Corporate Taxes in Japan: Corporation, Local and Consumption Tax

A Japanese company is subject to national taxes (corporation tax, local corporation tax and the Special Corporation Tax for Defense) and local taxes (corporate inhabitant tax and corporate enterprise tax). It also pays the special corporate enterprise tax together with corporate enterprise tax. On top of these, it must pay consumption tax and remit income tax withheld from salaries and other payments. Rates vary with the company’s capital, its income and the local government where its offices are located.

The main taxes on a Japanese company

The table below gives the overall picture. It helps to separate taxes on income from taxes on transactions and payments.

Corporation tax rates and the reduced rate for SMEs

The standard corporation tax rate for an ordinary corporation is 23.2%. SMEs benefit from a reduced rate on the portion of income up to JPY 8 million a year.

The 15% and 17% rates are special-measure rates that apply to fiscal years beginning on or before 31 March 2027. The 17% rate for income above JPY 1 billion a year was introduced by the FY2025 tax reform and applies to fiscal years beginning on or after 1 April 2025. Corporations using the group tax sharing system are not eligible for this special measure. Corporations whose average income over the past three years exceeds JPY 1.5 billion (excluded business operators) are also ineligible, and the statutory 19% rate applies to the portion up to JPY 8 million.

Calculating taxable income and treating losses

Income subject to corporation tax is not the same as accounting profit. It is adjusted to reflect taxable revenue and deductible expenses as defined under tax law. For example, part of entertainment expenses and certain directors’ compensation may not be deductible. Corporate enterprise tax is, in principle, deductible in the fiscal year in which the return is filed.

A company approved for blue-form tax returns (青色申告) can carry forward losses (net operating losses) to later years and offset them against future income. To use this from the first fiscal year, it is important to meet the deadline for the application for approval.

Points for subsidiaries of foreign companies

An SME is, in principle, a corporation with capital of JPY 100 million or less. However, a wholly owned subsidiary of a large corporation with capital of JPY 500 million or more, among others, cannot use the SME special measures even if its own capital is JPY 100 million or less. The same applies when the parent is a foreign corporation. We recommend deciding the amount of capital before incorporation, taking the tax effects into account.

Local corporation tax and the Special Corporation Tax for Defense

• Local corporation tax: calculated as 10.3% of the corporation tax amount (the base corporation tax amount). It is filed on the same return as corporation tax.
• Special Corporation Tax for Defense: levied from fiscal years beginning on or after 1 April 2026. It is calculated as 4% of the base corporation tax amount after deducting JPY 5 million a year.

A return for the Special Corporation Tax for Defense is required even when the tax due is zero. Interim returns will be required from fiscal years beginning on or after 1 April 2027.

Corporate inhabitant tax: the per-capita levy applies even in a loss year

Corporate inhabitant tax is paid to the prefecture and the municipality and consists of a corporation-tax-based levy and a per-capita levy.

• Corporation-tax-based levy: calculated by applying a rate to the corporation tax amount. The standard rates are 1.0% for the prefectural portion and 6.0% for the municipal portion. Many local governments apply rates above the standard rate (excess taxation), so check the actual rate for each one.
• Per-capita levy: a fixed amount based on capital and similar amounts and on the number of employees. The standard amounts range from JPY 20,000 to JPY 800,000 a year for the prefectural portion and from JPY 50,000 to JPY 3 million a year for the municipal portion.

In some areas, such as Tokyo’s 23 special wards, metropolitan and ward taxes are filed together with the metropolitan tax office. Because the per-capita levy is unrelated to income, it must be paid even in a loss year. If the company has offices in more than one local government, the corporation-tax-based levy is apportioned by number of employees and filed with each.

Corporate enterprise tax and special corporate enterprise tax

Corporate enterprise tax is paid to the prefecture where the company has offices. Ordinary corporations with capital of JPY 100 million or less generally pay only the income-based levy. Corporations with capital above JPY 100 million are subject to size-based business taxation (外形標準課税) and pay a value-added levy and a capital levy in addition to the income-based levy. Rates vary by prefecture and by the size of the corporation.

The FY2024 tax reform revised the scope of size-based business taxation. Even with capital of JPY 100 million or less, certain corporations that have reduced their capital, and certain wholly owned subsidiaries of large corporate groups that meet specified conditions, may now be subject to it. Subsidiaries of large foreign groups should not rely on capital alone; check the prefecture’s guidance and confirm with a certified tax accountant (税理士).

Special corporate enterprise tax is a national tax, but it is filed and paid to the prefecture together with corporate enterprise tax. It is calculated by applying the following rates to the income-based levy of corporate enterprise tax computed at the standard rate.

Consumption tax: treatment after incorporation and qualified invoices

Consumption tax is levied on domestic sales of goods and provision of services. A business pays the consumption tax it received on sales minus the consumption tax it paid on purchases and expenses. There are two rates: the standard rate and a reduced rate that applies to items such as sales of food and beverages.

• In principle, a business becomes a taxable business that must pay consumption tax if its taxable sales in the fiscal year two years earlier (the base period) exceeded JPY 10 million.
• A newly incorporated company has no base period, but a company incorporated with capital of JPY 10 million or more is a taxable business from its first fiscal year.
• A company may also become taxable soon after incorporation depending on factors such as sales or salaries in the first half of the previous fiscal year, or the size of its parent group.

For customers to claim input tax credits, they need qualified invoices. Whether to remain exempt or to register and become a taxable business should be decided in light of your relationships with customers. For details, see The Qualified Invoice System and foreign companies.

Withholding income tax: salaries, fees and payments abroad

When a company pays salaries, bonuses, directors’ compensation or fees to professionals such as certified tax accountants, it withholds income tax and pays it to the national government by the prescribed deadline. Companies with few employees may be able to use a special arrangement that consolidates payments into twice a year.

Payments to non-residents and foreign corporations, such as dividends or royalties to a foreign parent or compensation to directors living abroad, may also require withholding. If a tax treaty reduces the rate, the prescribed application form must be submitted in advance. To determine whether a payee is a resident or non-resident, see Tax residency in Japan: residents and non-residents. Prices for transactions with the parent company also need to be reviewed from a transfer pricing perspective.

Filing and payment schedule

• Final returns for corporation tax, local corporation tax and the Special Corporation Tax for Defense are, in principle, due within two months from the day after the end of the fiscal year.
• Corporate inhabitant tax, corporate enterprise tax and special corporate enterprise tax are, in principle, filed and paid at the same time.
• An extension of the filing deadline may be available, but deferring payment incurs interest tax and similar charges.
• If the previous year’s tax exceeded a certain amount, an interim return and payment are required during the fiscal year.

After incorporation, the first step is filing notifications with the tax office, the prefecture and the municipality. For notifications with deadlines, such as the application for blue-form return approval, see Filings after incorporation and their deadlines.

Summary: taxes on a Japanese company

The tax burden on a Japanese company is the sum of national taxes (corporation tax, local corporation tax and the Special Corporation Tax for Defense) and local taxes (corporate inhabitant tax, corporate enterprise tax and others). Rates and special measures depend on the amount of capital, the size of the parent company and the location of offices, so it is important to plan the tax structure from the incorporation stage.

Together with partner certified tax accountants, TIMOA supports you from designing capital and the fiscal year, through tax notifications after incorporation, monthly bookkeeping and payment of withholding tax, to year-end closing and returns for each tax. For details, see Accounting, Tax & HR.