A domestic corporation in Japan is taxed on its worldwide income, including foreign branch income, while 95% of dividends received by a company from a foreign company in which it has held at least 25% (or could be lower under relevant tax treaties) of the outstanding shares for a continuous period of six months or more can be excluded from the company’s taxable income. See the description of Dividend income in the Income determination section for more information.
A foreign corporation is taxed only on its Japan-source income. A foreign corporation with a permanent establishment (PE) in Japan is liable for corporate income taxes only on the income attributable to the PE.
The corporation tax rates are provided in the table below (effective from fiscal years beginning on or after 1 April 2016 and 1 April 2018).
|Company size and income||Corporation tax rate (%)|
|1 April 2016||1 April 2018|
|Paid-in capital of over 100 million Japanese yen (JPY)||23.4||23.2|
|Paid-in capital of JPY 100 million or less, except for a company wholly owned by a company that has paid-in capital of JPY 500 million or more:|
|First JPY 8 million per annum||15.0||15.0|
|Over JPY 8 million per annum||23.4||23.2|
National local corporate tax
Beginning from 1 October 2019, corporate taxpayers are required to file and pay the national local corporate tax at a fixed rate of 10.3% of their corporate tax liabilities. Currently, the national local corporate tax rate is 4.4%.
Standard enterprise tax (and local corporate special tax)
Enterprise tax is imposed on a corporation’s income allocated to each prefecture. This allocation is generally made on the basis of the number of employees and number of offices in each location. The local corporate special tax, which is a rate multiplied by the income portion of enterprise tax, will be abolished from tax years beginning on or after 1 October 2019 and replaced by the special corporate business tax (including a size-based tax regime) by the 2019 Tax Reform.
Similar to the local corporate special tax, the special corporate business tax will be levied on the tax amount of the local business tax (income portion) and collected by the local government. However, under the local corporate special tax, the local corporate tax rate, for tax years beginning on or after 1 October 2019, will be decreased as follows.
The standard rates of enterprise tax, including local corporate special tax, are shown below.
|2015 Tax Reform||2019 Tax Reform|
|Fiscal year beginning 1 April 2016 thru 30 September 2019||Fiscal year beginning 1 October 2019|
|Enterprise tax *:|
|First JPY 4 million||5.0% (3.4%)||3.5% (2.5%)|
|Next JPY 4 million||7.3% (5.1%)||5.7% (4.1%)|
|Over JPY 8 million||9.6% (6.7%)||7.0% (5.1%)|
|Local corporate special tax or special corporate business tax (the rate is multiplied by the income base of size-based enterprise tax), which is collected as national tax by filing corporate tax returns||43.2%||37.0%|
* Tax rates shown in parentheses do not include local corporate special tax or special corporate business tax.
If the paid-in capital of a corporation is JPY 10 million or more and the corporation has place of business in more than two prefectures, the graduated rates above are not applicable.
For utilities and insurance companies, the standard tax rate is shown as follows:
|Fiscal year beginning prior to 30 September 2019||Fiscal year beginning 1 October 2019|
|Local corporate special tax or special corporate business tax||43.2%||30.0%|
Size-based enterprise tax (and local corporate special tax)
Instead of the above general enterprise tax, a ‘size-based’ enterprise tax (Gaikei Hyojun Kazei) is applied to a company whose paid-in capital is more than JPY 100 million as of the year-end.
Factors such as the size of a corporation’s personnel costs and its capital (the amount of paid-in capital) will determine the additional amount of tax payable. The existing profit-based enterprise tax will also continue to apply at the tax rates indicated below. Therefore, a loss company in Japan may be required to pay tax based on value-added activities and the corporation’s paid-in capital.
The applicable standard rates are as follows:
|Taxable base||Size-based enterprise tax (%)|
|2015 Tax Reform||2019 Tax Reform|
|Fiscal year beginning prior to 31 March 2016||Fiscal year beginning 1 April 2016 thru 30 September 2019||Fiscal year beginning 1 October 2019|
|Value added base||0.72||1.2||1.2|
|Income base *:|
|First JPY 4 million||3.1 (1.6)||1.9 (0.3)||0.4 (0.11)|
|Next JPY 4 million||4.6 (2.3)||2.7 (0.5)||0.7 (0.19)|
|Over JPY 8 million||6.0 (3.1)||3.6 (0.7)||1.0 (0.27)|
|Local corporate special tax or special corporate business tax (the rate is multiplied by the income base of size-based enterprise tax), which is collected as national tax by filing corporate tax returns||93.5||414.2 **||260.0|
* The rate shown for the income base is the total income-based tax including (i) the portion collected as part of the national tax return and (ii) the portion included as part of the enterprise tax return. The portion in parentheses of the income base column shows the amount collected as an enterprise local tax (the difference is collected as a national tax). The above rate changes for income base may not affect taxpayers who have elected consolidated taxation since consolidation is not applicable for local tax purposes. Tax rates shown in parentheses do not include local corporate special tax or special corporate business tax.
** The local corporate special tax will be abolished from 1 October 2019 and replaced with special corporate business tax.
Inhabitant’s tax is imposed on a corporation’s income allocated to each prefecture and city (municipal borough). The allocation is generally made on the basis of the number of employees, in the same way as enterprise tax.
The standard tax rate is 3.2% as prefectural tax and 9.7% as municipal tax. However, the tax rate is increased to 4.2% for prefectural tax and 12.1% for municipal tax, depending upon the determination of each local government. From fiscal years beginning on or after 1 October 2019, the rate is increased as follows:
|Inhabitant’s tax||Current||Expected from 1 October 2019|
|Standard rate (%)||Maximum rate (%)||Standard rate (%)||Maximum rate (%)|
|Prefectural tax portion||3.2||4.2||1.0||2.0|
|Municipal tax rate||9.7||12.1||6.0||8.4|
|Local corporate tax rate||4.4||10.3|
In addition to the above, inhabitant’s tax is imposed on a per capita basis, in the range from JPY 70,000 (in cases where the amount of paid-in capital is JPY 10 million or less and the number of employees in each prefecture and city is 50 or less) to JPY 3.8 million (in cases where the amount of paid-in capital is over JPY 5 billion and the number of employees in each prefecture and city is over 50). The inhabitant’s tax amount is determined by the local government by the factors of paid-in capital and the number of employees.
Effective tax rate
The total corporate income tax burden (i.e. effective tax rate) varies depending upon the size of a company’s paid-in capital. Since enterprise tax is deductible, the effective tax rate is less than the total of the statutory rates of corporation tax, inhabitant’s tax, and enterprise tax.
The following is the summary of the effective applicable tax rates in the case of large corporations operating in Tokyo (taking no thought of an additional-value-based tax and capital-based tax out of the enterprise tax above):
|Effective tax rate (%)|
|Fiscal year beginning on or after 1 April 2018||Fiscal year beginning on or after 1 October 2019|
|Local corporate tax||1.021 (23.2% x 4.4%)||2.390 (23.2% x 10.3%)|
|Enterprise tax||0.88||3.779 **|
|Local corporate special tax or special corporate business tax||2.899 (0.7% x 414.2%)|
|Inhabitants’ tax||3.782 (23.2% x 16.3%)||2.413% (23.2% x 10.3%)|
|Effective tax rate *||30.62||30.62 **|
* Effective tax rate is calculated after deducting the enterprise tax (including local corporate special tax or special corporate business tax).
** As of 1 July 2019, the applicable enterprise tax rate and special corporate business tax rate is not released by the Tokyo Metropolitan Government.