Domestic and foreign corporation
A company that has its head office in Japan is a domestic corporation. The nationality of its shareholders or place of central management is not relevant.
A corporation other than a domestic corporation is regarded as a foreign corporation.
Permanent establishment (PE)
Under domestic tax law, the scope of Japan-source income in respect of which a foreign corporation is taxable depends upon the type of taxable presence that it has in Japan. Pursuant to the amendments of Article 5 of the OECD Model Tax Treaty (OECD MTC) in November 2017 and the signing of the MLI on 7 June 2017 by the Japanese government, articles related to the PE were revised by the 2018 Tax Reform. The articles of the Corporate Tax Law (CTL) and CTL Enforcement Ordinance (CTLEO) were revised to agree with the updated Article 5 of the OECD MTC. The revised definition of PE will apply to the tax years beginning on or after 1 January 2019. After the amendment, the types of taxable presence that a foreign corporation may have in Japan include the following:
- Branch, factory, other fixed places in which business is conducted in Japan, mine, quarry, building for rent, etc., but exclude a specified place used only for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise and any other activity of a preparatory or auxiliary character (Direct PE).
- Construction, installation, assembly project, or supervisory services related thereto for a period of greater than one year, but exclude a specified place used only for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise and any other activity of a preparatory or auxiliary character (Construction PE).
- A person other than an agent of an independent status (i.e. Agent PE) acting in a contracting state on behalf of an enterprise and has, and habitually exercises, in a contracting state, an authority to conclude contracts, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are:
- in the name of the enterprise
- for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or
- for the provision of services by that enterprise.
In the above case, the enterprise shall be deemed to have a PE in that state in respect of any activities that person undertakes for the enterprise, unless the activities of such person are limited to preparatory or auxiliary character.
If a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person shall not be considered to be an independent agent.
As a matter of law, the articles of Japan’s tax treaties have precedence over domestic tax law. By the amendments of the definition of PE under the domestic law, there may be some difference in the scope of PE from that of the existing tax treaties. Under the circumstances, the articles of the relevant tax treaties will override the above articles. Once a PE has been established for a foreign corporation under domestic law, all Japan-source income is taxable to the PE to the extent it is ‘attributable to’ the PE.