreciation deduction should be computed using one of the following main methods:(1) Reducing balance method
The depreciation base is reduced each year by the amount of the depreciation deduction
and a certain amount of the rate is applied to the resulting balance.
(2) Straight line method
A certain amount of the rate is applied to the acquisition costs of the depreciable assets.
The acquisition costs less the memorandum value are deductible each business year inequal amounts over the useful life applicable to the depreciable assets.
g. Bad debts reserve
When a corporation credits a certain amount to the bad debts reserve account in a particularbusiness year, the credited amount is deductible, within a definite amount, in computing theincome of that business year.
*This is not applicable to a corporation in a 100 percent group if the capital of the parent company
is ¥500 million or more.

49

h. Losses due to changes in the book value
The computation of taxable net profits usually ignores any change in the book value of the assets
held by a corporation, whether or not such a change in the book value reflects a change in themarket value.
Loss due to the revaluation of an asset is excluded from the total costs for tax purposes. However,this principle does not prevent a reduction in the book value of assets when they have been
severely damaged by floods, earthquakes, etc., or when their value has diminished due toobsolescence, or when a change in the book value is necessary under the Corporation
Reorganization Law, etc.
i. Royalties
Royalties payable are allowed as a normal business expense.

10.5 Specifically Non-Deductible Expenses
a. Taxes and fines
The national corporation tax, prefectural inhabitant tax, municipal inhabitant tax, penalties, fines,
etc., are not deductible.
b. Entertainment expenses
From accounting periods beginning on or after April 1, 2014, entertainment expenses exceeding
50% or more of those spent for eat and drink are not deductible, even though such expenses arenecessary for the conduct of the business (SM 61-4).
However, corporations*** whose capital is ¥100 million or less are able to choose to deduct as
expenses 100% of entertainment expenses, up until ¥8 million instead of the 50% deduction
described as above.
*** This is not applicable to a corporation in a 100 percent group if the capital of theparent company is ¥500 million or more.
c. Salaries and bonuses for the directors
Salaries paid to the employees of a corporation are deductible expenses of the corporation not
only for accounting purposes, but also for tax purposes.
However, salaries not paid periodically to the director of a corporation are not deductible for tax
purposes. An unreasonably high salary paid to a director of the corporation is also not deductible.
When the amounts of such salaries have been determined in advance in a shareholders’ general
meeting or in the Articles of Association of a corporation, etc., the part of the salaries that exceeds
the amount determined is treated as the non-deductible excess. Bonuses paid to a director are also
not deductible.
5010.6 Net Losses
If the taxable income for a given business year shows a net loss, the net loss may, at the optionof the corporation, be carried back to the preceding year or carried forward ten years (nine years
for loss incurred in accounting periods beginning on or before April 1, 2018).
If the corporation selects to carry back the net loss to the business year beginning within one year
before the start of the present business year, the tax on the taxable income for the past businessyear is refunded fully or partially.
If the corporation does not elect to carry back the net loss, the net loss is carried forward and isdeductible from the income of each business year beginning within ten years after the start of thepresent business year.
Deductible amount for the net loss carried forward
Corporations**** whose capital is ¥100 million or less
100% of the amount of taxable income in each business year
Corporations whose capital is ¥100 million or more
Accounting periods beginning between April 1, 2012 and March 31, 2015 … 80%
Accounting periods beginning between April 1, 2015 and March 31, 2016 … 65%
Accounting periods beginning between April 1, 2016 and March 31, 2017 … 60%
Accounting periods beginning between April 1, 2017 and March 31, 2018 … 55%
Accounting periods beginning on or after April 1, 2018………………………50%****This is not applicable to a corporation in the 100 percent group if the capital of its parent
company is ¥500 million or more.

10.7 Taxation on Transactions within a 100% Group
1. Taxation on the transfer of assets within a 100 percent group
Capital gains from the transfer of certain assets within a 100 percent group are taxable by theseller when the assets are sold outside the group, etc.
Note:
A 100 percent group means a group of companies that owns 100% of the shares of the othercompanies in the group directly or indirectly.
2. Tax treatment of donations within a 100 percent group
Donations within a 100 percent group are not treated as expenses as a donor nor income as adonee.
3. Capital transactions within a 100 percent group(1) When applying the dividend received deduction rule to the dividend paid within a 100
percent group, a deduction of interest corresponding to the dividend is not required.

51

(2) The transfer of shares to the issuing company of the shares within a 100 percent group is nottaxable.
4. Application of special tax treatment to a 100 percent group
Special tax treatment, as mentioned below, is applicable to a corporation whose capital is ¥100
million or less and shall not be applicable to a corporation in a 100 percent group if the shares of
the corporation are owned by two or more corporations whose capital is ¥500 million or more.
(a) Reduced tax rate(b) Non-application of additional taxation for retained earnings in a family corporation(c) Fixed amount deduction for entertainment expenses(d) Refund of the tax by the application of a loss carry-back(e) Deduction of Allowance for bad debts reserve10.8 International Aspects
a. Tax haven legislation
The anti-tax haven legislation was introduced in 1978 and since then a number of amendments
have been made. Under this legislation, the undistributed income of a foreign subsidiary whose
tax burden on its income is less than 20% is considered as a domestic corporation. The attribution
as a domestic corporation occurs when it owns directly and/or indirectly 10% or more of the total
stock of the foreign subsidiary, and more than 50% of the total stock or the voting power of thesubsidiary is owned directly and/or indirectly by domestic corporations and residents. These
measures are not applicable, however, if the foreign subsidiary satisfies all of the four criterion
below:(1) Substance criterion
The substance criterion is satisfied if the Designated Tax Haven Subsidiary has an office,store, factory, or other fixed facility in the jurisdiction where its head or the main office islocated or registered and such a facility is deemed to be necessary for it to conduct its main
business there. If a Designated Tax Haven Subsidiary conducts two or more businesses, its
main business is determined based on the facts and circumstances, taking into considerationsuch factors as (1) revenues, (2) income, (3) number of employees and (4) fixed assets.
(2) Local Management and Control Criterion
The local management and control criterion is satisfied if the Designated Tax Haven
Subsidiary itself manages and controls its main business in the jurisdiction where its head or
main office is located or registered.
(3) Active Business Criterion

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The active business criterion is satisfied if the main business of the Designated Tax Haven
Subsidiary is other than (1) holding debt or equity securities (such as a holding company),(2) licensing of industrial property rights, other technical rights, or copyrights (such as apatent holding company), or (3) the leasing of ships or aircraft.
(4) Business with unrelated persons criterion and Local Country Business Criteria
Depending on the type of business the Designated Tax Haven Subsidiary is engaged in, it
must satisfy either the business with unrelated persons criterion or the local country businesscriterion.
(a) Business with unrelated persons criterion
If the main business of the Designated Tax Haven Subsidiary is a specified business, morethan 50% of the business must be conducted with unrelated persons. Specified businesses
include wholesaler trade, banking, trust companies, securities, insurance and marine or airtransport businesses.
(b) Local country business criterion
If the main business of the Designated Tax Haven Subsidiary is retail sales, manufacturing,
services, real estates, personal property leasing, construction, land transport, agriculture,
forestry, fisheries, mining, or any business other than those covered by the criterion of abusiness with unrelated persons, the Designated Tax Haven Subsidiary may satisfy the local
country business criterion by conducting its business mainly in the jurisdiction, including thewater zones of such a jurisdiction, where its head or main office is located.
Regional Headquarters Companies
Effective for the tax years of the Designated Tax Haven Subsidiaries beginning on or after 1 April
2010, the local business exception is extended to the shares of a tax haven subsidiary that is aregional headquarters company (tokatsu kaisha). For this purpose, a designated tax havensubsidiary is a regional headquarters company if:(1) its shares are owned, directly or indirectly, 100% by the Japanese shareholder(2) it owns directly at least 25% of the shares (including the voting shares) of two or more
controlled foreign companies that carry on an active or substantial business in the country
where their head or main office is located, and(3) it actively conducts the business of its controlled foreign companies through a fixed place ofbusiness and with sufficient employees in the country where it is located.
b. Transfer pricing taxation
In order to deal with transfer pricing problems, and to realize fair and legitimate taxation in thefield of international transactions, transfer pricing taxation provisions were introduced in 1986 inJapan.

53

In the event that a corporation has conducted the sale or purchase of assets, the provision ofservices, or other transactions with a foreign affiliated company and if the amount of considerationin such transactions is not an arm's length price, and if this results in a reduction of the income of
the corporation, the transactions shall be deemed to not have been carried out at an arm's length
price for the purpose of determining the corporate income taxation liability of the corporation. A
foreign affiliated company refers to a corporation that has one of the following special
relationships with the said corporation:• A relationship in which either of two corporations owns, directly or in directly, 50% or more of
the total number of issued shares of the other corporation.
• A relationship in which 50% or more of the total number of issued shares of two corporations is
owned, directly or indirectly, by the same company.
• A relationship in which a director represents (or a number of directors together represent) atleast 50% of the directors of one corporation and, concurrently, that the director is a director or
employee (or those directors are directors or employees) of another corporation.
• A relationship in which a considerable portion of the business that one corporation conducts isreliant upon transactions with another corporation, or a relationship in which one corporation
procures a considerable portion of the funds necessary for its business activities by borrowing
from another corporation, or by receiving guarantees from that corporation.
The arm's length price shall be deemed to be the amount that is computed in accordance with thefollowing methods depending upon the types of transactions:Comparable uncontrolled price method: a price that would be determined by an unrelated seller
and buyer of the same kind of property under conditions involving similar levels of transactions.
Resale price method: determined by deducting a normal amount of profit from the price at which
the inventory is resold to a person who is not a specially-related person.
Cost plus method: determined by adding a normal amount of profit to the amount of the costs
incurred by the seller to acquire the inventory in question by purchase, manufacture, or by otheracts.
Discounted cash flow method: a method used to determine arm’s length prices when comparable
transactions cannot be found. A fair discount rate is used to estimate the value of the future
expected cash flows arising from the asset that was transferred to see if this value is at an arm’s
length price
Other methods: Other methods may include combinations of the above methods or the profit
split method.
The difference between the actual amount of the consideration in the transaction, which is subject
to the transfer pricing provisions, and the arm's length price as prescribed above shall not be
deductible for the purpose of computing the taxable income.

54

In the event that the tax authorities make a request, the corporation shall provide records or books,
or copies thereof, and if further necessary, the records and books of the foreign affiliated company.
If the corporation does not provide this information, the authorities determine the taxable income
by presuming such an amount to be the arm's length price that is computed in accordance with amethod listed above. This is done by taking as the basis the gross margin ratio of the businessactivity of similar corporations.
A corporation shall, in the event it has conducted transactions with a foreign affiliated company,
attach to its tax returns a document that contains the name and location of the foreign company,
its transaction volume, gross income, etc., as prescribed by a Finance Ministerial Order.
Adjustment with respect to transfer pricing taxation can be made by the tax authorities for sevenyears after the lodgment of the tax returns.
In cases where transfer pricing taxation was applied to one of the related companies, the resultant
upward revision of its income may give rise to double taxation on those two related companies,
taken as a single economic entity.
A downward adjustment of the income of the counterpart company to eliminate such double
taxation is generally called "the correlative adjustment". Japan has a policy of making suchcorrelative adjustments to its enterprises when a mutual agreement with the tax authority in the
country of the counter party has been reached under a tax treaty.
Effective for the tax years beginning on or after 1 April 2020, Price adjustment measures will be
introduced for transactions of hard-to-value intangibles.

c. Thin capitalization
When a foreign-owned Japanese corporation or a Japanese branch of a foreign corporation raises
funds from its parent corporation or its head office, the domestic tax burden of the corporate groupcan be reduced artificially by substituting debt finance for equity finance. This is because thepayment of interest can be deducted from the taxable income for corporation tax, while thepayment of dividends cannot. This form of international tax avoidance is known as thincapitalization. The purpose of thin capitalization rules is to prevent foreign or foreign-owned
corporations from reducing their tax burden through this type of capitalization. The rules were
implemented in Japan in 1992.
If a corporation's debt to its foreign parent corporation exceeds 300 percent of the share capital
paid-in by such a foreign corporation, an interest payment corresponding to the excess portion of
the debt will be disallowed as a deduction for tax purposes, provided that the ratio of thecorporation's total debt to its total equity exceeds 300 percent.
Foreign-related corporations are defined as non-resident individuals or corporations who directly
or indirectly own 50 percent or more of the total equity of the corporation in question, who control

55

the corporation in other ways that constitute effective control, or who are controlled by the same
persons who control the corporation.
The corporation's debt to its foreign-related corporations is limited to interest bearing debt. In
cases where foreign-related corporations have a permanent establishment in Japan, the amount ofinterest that is subjected to corporation tax as the income of the permanent establishment will not
be included in the interest payment in the above formula, provided that the liability for corporation
tax is not reduced or exempted under the tax treaty.
If the corporation proves that its debt/equity ratio is reasonable in comparison with the ratios ofother corporations of a similar size and conducting a similar business, such an ordinary ratio will
be used in applying the thin capitalization rules instead of the 300 percent ratio.

d. Earnings Stripping Rules
Earning stripping will be disallowed as a deduction for tax purposes for net interest
payments in excess of 20 percent of adjusted taxable income.
However, these rules shall not apply in the case that the amount of net interest payments
does not exceed 20 million yen or if total ratio of group net interest payments to groupadjusted income is 20% or less.
The disallowed amounts can be carried forward for 7 fiscal years and deducted in a fiscal
year in which net interest payments do not exceed 20 percent of adjusted taxable income
until the 20 percent of adjusted taxable income threshold is reached.

e. Foreign tax credit
Japanese domestic corporations that pay foreign national or local taxes based on income may takea credit against Japanese Corporation Tax subject to the limitations under the foreign tax credit
rules.
Deduction or credit
A Japanese domestic corporation may elect to take a credit or deduction for foreign taxes incurred
during the taxable year. If the credit is elected, no deduction is allowed for any creditable foreigntaxes.
Creditable foreign taxes
A credit is allowed only for foreign taxes on income, including excess profits taxes, taxes on theincome or a part of the income but which are assessed based on receipts or similar amounts, andtaxes on income that are collected based on receipts for the convenience of tax collection. Taxes
on income that are assessed based on receipts are commonly found in oil-producing countries andcountries with substantial agricultural exports. Withholding taxes on interest, dividends and56royalties are examples of taxes on income that are collected based on receipts for the convenienceof tax collection. Value added taxes and penalty taxes do not qualify for the credit.
The foreign tax credit limitation
The Japanese foreign tax credit limitation is designed to prevent foreign taxes in excess of thecorresponding Japanese tax amount from being used to reduce the Japanese tax on domestic
income. The limitation is based on the taxpayer’s overall foreign income and tax; separate country
limits are not used. The amount of foreign taxes for the current tax year that a Japanese taxpayer
can take as a credit is equal to the lesser of:● the creditable foreign tax amount incurred during the year, or● the amount of the foreign tax credit limitation.
Carryovers of foreign tax credit benefits
Taxpayers may carry forward for three years the national and local tax foreign tax credit limitation
amounts that are not used in the current taxable year. Taxpayers may also carry forward for three
years excess creditable foreign tax amounts.
f. Foreign dividend exemption system
Effective for the tax years beginning on or after 1 April 2009, the indirect foreign tax credit has
been replaced by a system of exempting 95% of foreign dividends from the income of the Japanesecompany shareholder. Only 95% of dividends are eligible for exemption under the assumptionthat approximately 5% of the dividends represent expenditures associated with the shareholding.
To qualify for the exemption, the Japanese company must have owned directly at least 25% (orany lower percentage applicable to the qualification of dividends for indirect foreign tax credit
under an income tax treaty between Japan and the country of residence of the company paying
the dividend) of the outstanding shares of the foreign corporation for at least six months prior to
the date the dividend is declared. No deduction or credit against Japanese tax is allowed for foreigntaxes, including withholding taxes, paid on the 5% of the dividends not eligible for exemption.

Chapter 11 Taxation of Individuals
11.1 Taxable Individuals
a. Residents
Individuals are deemed to be resident if they have a domicile in Japan or have resided continuously
in Japan for one year or more up to the current date. There are two categories of residents:
Permanent residents
A permanent resident is one who is domiciled in Japan either as a citizen of Japan or someone
who has domicile or residence in Japan for an aggregate period of more than five years within thelast ten years.
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Non-permanent residents
A resident of non-Japanese nationality who has had domicile or residence in Japan for an
aggregate period of five years or less within the last ten years is classified as a non-permanent
resident.
A non-permanent resident is assessed on Japanese sources of income and on any other income
from outside sources that is paid in or remitted to Japan.
b. Non-residents
An individual who does not fall into either of the above categories is deemed to be a non-resident
and is only liable to pay income tax on Japanese sources of income, regardless of where theincome is paid. However, many tax treaties exempt from Japanese tax the employment income ofa non-resident who works in Japan for an aggregate period of less than 183 days during a calendar
year or in any twelve month period commencing or ending in the taxable year concerned.
c. Domicile
A domicile is defined by the Japanese Civil Code as the base for one’s living. An individual’s
domicile is to be determined by the objective facts and no one individual is deemed to maintaintwo domiciles simultaneously. If the domicile cannot be determined, the person’s residence istreated as the domicile. A dual national of Japan and another country will be presumed by the tax
office to not reside permanently in Japan.

11.2 Taxes on Income
Introduction
Under the Income Tax Law, taxable income is classified into the following eleven categories inaccordance with the nature of the income, taking into consideration the taxable capacity as wellas the convenience of computation;(a) Employment income(g) Pensions and annuities(b) Business income(h) Temporary income(c) Capital gain(i) Forestry income(d) Dividend income(j) Exempt income(e) Interest income(k) Foreign source income(f) Rental income
The income tax is to be primarily assessed on the basis of the aggregate income, regardless of thenature and type of income. Individual taxpayers are liable to pay income tax on their total income
earned during the calendar year concerned.
Retirement income and forestry income, however, are taxed separately from other sources ofincome under the Income Tax Law. Interest income is taxed separately from other sources ofincome under the Special Taxation Measures Law. Dividends and capital gains are or may betaxed separately from other sources of income as well.

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Local inhabitant tax is assessed in full by both the prefecture and the municipality on an individual
who is resident in Japan on January 1st in any year and is based on the individual's income reported
for national income tax purposes in the previous year. In view of this, careful consideration should
be given by taxpayers as to the timing of their permanent departure from Japan. For practical
purposes, both prefectural and municipal taxes can be treated as components of one system of
local inhabitant tax.
Enterprise tax is only applied to certain business income as reported for national income tax
purposes in the previous year.
a. Employment income
This includes salaries, wages, bonuses and allowances. Allowances are normally treated at fullvalue as taxable benefits in kind and include overseas living allowances, those for the provisionof children's education, company cars, free utilities and accommodation. If an employee pays tohis/her employer an amount calculated as the 'economic rent' for the accommodation (which isnormally a fraction of the market rent), no taxable benefit will arise. Otherwise, the taxable benefit
is the value of the 'economic rent', except for directors in which case it is normally 50% of themarket rent. For some other allowances, a deduction is available in respect of the attributablebusiness element.
Employer's social security contributions and contributions to approved pension funds are tax
exempt. Some other benefits such as a commutation (office - home) allowance (there is an amountlimit at a level appropriate for the commuting distance), meal expenses for overtime work, andsubsidies to employees' recreational parties or trips for not longer than four nights, including
overseas trips, are tax free in general.
For expatriates working in Japan, the salary income in respect of services performed in Japan istreated as being a Japanese source of income regardless of where, by whom, or in which currency
the payment is made. A pro-rata deduction from total receipts in Japan is available for any days
spent working outside Japan if the person is not a permanent employee. Moving expenses andhome leave transportation once a year are generally tax free.
Taxable employment income is ordinary assessable income as explained above, less anemployment deduction. Employment income deductions are calculated as below: (Unit: thousandyen)Gross salary income

Employment deduction

Under

1,625

550

1,625 to1,800

Receipt õ40% - 100

1,800 to3,600 to6,600 to
Over

3,600
6,600
8,500
8,500

Receipt õ30% + 80
Receipt õ20% + 440
Receipt õ10% + 1,100
1,950

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b. Business income
Income from a self-employed business or professional activities is classified as business income.
Necessary expenses directly incurred and expended during a tax year for carrying on a businessare allowed in computing the net income arising in that year.
If a taxpayer maintains proper accounting records, he/she may be permitted to submit a Blue Tax
Return rather than a normal White Return. The Blue Return confers significant tax advantages incomputing net business income and also net rental and forestry income. These include thecharging of specified tax allowable general provisions and depreciation allowances, together withgreater flexibility in utilizing tax losses. Furthermore, the blue return allows a special deductionof ¥650,000
Losses arising can normally be offset against other income in a prescribed order, firstly againstrecurring income (such as income from interest, dividends, rentals and employment), secondly
against income of a temporary nature (such as capital gains and occasional income), thirdly
against forestry income and finally against retirement income.
Any net losses remaining may be carried forward for three years or back for one year, provided
that a Blue Tax Return is filed in the year the losses are incurred.
c. Capital gains
Capital gains are treated differently depending on whether they arise from the sale of land andbuildings, the sale of securities or of other assets. Gifts or donations are also normally regarded
as taxable disposals.
Capital gains from the sale of assets other than land and buildings and securities; an allowance ofup to ¥500,000, or the amount of the capital gain, whichever is less is available each year against
short-term gains (on assets held for less than 5 years), with any excess being available to reduce
long-term gains . The net taxable capital gain (the acquisition, installation or improvement in thepast, minus the total of the depreciation cost) that is included in the ordinary income tax
computation comprises the net short-term gains and 50% of the net long-term gains.
Capital gains from the sale of equity securities
In calculating the income amount, the taxpayer can deduct any necessary costs and various
expenses from the proceeds. The necessary costs are computed as the amount of stock or sharesat the end of the year valued by the weight-average method. Capital gains derived from the saleof stock or shares are taxed at the rate of 15.315% (20.315% including local inhabitant tax). A
taxpayer can select the taxation method of withholding income tax for the sale of listed stock orshares.

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Capital gains from the sale of land or buildings
Long-term gains – Where the property sold was held for more than 5 years, as of January 1 of theyear in which the transfer was made, the tax rate on capital gains from the sale of such property
is 15.315% (20.315% including local inhabitant tax). If a property used as a residence that was
sold was held for more than 10 years as of January 1 of the year in which the transfer was made,the tax rate on capital gains from the sale of such a property is 10.21% (14.21% including local
inhabitant tax) on a gain up to 60 million yen and 15.315% with a deduction of 3 million yen(20.315% with a deduction of 3.6 million yen including local inhabitant tax) on a gain over 60
million yen.
Short-term gains - Capital gains arising from sale of land and buildings held for less than 5 years,
as of January 1 of the year in which the transfer was made, are taxed at 30.63% (39.63% including
local inhabitant tax) of such gains.
Taxable gains are the computed gross proceeds, less the acquisition costs and expenses incurredin connection with the transfer less other applicable deductions. The special deductions available
are:Case of disposition

Deduction

Compensation upon expropriation

50 million yen

Sale of residential property

30 million yen

Special land development program

20 million yen

Special housing program

15 million yen

Farmland development program

8 million yen

The aggregate deduction is limited to 50 million yen per taxpayer per year.

d. Dividends
Dividend income includes all distributions of profits, including stock dividends, distributions ofgains by investment trusts and fixed interest amounts paid to shareholders during the first two
years of a company's trading. Dividends from listed shares are subject to a 20% (20.315%
including a special reconstruction tax) withholding tax. Dividends from non-listed shares are
subject to a 20% (20.42% including a special reconstruction tax) withholding tax.
Normally, dividend income is added to other sources of income for the purpose of tax calculation,with credit being given for the withholding tax imposed.

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e. Interest income
Most interest, like dividends, is subject to a 20% (20.315% including a special reconstruction tax)
withholding tax but, unlike dividends, is not presently taxed at higher marginal rates.
Interest and dividends on securities issued outside Japan and paid to Japanese residents through aJapanese paying agent are also subject to a 20% (20.42% including a special reconstruction tax)
withholding tax. Interest receivable on loans made by an individual for business purposes isnormally classified as assessable business income.
f. Rental income
Rental income includes income arising from the lease of land, buildings, ships and aircraft. Allreasonable and necessary expenses, including depreciation and interest, are deductible incalculating the taxable income.
Rental losses are generally allowed to be offset against other sources of taxable income. The
limitation on offset is to be implemented under the land value countermeasures. The limitation isthat the amount of financing cost related to the acquisition of land or the net rental loss, whicheveris less, is not allowed to be offset.
g. Pensions and annuities
At retirement or severance, and employee may be entitled to receive a lump-sum payment and/or
pension annuities from his or her employer or his or her employer’s private pension funds. Only
50% of retirement income, that is the lump-sum payment less a special deduction that is calculated
based on the length of service and/or disability, is separately taxed. However, this special
deduction is not applicable to private pension funds paid to administrators who have been working
for their company for less than five years.
The pension annuities received from the employer’s fund are taxed every year with a special
deduction together with the national pension annuities.

h. Temporary income
Temporary income includes gifts received from a corporation, prizes, and other income of atemporary nature. Expenses paid in order to acquire the income concerned are deductible and anallowance of up to Yen 500,000, or the amount of temporary income, whichever is less, isavailable each year. Only 50% of the amount of temporary income after deducting the allowanceis taxable as a part of the ordinary income amount.
i. Forestry income
Special deductions are allowed from income derived from the sale or transfer of timber that has
been owned for a period exceeding five years.

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j. Exempt income
Exempt sources of income include:• interest from approved employee savings schemes, established for the purpose of a housepurchase or retirement purposes;• interest received, up to specified limits, by elderly or disabled people and widows withdependent children;• academic prizes;• insurance payments for damages
k. Foreign source income
Foreign source income consisting of dividends, interest, royalties and business income arenormally taxed in Japan and the foreign taxes imposed at the source are normally credited against
Japanese tax liabilities.

11.3 Personal Allowances and Deductions
a. Allowances
An annual personal allowance of ¥480,000 is generally available to each taxpayer. An additional
allowance of ¥380,000 is available for each dependent (including a dependent spouse) providingthat the dependent's taxable income does not exceed certain limits. A dependent in this case issomeone who is 16 years old or older as of the date of December 31. If the dependent is between
the ages of 19 and 23 years old, the amount of ¥630,000 can be deducted, taking into consideration
educational expenses. Further allowances are available for elderly, handicapped and widowed
persons.
b. Deductions
Deductions are also allowed for accidental losses, medical expenses, social security
contributions, life and non-life insurance premiums, and donations with some limitations.
c. Losses
Any loss from a source of income, except for losses in income from of dividends, miscellaneous
income (royalties and social security benefits, etc.), security stock transactions and temporary
income, can be offset against any categories of income in the same year under certain conditions.
The net loss can be carried forward for three years if the taxpayer files a blue tax return.
d. Special family rules
Tax is imposed on individuals who have earned income and capital gains. A joint tax return system
is not used in Japan.

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11.4 Tax Rates
a. National tax
The following scale of national income tax rates applies to individual taxpayers for 2015 orafter.
Yen

Rate

Cumulative tax
for each bracket

Up to 1,950,000
5%1,950,000 – 3,300,000
10%
97,5003,300,000 – 6,950,000
20%
427,500
6,950,000 - 9,000,000
23%
636,000
9,000,000- 18,000,000
33%
1,536,000
18,000,000-40,000,000
40%
2,796,000
Over 40,000,000
45%
4,796,000
The above rates are applied separately to each of the four categories of taxable income, which are
ordinary income, forestry income, capital gain and retirement income.
In an effort to secure the financial resources needed for the recovery from the Great East Japan
Earthquake, a special recovery tax (income tax × 2.1%) also applies to employment income earned
during 2013 to 2037.
b. Local inhabitant tax
For all practical purposes, municipal and prefectural local taxes can be considered as a single
component. The local inhabitant tax has been fixed at 10% and the inhabitant tax is on a per capita
basis.
c. Withholding tax
The rate of any withholding tax depends on the category of the income. Dividends and interest are
subject to a tax rate of 20% (20.42% including a special reconstruction tax).Withholding tax tables
for salary and wages and for bonuses are set showing the marginal rate. Royalties, fees to writers,
entertainers, sports players, designers, lawyers, accountants, and other professionals are normallysubject to tax at a rate of 10% (10.21% including a special reconstruction tax) up to 1 million yen
and 20% (20.42% including a special reconstruction tax) over 1 million yen.
The withholding tax rate for overseas payments of dividends, interest and royalties is 20%(20.42% including a special reconstruction tax), unless tax treaties between Japan and the country64

of the recipient provide for lower rates. The salary paid to a non-resident director is subject to tax
at 20% (20.42% including a special reconstruction tax).
d. Tax credits
The following annual credits are available to reduce an individual's tax liability. Although no tax
refund is permitted if total credits exceed the year's tax liability, the excess credits may normallybe carried forward.
• Foreign tax paid or withheld on income from overseas sources.
• Dividends- If there is aggregate taxation of dividend income, in principle, it is possible to deduct
5% or 10% of the amount of the dividend income.
• A tax credit is available for the acquisition of a residential property, subject to restrictions on thesize of the property and the taxpayer's income level, when the taxpayer acquires a new houseand borrows the necessary funds from a public or private financial institution based on a loan
contract in which repayments are made by installments over 10 years or longer. However, recent
government reforms have increased this amount to 13 years, applicable from 1 October 2019 to
31 December 2020. Even if a housing loan is not needed, a tax credit is available whenrenovations are made that meet certain requirements (barrier-free, earthquake resistant, energy
saving, etc.).

11.5 Payment of Taxes
a. Taxable period
Taxes are assessed for the calendar year.
b. Payroll deductions
Withholding tax (national) and inhabitant taxes are deducted by the employer from salaries andwages. The withholding tax is adjusted at the year-end to settle the ultimate national tax liability
for each employee.
c. Estimated payment
All taxpayers with an estimated national tax liability of more than ¥150,000 (after allowing fortax deducted at the source) will be assessed on one-third of that amount, to be prepaid in two
installments, in July and November. The balance of the tax due is payable on the submission of a
final return.
d. Returns and assessment
Each resident individual must file a return before the 15th of March of the following year and onor before the individual’s departure from Japan.
Normally, an employee with gross earnings of less than ¥20 million (subject to a tax deduction atsource) and with other taxable income below ¥200,000 is not required to submit a return.

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e. Local inhabitant taxes
An inhabitant tax return is not necessary if a national tax return has been filed or the individual
only has employment income. The taxes are paid either by twelve monthly deductions from thetaxpayer's salary or in four equal payments per annum.

Chapter 12 Indirect and Other Taxes
12.1 Consumption Tax
This is a type of value added tax which is imposed on a very wide range of goods and services
consumed in Japan. Almost every domestic transaction and every transaction for the importationof foreign goods is subject to taxation at the rate of 6.3%. Together with the effective local
consumption tax rate of 1.7%, the total effective tax rate is 8%. However, recent government
reforms have led to an increase in the consumption tax to an amount of 10%, effective 1 October
2019.
Suppliers of goods and services calculate their tax liability based on the difference in value
between the gross taxable sales and gross taxable purchases and normally files a consumption tax
final return for each year. The consumption tax interim return is paid once, three times, or eleventimes per year depending on the amount of tax for the previous accounting year, together with therequired tax payment. If taxable purchases exceed taxable sales, a repayment of consumption tax
is made to the supplier. The tax year is the calendar year for self-employed individuals and theaccounting year for companies.
A supplier with taxable sales of under ¥10 million per year is not subject to consumption tax, but
may nevertheless elect to register in order to get the repayment of consumption tax under thescheme. Some suppliers with annual taxable sales of under Yen 50 million may receive permission
to compute their taxable purchases as a given percentage of taxable sales. The agreed percentages
are currently 90% in the case of wholesalers, 80% for retailers, 70% for manufacturers, 60% forrestaurants, financial or insurance businesses, etc., 50% for service industries and 40% for realestate.
A number of goods and services are exempted from consumption tax, including proceeds from thesale of land and securities, residential house rental, interest, education fees and medical expenses.
Export sales are not subject to consumption tax under certain required conditions.
When the taxable sales ratio during the taxable period is less than 95%, or 95% and over and thetaxable sales of this accounting year are over ¥500 million, the amount of consumption tax ontaxable purchases and taxable foreign goods that are necessary for transfers of taxable assets, etc.,
is calculated using the itemized method or proportional methods, respectively.
If all transfers of assets, etc., conducted in a taxable period are transfers of taxable assets, etc., orif the taxable sales ratio of the enterprise is 95% and over and taxable sales of the accounting year
are less than ¥500 million , the whole tax amount on taxable purchases, etc., is creditable.

6612.2 Stamp Tax
The Japanese Stamp Tax is a national tax imposed on persons who prepare any of a wide varietyof commercial documents. If two or more persons prepare the document, those persons are jointly
and severally liable for the tax.

12.3 Fixed Assets Tax
The fixed assets tax is levied on land, buildings and depreciable property and on the owner who hasthese assets as of January 1st each year.
It is required to submit a fixed assets report by the end of January. Then, the local authority calculates
the tax amount based on the report.
The standard rate of fixed assets tax is 1.4% of the tax basis.
In Tokyo, four payments are due every year during the months of June, September, December, andFebruary.

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