Taxation outline

Taxation outline

Definition of SME under Japanese law

Main point

  • Under Japanese Law, a SME is defined as a company with a maximum of JPY 100 million of capital

 

European SMEs are subjected to different taxes when doing business in Japan:

  • Corporate tax,
  • Withholding tax system and
  • Consumption tax (i.e. VAT).

The definition of an SME adopted by the European Commission in the recommendation 2003/361/CE, i.e. fewer than 250 employees and up to EUR 50 million annual turnover (or an annual balance sheet total not exceeding EUR 43 million), differs from the one used in Japan.

The Japanese Small and Medium Enterprise Basic Act  states not less than four different definitions of SMEs. For tax purposes, the definition under the Corporation Tax Act overrides any other legal definition and is used on these pages as it is the only one applicable for tax purposes. Under the Japanese Corporation Tax Act, a company is considered as a SME when its capital does not exceed JPY 100 million (≈ EUR 700 000), regardless its business (Source).

Overview of basic tax principles

The National Tax Agency (NTA) administers the business taxation system on a nationwide scale for both corporate entities and individuals running a business.

The basic principle of the business taxation system in Japan, is based upon a self-assessment method with an external accounting office or internal auditor/board of auditors for bigger companies, which need to be filed within 2 months, at the local taxation bureau of the registered corporate address, after the closing of the financial year.

The taxation system is a neutral system for all domestic corporations engaged in economic activities.
Important to bear in mind that tax evasion and late payment are subject to steep fines in Japan, sometimes amounting up to 50% of additional taxation.

Another important point is that the actual payment of the business tax and the consumption tax to the National Tax Agency is due within 2 months after the closing of the financial year. 

Blue form tax return system

The corporate taxpayer can select between the blue or white form tax return systems. The blue form tax return system is intended to encourage better, uniform and systematic record keeping and reporting by corporate taxpayers by offering certain benefits and preferential tax treatment to approved blue form taxpayers. The blue form tax return is not only limited to corporate taxpayers but can also be used by individual taxpayers. Important to bear in mind that a blue tax form return status is a privileged status, approved by the head of the local tax office, and hence can also be revoked at any time.

Compared to other Asian developed economic nations, Japan’s business taxation percentage has always been on the higher side, as approximately 40% burden on profits has been the norm for a long time.

In order to revitalize the economy following the real estate bubble burst in the early 90’s, annual tax reforms have been executed regularly but no real in-depth changes were realized. That said however, smartly audited, usually bigger, companies could benefit from lowered business taxes during this period, thanks to these newly introduced taxations laws over the 2 last and sometimes also called lost decades.

Source: Rob Van Nylen, Accounting and Taxes (EU-Japan Centre for Industrial Cooperation Report)