Japanese Corporate Tax System overview

Corporations engaged in economic activities in Japan are subject to taxes in Japan on the profits generated by those economic activities. Steps have been taken, however, to ensure that the tax system does not impose unfair burdens on multinational corporations engaged in economic activities in Japan on the basis of the mode of their business presence in Japan. Income of corporations established in Japan is, as a rule and with the exception of certain non-taxable and tax-exempt income, subject to taxation, regardless of where it was generated (i.e., the source country of income), but when that income includes profits earned in foreign countries that are taxed in the source countries of that income, foreign taxation deductions are available whereby taxes paid in a foreign country may within certain bounds be deducted from Japanese taxes owed for the purpose of eliminating double taxation between the source country of income and Japan. Regarding Japanese branches of foreign corporations, measures such as only certain income generated within Japan is subject to taxation in Japan, have been implemented to avoid international double taxation in Japan. The taxes levied in Japan on income generated by the activities of a corporation include but not limited to corporate tax (national tax), corporate inhabitant tax (local tax) and enterprise tax (local tax). Except in instances requiring exceptional treatment, the scope of income subject to corporate inhabitant tax and enterprise tax is determined and the taxable income calculated in accordance with the provisions for corporate tax. Corporate inhabitant taxes are levied not only on income but also on a per capita basis using the corporation’s capital and the number of its employees as the tax base. Corporations having large paid-in capital are subject to enterprise tax on a pro forma basis.