How-to: Handling taxes in Japan
A free step-by-step beginner’s guide to help understand Japanese taxes.
Updated October 15th, 2017
If you seek a new business opportunity in Japan, taxes can be a major hurdle. How do you deal with this when it happens? I know it's not easy to figure out foreign taxes. However, few people consult a tax expert before assessing their potential for making a profit on their own and; connecting with an English-speaking accountant in Japan can be like finding a needle in a haystack!
No matter how familiar you might be with the business opportunities in Japan, you might miss a valuable chance to save money if you decide to handle the lion's share of expenditures. So here is a rundown of some key advice we've gathered from our experience.
How much will you have to pay for taxes in the first year?
What I certainly want you to keep firmly in mind is the 600USD (70,000YEN) that you need to pay for taxes after finishing your first fiscal year in Japan. This critical number shows the lowest amount of taxes you will have to pay whether you succeed in making a profit or not.
There are two major types of taxes, 'Corporate Tax' and 'Consumption Tax', that you need to know about if you have a business in Japan. In addition to these, if you can keep in mind the term 'Property Tax', you will have covered the first few bases.
In Japan you're exempt from paying the consumption tax for the first two years and similarly you will not need to pay Property Tax unless the value of your property exceeds the given limit. So, you need only pay attention to Corporate Tax at the beginning.
Corporate Tax is a combination of National Tax and Local Tax. What we need to pay attention to is Local Tax. National Tax is a tax which you do not need to pay if you do not make a profit, Local government always charges for the use of public property in Japan - In other words, the 600USD (70,000¥) represents Local Tax.
This number also becomes important when you decide to exit the Japanese market. If you close your company for any reason, you will be surprised at the amount of money it will cost to liquidate your business. As a result, many people choose the status of a 'Dormant company' instead of liquidation. However, should you choose the dormant status, there is a possibility of being charged for 'Local tax' consistently by having to declare on a tax return every year (It is difficult either way!).
Establishing a company in Japan: what to do next?
You might notice when you enter the Japanese market, that there are a lot of 'Samurai' in Japan. I don't refer to the warriors of feudal Japan - these Samurai are the professional workers such as lawyers and accountants.
Samurai still exist in high numbers in Japan:
|US and most western countries||Japan 'Samurai'||Job Description|
|Lawyer||Lawyer (BS: Bengoshi)||Legal consultation/ Negotiated settlement/Legal action|
|Lawyer for registration (SS: Shiho-Shoshi)||Real estate registration/ Collection of claims|
|Lawyer for paperwork (GS: Gyosei-Shoshi)||Certification of contents /division of conference documents|
|US and most western countries||Japan 'Samurai'||Job Description|
|Accountant||Accountant (KS: Kaikeishi)||Audit/Financial Advisory
(for big sized businesses)
|Tax Service/Individual Tax/Financial Advisory (for small and medium-sized businesses)|
|Certified social insurance labor consultant
|Labor difficulties/Health insurance/Employee’s pension plans|
It is more straightforward in the United States and most western countries. A lawyer doubles as a lawyer for registration (SS) and a lawyer for paperwork (GS), while an accountant doubles as a tax accountant (ZS) and a certified social insurance labor consultant (SHS). Therefore, when you do business in Japan, you should be careful about the differences among these because their degree of professionalism is subdivided into fields.
For example, to get support for the establishment of companies, foreigners should contact a lawyer for registration (SS), a lawyer for paperwork (GS) and a tax accountant (ZS) in Japan. A lawyer for registration (SS) is a professional in procedures concerning registrations and a lawyer for paperwork (GS) takes care of paperwork in almost all cases except registrations.
Doing reliable work and having the power to submit legal documents at a notary public office are common characteristics of both, but a lawyer for paperwork (GS) is more experienced compared to a lawyer for registration (SS), which makes them a more reasonable option in this matter.
However, if you are interested in not only establishing a company in Japan but also being successful in your business by efficiently using your funds, I advise you to ask a tax accountant (ZS) for help in establishing your business. There are at least three significant reasons, they are as follows:
a) 'Blue-form Return' for tax-reduction strategy
Many entrepreneurs consult a tax accountant (ZS) after both finishing the establishment of a company and experiencing an increase in sales. However, I say with absolute certainty: that you should consult a tax accountant (ZS) as soon as possible because there is an essential document for tax-reduction, which is called 'Blue-form Return', which you should submit within two months after your company has been authorised. However, both a lawyer for registration (SS) and a lawyer for paperwork (GS) never tell you to do it, because that is not their duty. So many entrepreneurs have struggled and considered leaving the Japanese market due to a lack of information about this kind of document!
b) A tax accountant (ZS) has unofficial information
An accounting firm’s business model is a stock business which is different from other professionals. They have longer and closer relationships with their clients. Thus, they are familiar with a client’s internal matters. If you are not familiar with the Japanese market, a tax accountant (ZS) will be a great mentor for you. Moreover, if the accounting firm specialises in your business area, you might get rare information e.g. gross margin percentage, labor share etc. Furthermore, they would finish such a cumbersome tax declaration at the same price.
c) Many tax accountants (ZS) double as a lawyer for paperwork (GS)
A tax accountant (ZS) can register as a lawyer for paperwork (GS). Because a tax accountant (ZS) is thought to have a higher level national license than a lawyer for paperwork (GS). Thus, a registered tax accountant (ZS) as a lawyer for paperwork (GS) has the power to submit documents at a notary public office and an electronic signature verification system for establishing companies. If you decide to open the company without a tax accountant (ZS), you must pay a 'Revenue Stamp' of 350USD (40,000¥). However, a tax accountant (ZS) doesn’t need to pay it and can therefore offer a lower price than the one you would get if you did it yourself.
What is the effectiveness of the 'Blue-form Return'?
As you can see there are many reasons why you should ask a tax accountant (ZS) to help establish your company. Next, I will explain the specific effects of the 'Blue-form Return'.
If it is accepted by the tax office, you will get 5,500USD (650,000¥) income deduction' every year, and at the same time you can carry over your company’s loss for nine years. Most of the companies invest the most in the first year (please be aware that corporations do not go bankrupt because of loss but due to the inability to pay liabilities), so it is important that you can offset your 1st year deficit against the ongoing 2nd year profit or not.
If you want to reap the benefits, you must submit the 'Blue-form Return' within the specific time frame, because you cannot say “I forgot to submit it!!” to a tax officer later.
If you ask a tax accountant(ZS) to establish your company, he will be able to submit this document for you. In contrast, most lawyers for registration(SS) and lawyers for paperwork(GS) don’t know of the “Blue-form Return,” because taxes are not of their concern. Thus, since you are a person of high instinct, do you understand whom to ask?
Which district’s address should you get?
One more tip. when you establish your own business in Japan, you must have a Japanese address - I recommend Azabu tax office’s district. The tax office is familiar with foreign taxpayers so you will get useful and more efficient support there.
Numbers you should remember:
- 600USD: the amount of taxes you will have to pay
- 350USD: 'Revenue Stamp' fee for establishing your company
- 5,550USD: 'Income Deduction' what you can deduct from tax every year
- 9years: the period you can carry over your company loss
Points you should remember:
- Tax accountant (ZS): your great mentor in the Japanese market
- Blue-form Return: the most basic form of tax-reduction strategy
- Income Deduction: be listed in the last section of the company's income statement before calculating net income
- Carry Over: adjusting an amount against succeeding amounts, or transferring it to the next period.