Accounting and Taxation

The 22nd edition as of May 2024

Introduction

In this pamphlet, we have outlined only general terms, but do not specify great
detail. Since accounting and tax treatment depend upon varying circumstances,
please forward any specific questions to Osaka Business and Investment Center(O-BIC). We will refer you to an appropriate professional firm.
O-BIC and its editing advisors will be indemnified from any claims, liabilities,
costs and expenses arising for any reason through use of this document without
professional advice.

The latest update of this document is May 2024

Issued by:
Osaka Business and Investment Center (O-BIC)
Editing advisors: Legal Management LLP

1

Table of Contents

Accounting and Tax.................................................................................... 3
1.

Type of corporation taxes and tax rate ..............................................................................................................3<List of Tax Rates> ..........................................................................................................................................82.

Transfer pricing taxation ...................................................................................................................................93.

The method to tax on the profit of a branch of a foreign corporation .............................................................10

4.

Differences by types of entities.......................................................................................................................11

5.

Notification .....................................................................................................................................................12

6.

Losses treated for tax purposes .......................................................................................................................13

Social Security System ............................................................................. 14
1.

Social Security System in Japan .....................................................................................................................14

2.

Overview of Each Program and Premium Rate .............................................................................................. 15

3.

Notification to Authorities .............................................................................................................................. 16

4.

Application to Foreign Workers .....................................................................................................................16

5.

Coverage for Directors of Corporation ...........................................................................................................17

Others ......................................................................................................... 18
1.

Vacation .......................................................................................................................................................... 18

2.

Rules of Employment ..................................................................................................................................... 18

3.

Labor-management Agreement.......................................................................................................................19

4.

Annual Health Check-up.................................................................................................................................19

Salary and Individual Income Tax ......................................................... 19
1.

Monthly Salary ...............................................................................................................................................19

2.

Bonus ..............................................................................................................................................................19

3.

Retirement Allowance .................................................................................................................................... 194.

Withholding Income Tax ................................................................................................................................ 195.

Year-End Adjustment of Income Tax .............................................................................................................19

6.

Individual Inhabitant Tax ................................................................................................................................20

7.

Director’s Remuneration, Bonus and Retirement Allowance .........................................................................20

8.

Difference in Salary by Types of Company....................................................................................................21

9.

Income Tax Applied to Foreigners Staying in Japan ......................................................................................212

Accounting and Tax
１． Type of corporation taxes and tax rate
Taxes imposed on corporations are broadly classified into national and local taxes. Local taxes are taxes imposed by
prefectures and municipalities (city / town / village).
Major taxes imposed on Japanese corporations in general include:⇒ Taxes payable to the national government: Corporation tax, local corporation tax, consumption tax, income tax(withholding income tax)
⇒ Taxes payable to the local government: Inhabitant tax, enterprise tax, special local corporate tax, fixed property
tax, business facility tax(1) Corporation tax
Corporation tax is assessed on the taxable income of corporations. Corporation tax is calculated in the same manner forboth subsidiaries (domestic corporation) and branch offices (foreign corporation).
① Calculation method: Taxable income calculated by making the necessary tax adjustments* to the net income
per the statement of income is multiplied by the corresponding tax rate specified in item (b) below. (*Nondeduction of entertainment expense, directors’ bonus etc.)② Tax rate: 23.2%
For small and medium sized companies with capital of 100 million yen or less (with the exception of wholly
owned subsidiaries of large companies with capital of no less than 500 million yen), a reduced tax rate of
15 % tentatively* applies for their portion of taxable income not exceeding 8 million yen. For the fiscal years
reduced tax rate is not applied, 19 % is applied for the same portion of taxable income in principle.
③ Filing / Paymenta) Final return: (In principle) Within 2 months from the fiscal year end.
(Exception) If settlement of accounts is not completed within 2 months due to the audit schedule or forother unavoidable reasons, this 2-month period may be extended to a maximum of 3 months, subject toprior notification. Extension to file, however, does not extend payment of taxes due. Accordingly, interesttax will be imposed on corporation tax that is not paid within the original 2 month deadline.
b) Interim tax return: Required only when the amount of corporation tax for the first 6 months of the fiscal
year is over 100,000 yen when calculated based on the tax amount of the previous year. Filing andpayment for the interim tax return must be completed within 2 months from the end of the first 6 monthsof the fiscal year.

3(2) Local corporate tax
A corporation which is liable for the corporate tax is also liable for the local corporate tax. The taxable year of the local
corporate tax is the same as that of the corporate tax. Taxable basis of the local corporate tax for a given year is theamount of the corporate tax of such year and the tax rate is 10.3%. Filing of the local corporate tax return should bemade within two months after the end of such taxable year.
(3) Consumption tax
A taxable enterprise for consumption tax purposes must file a tax return and pay the difference between consumption
taxes received from sales or other revenues and consumption tax paid on purchases. Neither filing nor payment ofconsumption tax is required if an entity is not a taxable enterprise. Whether an entity is classified as a taxable enterpriseor not is determined based on the amount of taxable sales which exceed 10 million yen in the period two years to thecurrent year in principle. In case of newly established company whose capital is less than 10 million yen and met certain
requirements, such entity is tax-exempt enterprise at first. Because requirements are complicated, please have a tax
professional for more details, whether an entity is classified as a taxable enterprise or not.
(a) Calculation method:
Consumption Tax Payable = Consumption tax received - Consumption tax paid*
Consumption tax received: Consumption tax received on sales and asset transfers
Consumption tax paid: Consumption tax paid in connection with purchases and expenditures plus
consumption tax paid to customs upon import. (*There are some cases where consumption tax paid onpurchases and import is not deductible.)(b) Tax rate: Standard tax rate 10% (National tax 7.8%, Local tax 2.2%)
Reduced tax rate 8% (National tax 6.24%, Local tax 1.76%)(c) Filing / Paymenta) Final return: Within 2 months from the fiscal year end (No extension system)b) Interim tax return: If the tax amount of the preceding fiscal year exceeds 480,000 yen (national tax
portion), an interim tax return must be filed within 2 months from the last day of each of thecorresponding periods below:
・ More than 480,000 yen and no more than 4 million yen: 6 months period from the beginning of the
fiscal year
・ More than 4 million yen and no more than 48 million yen: Every 3 months period from the
beginning of the fiscal year (except for the last 3 months period)
・ More than 48 million yen: Every one month period (except for the last month)4

The Invoice System (Qualified Invoice (QI) System) (Enforcement: October 1, 2023)
A seller who is a Qualified Invoice Issuer (QI Issuer) is required to issue a QI and retain a copy of the issued QI whena buyer (Taxpayer) requests a QI. A Buyer is required to retain the QI issued by QI Issuer in order to claim input
Consumption Tax credit.
(a) Registration as a QI Issuer
It is not an obligation and you can decide whether you register as a QI Issuer or not.
In order to issue QI, you need to be registered as a “QI Issuer” by submitting QI Issuer Registration Application
to the National Tax Agency.
The National Tax Agency publishes information on Registered QI Issuer such as a name of registered entity,
registration number at “National Tax Agency Qualified Invoicing Business Publication Site”.
Only a Taxpayer can apply for the registration, therefore, a Consumption Tax Exempt Entity should first
become a Taxable Entity by submitting the Taxable Entity Application. Once an entity becomes a Taxable
Entity, consumption tax declaration is required.
(b) Information required in QI
Information required in QI is as follows:- Name of the QI issuer- Transaction date
- Transaction details (including that the item is subject to reduced tax rate)- Compensation amount totaled separately by tax rate
- Name of customer receiving the QI- QI issuer number- Applicable tax rate
- Consumption tax amount categorized by tax rate(4) Withholding income tax applicable to domestic corporation
Corporations that make certain payments such as salaries, remuneration / fees etc. to residents in Japan are obligated towithhold taxes upon payment (withholding at the source) and pay the withheld amount to the government. It is important
to note that it is the responsibility of the payer of income to withhold taxes, and failure to collect or pay withholding tax
may result in such penalties as additional tax on non-payment or overdue tax on payer of income (Please have tax
professional for more details on withholding tax assessed against payments to non-residents and foreign corporation).
For 25 years from January 2013, Restoration Income Surtax (2.1 % of withholding tax) must be withheld together withwithholding income tax.
(a) Payments subject to withholding income tax
a)Salary, bonus, retirement allowance, etc.

b)

Professional fees to lawyers, licensed tax accountants, etc.
5c)Fees for manuscript and lecturesd)Dividends

e)

Other

(b) Payment: No later than the 10th day of the month following the month the payments listed in section (a)above were made.
(c) Special provision for the due date: If a corporation pays salaries to fewer than 10 employees, income tax
withheld for item a) and b) above may be paid semiannually (July and January) by submitting thenotification to the tax office.
(5) Inhabitant tax
Inhabitant tax is imposed by prefectures and municipalities. The tax return must be filed with both the prefecture andmunicipalities.
(a) Calculation method: Inhabitant tax is calculated as the sum of “corporation tax levy” and “per capita levy”(b) Tax rate
① Corporation tax levy: 10.2 % of the corporation tax (7 % for companies whose capital is no more than
100 million yen, or without capital or investments, and corporation tax taxable base amount is no morethan 20 million yen per year).
② Per capita levy: Tax amount is determined according to capital size* and the number of employees(within the range of 70,000 yen - 3,800,000 yen), so this levy is imposed even on deficit corporations.
For example, in the case of a corporation having business facilities in Osaka city, the per capita levy is
20,000 yen for Osaka prefecture and 50,000 yen for Osaka-city when the capital is not more than 10
million yen and the number of employees is no more than 50. (*In the case of a branch office in Japan,
the per capita levy is determined according to the capital size of the overseas head office).
(c) Filing / Payment: Same as in the case of corporation tax.
(6) Enterprise tax
Enterprise tax is levied by prefectures on businesses conducted by corporations. Taxation is based either on the proforma basis or on the income of corporations.
(a) Pro-forma basis taxationa)

Calculation method
Pro-forma basis taxation applies to corporations whose capital is more than 100 million yen (in the caseof branch offices in Japan, the capital of the overseas head office applies). Tax is calculated as the sumof the following three components: (i) income levy based on the taxable income of corporation tax, (ii)capital levy based on the size of capital etc. and (iii) the added-value levy based on payroll, interest, etc.

b)

Tax rate: Refer to List of Tax Rates on page 10.
6(b) Corporation not subject to the pro-forma basis taxationa)

Calculation method
Corporations whose capital is less than or equal to 100 million yen are not subject to pro-forma basis
taxation and will only be liable for the income levy component.

b)

Tax Rate: Refer to List of Tax Rates on page 9.

(7) Special corporate enterprise tax
Special local corporate tax applies to corporations that are obligated to file an enterprise tax return. This is classified asnational tax, but is payable to prefectures based on the local enterprise tax amount.
(8) Fixed property tax
Fixed property tax is imposed by municipalities on tangible fixed assets (land, buildings, depreciable assets) owned bycorporations.
For real property (land and buildings), municipalities will automatically send tax payment slips based on the registeredinformation (“Official assessment method”). Other assets must be declared by the taxpayer.
Fixed property tax on depreciable assets (Declaration of depreciable assets)(a) Tax rate: 1.4 %(b) Filing and payment
Details of depreciable assets (furniture and fixtures, interior equipment, etc.) owned as of January 1 of eachyear must be declared to municipalities by January 31. Tax amount is calculated by municipalities and paidin a maximum of four installments per year.
(c) Other
Fixed assets tax is exempted in the following cases.
If the taxable valuation of an asset in a municipality is less than 300,000 yen for land, 200,000 yen for abuilding, or 1,500,000 yen for a depreciable asset, fixed property tax will not be levied.
(9) Business Facility Tax
Business Facility Tax is imposed on corporations that own large business facilities (office, hotel, warehouse, etc.).
Corporations that have business facilities in designated municipality such as Osaka city must declare this tax.
(a) Corporations subject to Business Facility Tax: Corporations that have a business facility with floor spaceexceeding 1,000 square meters or the total number of employees working in the facility is over 100.*(b) Tax ratea)Asset based tax: Floor area (square meters) ×600 yenb)

Employee-based tax: Total payroll ×0.25 %(c) Filling / Payment: Within 2 months after the fiscal year end

7

*Corporations with either business facilities with floor space exceeding 800 square meters but under 1,000 square meters
or total employee number exceeding 80 employees but under 100 square meters are not levied business facility tax but
has obligation to file Business Facility Tax.
[Reference: Mandatory Electronic Declaration (via e-Tax, eLTAX) by Large Companies]
Companies (excluding foreign companies) with capital or investments exceeding 100 million yen are required to submit
their final and interim returns for corporate tax, local corporate tax, consumption tax, corporate inhabitant tax, enterprisetax, and special corporate enterprise tax via electronic declaration system (For National Tax: e-Tax, For Local Tax:eLTAX) has become mandatory.
<List of Tax Rates>
Tax rate applied for taxable income recognized by corporations (for small and medium sized enterprises with paid-in-capital of 100
million yen or less)
Brackets of taxable income
Corporate tax
Local Corporate tax
Inhabitant tax
Business tax(except pro forma basis taxation)
Special corporate enterprise tax

Up to 4 million
yen per year
15.00 %
1.54 %
1.05%

4 million yen
to 8 million yen
per year
15.00 %
1.54 %
1.05%

Over 8 million
yen per year
23.20 %
2.38 %
1.62%

3.50%

5.30%

7.00%

1.29%

1.96%

2.59%

Total tax rate

22.38 %

24.85 %

36.79 %

Effective tax rate

21.35 %

23.16 %

33.57 %

※The above tax rates are applicable under the following conditions:・ A small and medium sized enterprise with paid-in-capital of 100 million yen or less that is not wholly owned subsidiary of a large
corporation with paid-in-capital of 500 million yen or more.
・ Resides in Osaka-city and corporate tax amount is 20 million yen or less.
・ Annual taxable income is 50 million yen or less.
・ Excepting offices or other places of business located in two prefectures or more.
Per capita levy on corporate inhabitant tax
Employee
Capital amounts
numberOver 50
Over 5,000,000,000 yen
50 or underOver 50
Over 1,000,000,000 yen and
5,000,000,000 yen or under
50 or underOver 50
Over 100,000,000 yen and
1,000,000,000 yen or under
50 or underOver 50
Over 10,000,000 yen and
100,000,000 yen or under
50 or underOver 50
10,000,000 yen or under
50 or under

Osaka Prefecture
1,600,000 yen
1,600,000 yen
1,080,000 yen
1,080,000 yen
260,000 yen
260,000 yen
75,000 yen
75,000 yen
20,000 yen
20,000 yen

8

Per capita levy
Osaka City
3,000,000 yen
410,000 yen
1,750,000 yen
410,000 yen
400,000 yen
160,000 yen
150,000 yen
130,000 yen
120,000 yen
50,000 yen

Total
4,600,000 yen
2,010,000 yen
2,830,000 yen
1,490,000 yen
660,000 yen
420,000 yen
225,000 yen
205,000 yen
140,000 yen
70,000 yen

Pro-forma basis taxation

Applicable for the fiscal years beginning on or after April 1, 2022
Excess tax rate
Standard tax rate

Income levy

1.180%

1.000%

Added-value levy

1.260 %-

Capital levy

0.525 %-

Special corporate enterprise tax

260% of income levy calculated applying standard tax rate

* Tax rate may be different among the prefectures.

２． Transfer pricing taxation
Under the transfer pricing system, if a business entity engages in sales/purchase of assets, rendering of services or any
other transactions with its “foreign-related parties”, and the value received/paid in such transaction is less/more than thearm's-length price respectively, the foreign-related transaction is deemed to have been executed at an arm's-length pricefor taxation purposes.
Transfer pricing taxation is a system designed to prevent a company from shifting income to a foreign country throughtransactions with its foreign affiliates or “Foreign-Related Parties”. For example, a corporate group can minimize its
global tax obligations by reducing the export price of its product to a foreign affiliate that is located in a low-tax country,
which in effect shifts income taxable in Japan to a foreign affiliate.
The transfer pricing system assesses tax based on the assumption that such controlled transactions within a corporategroup are executed at a reasonable price called the “Arm’s-Length Price”.
(1) What is the definition of a “Foreign-Related Party”?
The transfer pricing system applies to transactions among foreign-related parties. Foreign-related parties specificallyrefer to the following corporations.
1. A foreign corporation that basically has a 50 % or more shareholding relationship with the Japanese company.
2. A foreign corporation with less than 50 % shareholding relationship but has a substantial control relationship(in terms of directors, business dependency, funding) with the Japanese company.
(2) What is Arm's-Length Price?
In order to compute arm’s-length price, there are three methods; (a) Comparable Uncontrolled Price Method (CUP
Method), (b) Resale Price Method (RP Method), (c) Cost Plus Method (CP Method), referred to as the “Three Basic
Methods”. If the “Three Basic Methods” are not applicable, equivalent methods to the “Three Basic Methods”, “Profit
Split Method (PS Method)”, “Transactional Net Margin Method (TNMM Method)” , and “Discounted Cash Flow
Method (DCF Method) can be applied. There is no order of priority of the application among the methods to computethe arm’s-length price. The most suitable method to a certain controlled transaction is applied (the Best Method Rule).
(3) Transfer pricing documentation rules(a) Notification for Ultimate Parent Entity, Country-by-Country Report (CbC report) and Master FileIn correspondence with the discussion on base erosion and profit shifting (BEPS) in the OECD, amultinational enterprise group (MNE) meeting a certain criterion (a specified MNE group) is required to file
“Notification for Ultimate Parent Entity”, “Country by Country Report (CbC Report) and “Master File” inaddition to the existing transfer pricing documentation (Local File). The criterion of filing obligation and otherinformation of the CbC Report and the Master File is described in the table below.

9Criterion and other information of Notification for Ultimate Parent Entity, CbC Report and Master File
Obligationofsubmission
Who to file

What to be
described

Due date ofsubmission
Languagepenalty

Notification for Ultimate
CbC Report
Master File
Parent Entity
A specified MNE group having consolidated revenue of 100 billion JPY or over in thelast fiscal year is obliged to file one.
the Japanese entities
belonging to an Entity ofa specified MNE group(including PEs in Japan)
names of the Ultimate
Parent Entity, etc., thelocation of its head or
principal office, its
corporate number, andthe name of its
representative
By the day when the
Ultimate Parent Entity’s
fiscal year ends (via eTax)-

the Japanese entities thatare the ultimate parent
entity of the specified
MNE group in principle
quantitative informationsuch as sales amount,amount of tax, number of
employees of theconstituent entities of thespecified MNE groupone of the Japanese entities
belonging to a specified
MNE group (including PEs
in Japan)qualitative informationsuch as organization
structure, outline ofbusiness operation, andfinancial condition of thespecified MNE

Within one year from the following day of the end of the
fiscal year of the ultimate parent entity of the specified
MNE group (via e-Tax)
EnglishFine of 300 thousand JPY
or less

Japanese of English
Fine of 300 thousand JPY
or less(b) Local FileA corporation that has received or paid 5 billion JPY or more in total for foreign controlled transactions witha foreign related company or 300 million or more JPY in total for intangible asset transactions with a foreign
related company during the previous business year (the current business year if there is no previous businessyear), among transactions such as sales of assets, provision of services and other transactions (foreign
controlled transactions) with foreign related companies, is subject to the preparation of a Local File(documents deemed necessary for the calculation of arm's length prices) and is obliged to prepare or obtainand preserve a Local File by the deadline for filing its tax return (simultaneous documentation obligation).
It should be noted that it doesn’t mean the company is exempted preparation of the Local File itself even in acase where it is exempted from the contemporaneous documentation obligation since the size of thetransaction is less than that of stipulated one.
Presumptive assessment or audit to similar businesses would be conducted by the tax authorities unless thecompany doesn’t file the document equivalent to the Local File at the request of the tax auditors within aperiod they designate.
３． The method to tax on the profit of a branch of a foreign corporation
The method of taxation on branches of foreign corporations was changed from the “entire income approach” to the“attributable income approach” from the fiscal year beginning on or after April 1, 2016. Under the entire income
approach, if a branch of a foreign corporation is located in the territory of Japan, all Japan source income earned by theforeign corporation is, whether or not such income is attributable to the branch, attracted to such branch (force of
attraction) and the branch sums up and declares all of the income sourced in Japan. Under the attributable income
approach, however, among the income earned by a foreign company, only income attributable to its branch (income
attributable to PE) is the income subject to the declaration by the branch. On the other hand, the headquarter of which
the branch is a part directly earns such income as rent or fee for the dispatch of professionals, such incomes are10

attributable to the headquarter and the tax obligation is imposed on the headquarter itself. If the headquarter of theforeign corporation directly earns such income as interest, dividend, royalty or some other types of investment income,withholding tax is withheld when such income is paid and the tax obligation of the headquarter is cleared.
As an income attributable to a branch is a Japan source income, an income earned by a branch outside Japan is also
included in the Japan source income and subject to the declaration by the branch. Accordingly, the foreign tax credit
is applied to the branch of a foreign corporation to avoid the double taxation in the source country and Japan.
The income attributable to PE is calculated according to the authorized OECD approach (AOA). Under the AOA,
transactions conducted by a branch are distinguished into the external transactions and the internal dealings. The internal
dealings of sales and costs should be assessed and recognized as if they were transacted between parties in arm’s-lengthand reflect the amount in the calculation of the profit of the branch. A method similar to the one which is adopted under
the transfer pricing taxation is applied to the process to validate the transaction prices of the internal dealings. Please
note a certain modification is made to the calculation of income of a branch described above, e.g. internal royalties shallnot be recognized, if the country where the headquarter is a resident and Japan conclude a tax convention based on thearticle 7 of the former OECD model tax convention.
It is obligated to prepare documentations describing external transactions and internal dealings conducted by the branch.
The documentations also need to include the information of the functions performed, assets used and risks assumed by
the branch. These documentations need to be demonstrated to tax authorities when required.
In view of taxation, difference between a branch and a subsidiary is smaller under the “attributable income approach”
than “entire income approach” since the rights of taxation is allocated by likening headquarters and its branches whichhave the same judicial personality to headquarters and its subsidiary which are the separate entities.
４． Differences by types of entities(1) Differences by scope of taxation
Branch OfficeClassification
for Tax
Purposes

Subsidiaries （KK, GK*, etc.）

・Foreign corporation

・Domestic corporation

・Income attributable to the branch is taxable (not only
Japan source income, but also foreign source income)Taxable Income
・To avoid double taxation, the foreign tax credit
applies to the branch.
・In general, only inhabitant tax per capita levy applies
to branch office. Pro-forma basis taxation in enterprise
In the casetax applies to corporations whose paid-in-capital ofof Losshead office is more than 100 million yen.

・Both Japan source income and foreign source income
are taxable. (Foreign tax credit system is available forthe purpose of avoiding double taxation.)・Lending / borrowing between the head and branch
offices is also deemed as a transaction with an outside
party, so the branch in Japan needs to recognize theinterest of any loan transaction with its headquarter orother parts of the company of which the branch is apart (hereinafter, “headquarter or other).
・Interest expense paid in connection with theborrowing above will be deductible for tax purposes.
・Related to the above, the interest derived from thelending / borrowing transactions with the headquarteror other which is located in a country with which the・Preparation of a loan agreement and payment of
reasonable interest are required even in a parentsubsidiary relationship.
・Interest expense is deductible for tax purposes but
attention should be paid to the thin capitalization rule.
・Tax on interest income must be withheld upon thepayment of interest (Reference should also be made to
the applicable tax treaty).

Borrowings

11

・In general, only inhabitant tax per capita levy applies
to subsidiaries. Pro-forma basis taxation in enterprisetax also applies to subsidiaries whose paid-in-capital ismore than 100 million yen.

Other FundTransfers

Japanese government concludes a tax convention
based on the old model tax convention before AOA
adjustment is not subject to the above rule. In thiscase, the interest between the branch and its
headquarter or other is excluded in computing thetaxable income.
・A rule similar to the thin capitalization rule isintroduced to limit the deduction of interest expensesof the branch.
・Documents similar to contract documents should be
prepared for each loan transaction between the branch
and the headquarter or other.
・Surplus funds etc. to be remitted to the head office ismerely an intra-company money transfer and will not
be recognized as dividends. (No such matters as tax
withholding will arise.)・Documents similar to contract documents which
explains the character of each remittance of funds need
to be prepared.

・Expenses to be borne by the branch office may beallocated to the branch (based on reasonable
standards). Evidence materials for allocation should
be retained to prepare for tax audits in the future.
Financial statements of the head office must be
attached to the tax returns.
No withholding tax obligations will arise to any
Withholding tax internal dealings between the branch and its
headquarter or other.
Expenses
incurred by thehead office /parent company

Tax Rate

・Transfer of funds between the parent and subsidiarysuch as payment of dividend, interest & royalties,
repayment of borrowings, settlement of AP and costsof assets purchased must be evidenced with invoices
or agreements. Note that certain payments such as
dividends are subject to withholding tax (Reference
should also be made to the applicable tax treaty).
・Remittance of surplus funds of the subsidiary to theparent is considered as a loan from the subsidiary to
the parent. Accordingly, the subsidiary must
recognized interest income.
・ No such concept as expense allocation since thesubsidiary is a separate entity (Expenses paid on
behalf of the subsidiary needs to be billed via an
invoice and settled through payment).

Refer to each of the above explanations.

There is no tax rate difference by types of entities.

＜Advantages＞
・ Because representatives at subsidiaries who do notmeet certain requirements are not considered as
directors in corporate tax law, bonus is deductible as
expense.
＜Disadvantages＞
・ Corporate tax return should be filed with financial
Advantages
statements of head office.
Disadvantages
・ Inhabitant tax per capita levy and pro-forma basis
taxation applies to corporations whose head office has
paid-in capital of more than 100 million yen (even if
the size of branch office in Japan is small).
・ Documents similar to contract documents should be
prepared for all internal dealings between the branch
and its headquarter and other.

＜Advantages＞
・ Burden of inhabitant tax per capita levy and proforma basis taxation can be reduced if a subsidiary
whose paid-in capital is low even in case paid-in
capital of foreign-parent company is more than 100
million yen.
・ Corporate tax return should be filed without financial
statements from foreign-parent company.
＜Disadvantages＞
・ Preparation of agreements for sending funds and/or
any business transactions is required even in aparent-subsidiary relationship.

５． Notification
In case of opening a branch office or establish a subsidiary, it is required to submit the following notifications regardlessof types of entities. Note that failure to submit notifications by the due date may result in the loss of various tax benefits.
12Submit toTax Office

U pon
f oun da ti on

N otif ic ation s

B y the f i rs t
f i s cal y ear
end

Remarks

Notification of Incorporation (National tax)○

Within two months from theestablishment of a branch/subsidiary.

Application for Approval of Filing a Blue-form Tax Return○

The earlier of the end of the first fiscal
year or within three months from theestablishment of a branch/subsidiary.

Notification of Establishment of an Office Paying Salaries○

Within one month from theestablishment.

Application for Approval of Extension of Withholding Tax
Payment○

Applicable to W/H tax payments from themonth following the application.
Extension available only to businesses
with less than 10 employees.

Application for Extension of Filing (National Tax)○

Not required if extension is notnecessary.

Notification of Inventory Valuation Method○

Not required when adopting the final
purchase method.

Notification of Asset Depreciation Method○

Not required when adopting the straightline method (for buildings, equipment
attached to buildings, structure) anddeclining balance method (for otherassets).

Report on the Selection of Taxable Enterprise forConsumption Tax○

When a Tax Exempt Entity selects tobecome a Taxable Entity

Report on the Selection of the Simplified Tax System forConsumption Tax○

Required only when applying for thesimplified taxation method.

Application for Approval of Extension (Prefectures)○

Not required if extension is notnecessary.

Notification for Extension of Filing the Corporation Tax
Return (Prefectures)○

Not required if extension is notnecessary.

Tax Office

Notification of Incorporation (Prefectures)
Prefectural
Tax Office

Municipal
Tax Office○

Notification of Incorporation (Municipalities)○

Online application is also available for each notification. Please refer to the following website for details (available inJapanese only): Tax office: https:// www.e-tax.nta.go.jp/; Osaka Pref. (Osaka city): https://www.eltax.lta.go.jp/first/
６． Losses treated for tax purposesTax losses are treated in the following two ways:(1) Tax loss carry forward
Net losses incurred in each of the nine fiscal years prior to the first day of a given fiscal year may be offset against theincome of such given year. However, other than the case where the corporation is Small and Medium-sized Corporations(“SMCs”)*, deductible amount is limited up to 50% of the income. In other words, losses incurred in the current fiscal
year may be utilized against future income and may be carried forward for the next ten years.
The corporation must have a blue-form tax filing status to benefit from this treatment. Furthermore, this nine-year loss
carry forward provision is not applicable if a corporation obtains a tax refund by way of a tax loss carryback.
13

(2) Tax refund by loss carryback
If a SMC* filing a blue-form tax return incurs losses in a given year and has paid corporation tax in the immediately
preceding year, the SMC is entitled to a refund of prior year’s taxes by filing a claim for refund.
*Small and Medium-sized Corporations: Corporations with paid-in-capital of 100 million yen or less, and not wholly
owned subsidiaries of Large Corporation with paid-in-capital of 500 million yen or more.

Social Security System
1.

Social Security System in Japan

Employers are required to join the following insurance programs if they hire employees who meet certain conditions:(1) Workers’ Accident Compensation InsuranceThis insurance provides the prescribed insurance benefits to workers or their family members if workers become
injured, ill or disabled, or die due to an accident at work or during commute.
(2) Employment InsuranceThis insurance provides benefits to workers when, for example, they lost their jobs in order to secure workers’ living
and employment stability.
(3) Employees’ Health Insurance (including Long-term Care Insurance)
This is a public health insurance program which provides insurance benefits for illness or injury outside work and thetime off work due to such illness or injury, childbirth, death, etc. If employees and dependent family members receive
medical treatment at authorized insurance medical institutions, 70% of the medical costs are covered by the insurance.
(4) Employees’ Pension InsuranceThis insurance provides old age pension as well as disability pension and survivors pension to help employees andtheir families stabilize their living and improve social welfare.
In general, (1) Workers’ Accident Compensation Insurance and (2) Employment Insurance are collectively called “labor
insurance”, and (3) Health Insurance and (4) Employees’ Pension Insurance are collectively called “social insurance”.
In Japan, all individuals are required to join health insurance and pension insurance under “universal insurance system”.
This system applies to all individuals regardless of the nationality.

14

2.

Overview of Each Program and Premium Rate
Premium Rate ※1
Employer's
Employee's
contribution
contribution

Insurance

Benefits

Applies toWorker's Accident
Compensation
Insurance

Benefits for work-related
death/injury/
illness/disability, etc.

All business entities
which employ one ormore workers.

0.25～8.8%(Varies by industry)(N/A)

Employment
Insurance ※5

Benefits for unemployedemployees on childcare
leave, elderly workers, etc.

Applies to all workers
expected to be employed
by a business entity forminimum 20 hours per
week and 31 days

0.95%
(Except for someindustries such as
construction, etc.)

0.6%

General Contribution

Benefits for workers who
suffer from health damage
by asbestos and theirfamilies

All business entities
covered by Workers’
Accident Compensation
Insurance

0.002%(N/A)

Employees' Health
Insurance

Benefits fordeath/injury/illness outside
work, childbirth, etc.

Rate for Japan Health
Insurance Association,
Osaka branch:
5.17%(5.97% for aged 40 orolder)

Rate for Japan Health
Insurance Association,
Osaka branch:
5.17%(5.97% for aged 40 orolder)

9.15 %

9.15 %

0.36%

(N/A)

15.932%(16.732% for aged 40
or older)(※2, 3, 4)

14.92%(15.72% for aged 40
or older)(※3, 4)Long-term Care
Insurance(applies to employees
aged 40 or older)
Employees' Pension
Insurance
Child Welfare
Contribution

Benefits for
employees/family
members who requirelong-term care, etc.
Old age pension,
disability pension andsurvivors pension
Contribution forchild allowance, etc.

Applies to full time
workers employed by acorporation or business
entity, and workers whose
normal working
hours/days are approx.
3/4 or more of regular
employees※6
All employers covered by
Employees’ Pension
Insurance

Total※1 Premiums rates as of April 2024
※2 Total percentage for employer is estimated assuming Workers’ Accident Compensation Insurance is 0.3%.
※3 For Workers’ Accident Compensation Insurance and Employment Insurance, premiums are generally calculated by multiplying
employees’ annual income by the premium rates.
※4 For Health, Long-term Care, Pension Insurance and Child Welfare Contribution, premiums are calculated by multiplying Monthly
Standard Remuneration (determined for each employee based on their monthly salary) by the premium rates.
※5 Employment Insurance: employees aged 65 or older became eligible workers effective on January 1, 2017. Senior insured aged 65 orolder also required to pay employment insurance premium effective on April 1, 2020.
※6 Short-time workers working at a business entity which constantly employs over 100 insured persons (excluding short-time workers)
became applicable effective on October 2022.
Short-time workers working at a business entity which constantly employs over 100 insured persons (excluding short-time workers)
shall be applicable effective from October 2024.

15

３．

Notification to Authorities
Insurance

Submission deadline

Submit toWorkers’ Accident
Compensation Insurance

Within 10 days from the date following the date of establishment of
insurance relationship (the date the first worker is employed)*Estimated insurance premium must be reported and paid within 50
days from the date following the date of establishment of insurance
relationship.

Local Labor Standards
Inspection Office

Employment Insurance

Within 10 days from the date following the date of establishment of
insurance relationship

Employees' Health Insurance

Within 5 days from the date following the date of establishment of
insurance relationship

Employees' Pension Insurance

Within 5 days from the date following the date of establishment of
insurance relationship

Local Public Employment
Security Office(Hello Work)
Local Pension Office (orproceeding centers located ineach prefecture by post) or
Health Insurance Society
Local Pension Office (orproceeding centers located ineach prefecture by post)

４． Application to Foreign Workers(1) Labor Insurance⇒ Worker’s Accident Compensation Insurance
Workers’ Accident Compensation Insurance applies to foreign workers as well, regardless of the nationality, evento “illegal residents”.
⇒ Employment Insurance
Employment Insurance applies to foreign workers as well regardless of the nationality. Employers are required toreport information such as names and resident status of foreign workers to Hello Work upon hiring and termination.
(2) Social Insurance
In Japan, social insurance is mandatory for all foreign employees regardless of the nationality except for:(a) Individuals who are paid by Head Office outside Japan(b) Part-time workers who work short time(c) Temporary workers(d) Individuals employed by a business entity exempted from social insurance (e.g. a sole proprietor’s office withless than 5 employees, etc.)(e) Individuals aged 70 or older (75 or older for Health Insurance)(f) Individuals who have Certificate of Coverage for International Social Security Agreement*Individuals who fall under any of (a) through (e) above are required to join National Health Insurance and National
Pension Insurance on their own.
< Lump-Sum Withdrawal Payment for short-term foreign residents >If a foreign employee who meets all of the conditions listed below withdrew from National Pension Insurance or16

Employees’ Pension Insurance and left Japan due to international transfer or employment termination, they canapply for Lump-sum Withdrawal Payment after they left Japan.
(It is possible to apply for such payment in Japan.)(a) An individual who does not have Japanese nationality(b) An individual who has at least 6 months of coverage under National Pension Insurance or Employees’ Pension
Insurance(c) An Individual who has canceled registered address in Japan within 2 years(d) An individual who has never been entitled to any Japanese public pension
Note for the lump-sum withdrawal payment application:
Qualified period for old-age basic pension was shortened to 10 years from August 2017. You may be qualified forthe totalization benefits under Japanese system as well as foreign system if you have qualifying coverage periods
under pension systems of countries with which Japan have totalization agreements, subject to each qualification
conditions. Please check the social security agreement.
< International Social Security Agreement>
A foreign employee who is covered by a social security system of a country which signed the International Social
Security Agreement with Japan is exempt from the Japanese social security system if certain conditions are met.
As of May 2024, Japan has signed the Agreement with and has come into effect in 23 countries. Please note that a
Certificate of Coverage for International Social Security Agreement is required in order to qualify for exemption.
Implemented

Germany, United Kingdom, Republic of Korea, United States, Belgium, France, Canada,
Australia, Netherlands, Czech Republic, Spain, Ireland, Brazil, Switzerland, Hungary, India,
Luxembourg, Philippines, Slovakia, China, Sweden, Finland, Italy

Note: Only “Elimination of Dual Coverage” is applicable to the Agreements with United Kingdom, Republic of Korea, Italy andChina.

５． Coverage for Directors of Corporation(1) Worker’s Accident Compensation Insurance
In principle, Workers’ Accident Compensation Insurance does not apply to directors of a corporation as a director is
not considered as an employee.
However, if a director is a “director-employee” or has duties in an employee's capacity, the director may be entitled toreceive benefits from Workers’ Accident Compensation Insurance for illness or injury related to such duties.
(2) Employment Insurance
In principle, directors of a corporation are not eligible to join Employment Insurance.
However, a director may be able to join Employment Insurance if they are a “director-employee” or has duties in an
employee's capacity, and if their income as an employee is higher than their income as a director.

17

(3) Social Insurance
Health Insurance and Pension Insurance are mandatory for directors of a corporation.
However, since Health Insurance benefits are limited for the illness or injury outside work, they are not paid for workrelated illness or injury suffered by a director of a corporation except for certain cases.
In other words, directors should be aware that they may not be able to receive any benefits or compensation from Health
Insurance or Workers’ Accident Compensation Insurance for their illness or injury at work.

Others１．

Vacation(1) Annual Paid Leave
An employer must grant annual paid leave of 10 working days to an employee who has been employed continuouslyfor 6 months and who has worked at least 80 percent of the total working days. The entitlement to annual paid leave
expires in 2 years from the date of grant due to the statute of limitations. The table below shows the relationshipbetween the service years and the number of annual paid leave days granted.

Service years

0.5 years

1.5 years

2.5 years

3.5 years

4.5 years

5.5 years

6.5 years
or longer

Annual paid leavedays granted

10

11

12

14

16

18

20

Employers required to have all employees, who are granted annual paid leave of 10 or more working days, take atleast 5 annual paid leave a year.
(2) Other types of paid leave
In Japan, it is common for employers to grant additional paid leave as employee benefits for occasions such as
employee’s marriage or death of their family members.
Employers are not required to grant paid leave for an employee’s leave of absence due to illness or injury outside work.
２．

Rules of Employment

An employer which continuously employs 10 or more employees is required to draw up and submit Rules of
Employment to the local Labor Standards Inspection Office. Also, the employer must ask the employees’ opinion about
the rules and attach it in writing when submitting the rules. The same procedure is required when any change is madeto the rules. Employers must notify the rules to all employees.
Submission of the Rules of Employment is not mandatory for business entities with fewer than 10 employees. However,
it is recommended for all business entities to prepare the rules in order to avoid unnecessary disputes between labor andmanagement.

18

３． Labor-management Agreement
Labor-management agreement is a written agreement signed between a person representing a majority of the workers
and the management. A typical example is “Agreement on overtime work and work on holidays.” Employers should beaware that they cannot have employees work exceeding statutory working hours or on statutory holidays unless thisagreement is signed and submitted to the local Labor Standards Inspection Office.
４． Annual Health Check-up
Employers have an obligation to provide employees with health check-up once every year. Employers are also required
to provide health check-up to new employees when they are hired.

Salary and Individual Income Tax
１．

Monthly SalaryMonthly salary means the payments that are paid monthly at a fixed amount. Monthly salary includes base salary,commuting allowance, position allowance, etc.
Employment income refers to income relating to salary, compensation, wage, annual allowance, bonus or any other pay
that has the nature of any of these
２． Bonus
Bonus is a payment which is paid separately from monthly salary, in the name of bonus, summer bonus, year-end bonus,
etc., or any other payments similar to those.
When it is uncertain whether a payment has the nature of bonus, the payment is considered as bonus if (1) the amountor standards of payment are not predetermined and (2) it is an extra payment based on company profit.
３． Retirement Allowance
Retirement allowance is a lump-sum payment or pension which is paid to an employee upon retirement or employment
termination.
４． Withholding Income Tax
Employers have an obligation to withhold employees’ income tax from their monthly salary or bonus payments and pay
it to the government. The amount of income tax is calculated in accordance with the statutory “Withholding Tax Amount
Table for Employment Income”.
５． Year-End Adjustment of Income Tax
Year-end tax adjustment is the process whereby an employer settles the discrepancy between the total amount of income
tax withheld from each salary and bonus payment made during the year and the tax amount to be paid for total salary19and bonus paid during the year for each employee who has submitted “Application for (Change in) Exemption for
Dependents” to the company. Employers are required to do this settlement when the last salary/bonus of the year is paid.
Individuals who received salary payments of 20 million yen or more during the year are not subject to year-end tax
adjustment.
Usually, employees have year-end tax adjustment in December. However, if an employee leaves Japan during the year
due to transfer, etc., they have year-end tax adjustment in their last salary paid in Japan.
６． Individual Inhabitant Tax
Individual inhabitant tax is a local tax, consisting of prefectural inhabitant tax and municipal inhabitant tax.
Employers are required to submit Salary Payment Report to the municipality of each employee’s residence by January
31 every year. Based on this report, the municipalities will determine the amount of inhabitant tax for the next tax year
for each employee. Employers have an obligation to deduct inhabitant tax from employees’ salary on a monthly basis
and pay it to the municipalities in accordance with the tax payment notice from the municipalities.
An inhabitant tax year runs from June through May the following year. If an individual leaves Japan during the tax year,
they must pay all of the remaining balance of their inhabitant tax for that tax year (the balance up to May).
Inhabitant tax is imposed on an individual’s income earned during the previous year if they are registered on the Japanese“Basic Resident Registration (Jyumin Kihon Daicho)” as of January 1. It means, if an individual had registered address
in Japan on January 1, they are liable to pay their inhabitant tax for the period from June that year to May the following
year, even if they leave Japan between January and May. Employers should be careful when employees leave Japan.
７． Director’s Remuneration, Bonus and Retirement Allowance(1) Determination of Directors’ Remuneration
Directors’ remuneration is to be determined in the article of incorporation or shareholders’ meeting.
(2) Definition of “Director” under the Corporate Tax Law
In addition to the director defined by the Companies Act, such as director, executive officer, and statutory auditor, aperson who is substantially involved in the management of a company is deemed as director for tax purposes. As longas an individual is registered as director, this person is regarded as director for tax purposes regardless of the substanceof involvement in the company.
The representative of a foreign corporation’s branch office in Japan, unless being a director of the head office, will not
qualify as a director for tax purposes.
(3) Director Salaries which Qualify as Deductible Expense for Corporate Tax Purposes
Director salaries deductible for corporate tax purposes are broadly categorized into following three types.
(a) Fixed amount periodical compensation:
Fixed amount salary paid monthly throughout the fiscal year.
20(b) Fixed compensation notified in advance:
Salary that is paid in accordance with advance notification of amount and time of payment filed to the tax
office. If the amount and time of payment for director salary is fixed in advance, such salary can qualify as
deductible expense for corporate tax purposes only by submission of notification.
(c) Profit-based compensation:
Salary that is calculated based on the corporation’s profit (applicable to listed companies)(4) Retirement Allowance to Director
For the calculation of income tax imposed on retirement allowance, there is a tax benefit to squeeze the taxable income
to half the amount of taxable income after retirement allowance deduction.
However, this tax treatment cannot be applied to taxable income calculation for retirement allowance paid to director
who has worked for 5 years or less.
８． Difference in Salary by Types of Company
In principle, types of company of the employer will not affect the treatment of salary paid by a company in Japan.
However, tax and social insurance treatment will be varied based on resident status of employees (resident or nonresident) and the location where salary is paid (paid in Japan or overseas).
９． Income Tax Applied to Foreigners Staying in Japan
Under the income tax system in Japan, individuals are classified into residents and non-residents. Residents are further
classified into permanent and non-permanent residents. The scope of income subject to taxation in Japan is defined foreach of these categories.
<Resident Status and Tax Treatment>
Classification of Resident Status

Permanent Resident
Individual

Resident
Non-Permanent
Resident
Non-Resident

An individual who meets either of the following conditions:*Has a domicile in Japan*Has been residing in Japan for a period of one year or more
and is not a non-permanent resident.
An individual who meets both of the following conditions:*Does not have Japanese nationality.
*Has been residing in Japan for a period of 5 years or less in
the last 10 years.
An individual other than a resident.

(1) Permanent Resident
Permanent residents are subject to Japanese taxes not only on their income earned in Japan (domestic source income)but also on income earned outside Japan (foreign source income). In other words, permanent residents are subject toJapanese taxes on their worldwide income.
21

(2) Non-Permanent Resident
Non-permanent residents are subject to taxation in Japan with respect to all domestic source income and the portion offoreign source income that is paid in or remitted to Japan.
(3) Non-Resident
Non-residents are individuals who reside in Japan for a period of less than one year. Non-residents are subject toJapanese taxes only on their domestic source income.
<Tax Exemption for Short-Term Visitors>
Non-residents are liable for Japanese taxes on their domestic source income. However, such taxes may be exempt if
certain requirements are satisfied, such as non-resident working in Japan for only a short period of time who is a residentof a country that has a tax treaty with Japan (155 countries/areas as of May 2024). This is called tax exemption for shortterm visitors.
<Calculation of tax and taxable income>Once the scope of income subject to Japanese taxation is determined, income needs to be classified to certain types ofincome stated in the Income Tax Law. Then taxable income is calculated after applying certain deductions. Tax amountis calculated by multiplying the progressive tax rates shown in the below table to the taxable income.
Taxable income
1.95 million yen or lessOver 1.95 million yen and 3.30 million yen or lessOver 3.30 million yen and 6.95 million yen or lessOver 6.95 million yen and 9 million yen or lessOver 9 million yen and 18 million yen or lessOver 18 million yen and 40 million yen or lessOver 40 million yen

22

Applicable tax
rates
5%
10%
20%
23%
33%
40%
45%