Japan is a world-leading economy in the heart of Asia, excelling in innovative technology and its value-adding research and development culture. Japan’s highly reliable domestic and international transportation infrastructure enables businesses to reach markets near or far with ease. The large domestic market is loaded with consumers with a high buying power, making it an attractive pull factor for foreign investors.
When starting a business in Japan, owners must take into account the country’s unique culture and business structure. Having in-country specialists like Links International can help you ease into the Japan business world, stress-free.
The Japan taxation system can give new business owners, especially from overseas, a major headache. Still, it is of fundamental importance for an employer or business owner to understand the tax obligations and taxation system where the business is. To help employers and HR leaders grasp the basics of taxation in Japan, Links has put together some essentials of what you need to know about Japan tax rates and some corporate tax basics.
Tax Obligations as An Employer in Japan
Japan’s tax filing system is based on a self-assessment system, where taxpayers calculate their annual income and file the tax return themselves.
Withholding Tax at Source
Certain income is also subject to withholding tax where the employer will deduct the income tax from the salary, and the tax collected will then be paid to the taxation office on behalf of the employee.
According to the Japan External Trade Organization (JETRO), the following are examples of the types of income subject to withholding tax at source:
Payments made in Japan of the following or other prescribed income to residents (individuals):
- Salary, wages, bonuses and similar compensation
- Retirement allowances
- Compensation, fees, etc., to certain professionals
Payments made in Japan of the following or other prescribed income to domestic corporations:
Social Security Tax
In Japan, a company must register under several insurance systems when first incorporating or upon hiring its first staff. An employer must ensure all employees take part in the four public health insurance and pension insurance systems:
- Workers’ Accident Compensation Insurance
- Employment Insurance
- Health Insurance and Nursing Care Insurance
- Employees’ Pension Insurance
An employer usually withholds the employee’s social security contribution by deducting the payable portion from the salary in addition to making his/her own contribution to the employee’s social security funds.
For more information, please visit the website of Japan Pension Service.
Japan Corporate Tax Rates
Taxes are levied on income derived by the activities of a business in Japan; these taxes include corporate tax, local corporate tax, corporate inhabitant tax and enterprise tax. Below, we will be referring to Japan corporate tax rates with a fiscal year commenced between 1 April 2018 and 31 March 2019, with references to information from JETRO.
Corporate Income Tax
The current income tax rate for corporates with paid-in capital of over 100 million yen is at 23.2%. For small and medium-sized enterprises, the first 8 million yen is levied at a rate of 15% while income over 8 million yen is levied at 23.2%.
Local Corporation Tax Rate
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.
Corporate Inhabitant Tax
Corporate inhabitant taxes consist of two elements: a calculation based on the corporate income (rates vary for different prefectures and municipalities) as well as on a per capita basis based on the corporation’s capital and the number of employees.
Per capita corporate inhabitant tax rates for corporates with over 50 employees:
|Capital Amounts||Per Capita Levy|
|¥1,000,000,001 – ¥5,000,000,000||¥2,290,000|
|¥100,000,001 – ¥1,000,000,000||¥530,000|
|¥10,000,001 – ¥100,000,000||¥200,000|
|¥0 – ¥10,000,000||¥140,000|
Per capita corporate inhabitant tax rates for corporates with up to 50 employees:
|Capital Amounts||Per Capita Levy|
|¥1,000,000,001 – ¥5,000,000,000||¥950,000|
|¥100,000,001 – ¥1,000,000,000||¥290,000|
|¥10,000,001 – ¥100,000,000||¥180,000|
|¥0 – ¥10,000,000||¥70,000|
Corporations in Japan having a capital or investment of more than 100 million yen are subject to enterprise tax. A local tax imposed by the prefectural governments on a pro forma basis. The tax amount is calculated on the corporation’s income, added-value and capital. The below table shows the standard tax rates; however, tax rates may differ depending on the local government.
Tax rates of enterprise tax on a pro forma basis as follows:
|Type of Levy||Standard Tax Rate|
|Income Levy||0.3%/ 0.5%/ 0.7%*|
|Added Value Levy||1.2%|
*The income levy between income brackets: 0.3% for up to 4 million yen per year, 0.5% for over 4 million yen and up to 8 million yen per year, and 0.7% for Over 8 million yen per year.
Employees’ Income Tax in Japan
As an employer, it is crucial and a responsibility to understand and facilitate your employee’s tax obligations in addition to your own.
Unless the employer has settled tax payments through the withholding tax system, the employee is required to submit an income tax return each year.
Japan Individual Income Tax Rates
|¥0 – ¥1,950,000||5%|
|¥1,950,001 – ¥3,300,000||10%|
|¥3,300,001 – ¥6,950,000||20%|
|¥6,950,001 – ¥9,000,000||23%|
|¥9,000,001 – ¥18,000,000||33%|
|¥18,000,000 – ¥40,000,000||40%|
|¥40,000,001 and above||45%|
Individual Inhabitant Taxes
The individual inhabitant taxes refer to the prefectural tax and municipal tax which are applied to employees who have a domicile in Japan as of 1 January each year. The standard tax rate is 10% (prefectural tax and municipal tax combined) and levied by prefectural governments and municipal governments in Japan. Employees who have resided in Japan for less than 1 calendar year are not subject to the individual inhabitant taxes. The employee is obliged to file and pay the taxes if his/her company does not withhold part of the salary for such purposes.
Links International is an award-winning HR Outsourcing provider in Asia that offers support and advice for HR professionals and business owners to tackle HR and payroll challenges. Get in touch with one of our representatives today! Are you looking for HR functions support for your new business in Japan? Links also provides payroll outsourcing, recruitment, outplacement and HR analytics services for various industries across Japan.