setting up business in japan tec 28 jan 10 (sirius)

Saturday, April 8, 2023

Setting up Business in Japan

The Executive Centre, Shibuya

Setting Up Business In Japan

Tax and Operational Essentials... Agenda

Who am I – (Individual tax overview)What can I become – (Forms of doing business in Japan)My debt to society – (Corporate Tax essentials)Accounting for change – (Accounting/Expenses)Sharing the wealth – (Employee-related issues)Why am I here – (Getting profits out of a company)When the music stops – (Exiting from the business)Take aways…


Tax and Operational Essentials... Who am I


Individual Tax OverviewClassifications

For Japan tax purposes, individuals are classified as either:Non-resident

No intention to reside in Japan, andIn Japan less than twelve months

Non-permanent residentIntention to reside in Japan, orIn Japan more than twelve months but less than five years in previous ten years

Permanent residentIntention to reside permanently in Japan, orIn Japan for more than five years in previous ten years


Individual Tax OverviewScope of taxation

Tax classification determines what income is taxed in Japan and at what rate…Non-resident

Only Japan source income subject to tax at flat 20% (on gross)Exempt from Japan tax if conditions under a Tax Treaty are met

Non-permanent residentJapan source income plus any income remitted into JapanTaxed at progressive rates (0% to 50%)

Permanent residentIncome earned anywhere in the worldTaxed at progressive rates (0% to 50%)


Individual Tax OverviewVlSAs

Important to consider…Does the individual meet VISA requirements where

He/she leaves company employmentHires someone from abroad

ExampleBob works for US investment bank – investor/manager VISA , intra-company transferee visa, specialist visaHe sets up his own consulting firmWhen his current VISA expires...


Tax and Operational Essentials... What can I become


Tax and Operational Essentials... Choice of entity

Forms of doing business in JapanIndividual (sole proprietorship)Corporate entity (KK, GK)Branch


Entity taxationSole Proprietorship

Simplest formIndividual is the business Business expenses claimed as a deductionTaxed at applicable progressive rate

Issues include...Legal liabilityLeasing propertyAttracting employees


Entity taxation Corporate entities – overview

Japanese corporations taxed on worldwide income Two common types:1. Joint Stock Co. (aka kabushiki kaisha, “KK”)2. Limited Liability Co. (aka godo kaisha, “GK”)


Using a corporationIssues to consider

Paid in capitalRepresentative DirectorChoosing fiscal year


Entity taxationKK – kabushiki kaisha

Commercial/Legal considerationsCan undertake any business activityOnly type of company which can be listed in JapanMost used form of business entity in Japan – prestige factorShareholders have limited liability

Tax considerationsTaxed on worldwide incomeDirectors bonuses generally non-deductibleDividends paid to non-resident shareholders incur 20% WHT (unless reduced under applicable DTA)US check-the-box treatment unavailable


Entity taxationGK – godo kaisha

Commercial/Legal considerationsCan undertake any business activityAll members have limited liabilityLess onerous corporate governance requirements (than KK)Gaining wide acceptance in Japan

Tax considerationsSame Japan tax treatment as KKPass through treatment in the US may be available via Check-the-Box regulations


Entity taxationBranch office

Commercial/Legal considerationsCan conduct basically any businessHead office retains legal liability

Tax considerationsSubject to Japan tax on its Japan source income No WHT on income repatriated to head officeBonuses to Branch representative generally deductibleNational Tax Agency (NTA) may want to inspect head office’s books


Tax and Operational Essentials... My debt to society


Taxation in JapanOverview

Corporate tax41% (effective) corporate tax rate

Corporation tax (national): 30%Inhabitants tax (Tokyo): 6.21%Enterprise tax (Tokyo): 3.26%Local special tax: 4.292%

Aggregated rates: 43.726Effective tax rate 40.69%

Consumption tax – 5%Individual tax

Tax rates (0 – 50%)Withholding and capital gains taxes


Incorporation/Getting started Initial tax filings

1 Jan 2010Notice of incorporation filed with National Tax Office (Two months from incorporation)

31 Jan 31 Mar

KK’s Fiscal year – January 1 to December 31

28 Feb

Application for filing Blue return due

Incorporation of a company

Notice of incorporation filed with Local Tax Office (Typically a month but depends on office – eg. Tokyo is 15 days)


Corporate TaxationBlue tax return status (1)Blue return filers may qualify for special privileges,

including:Ability to carry forward lossesLimited ability to carry back losses arising within five years of establishment of companyTax office must examine books and records & provide written explanation before making any tax adjustments


Corporate TaxationBlue tax return status (2)Blue return filers must

Maintain accounting books

Blue Return status revoked ifFailure to maintain accountsDelaying the filing of tax returns for a period of two years


Corporate TaxationMore initial filings…

Due within two months of incorporationNotification of establishment of office paying salaries, for WHT purposes

Due by due date of tax return filing (if applicable):Application for Valuation Method of InventoryApplication for Depreciation Method of Depreciable Fixed AssetsApplication for calculation method of book value per unit of securitiesApplication for translation method of monetary assets and liabilities denominated in foreign currency


Tax and Operational Essentials... Tax return filingsCorporate tax

Annual return due within two months of fiscal year endOne month extension on filing (not payment) is commonInterim return due within two months of half year end

Consumption taxAnnual return (if applicable) due within two months of fiscal year endNo extensions


Tax and Operational Essentials... Tax return filings – timeline

1 Jan 2009 31 Dec 2009

Interim tax return due

31 Aug 200931 Mar 2010

Corp tax return due if extension granted

XYZ KK’s Fiscal year – 1 January to 31December

28 Feb 2010

Consumption tax return due

Corporate tax return due unless granted extension


Tax and Operational Essentials... Accounting for change


Tax and Operational Essentials... AccountingAttached to the final corporate tax return

Balance SheetP&L StatementDetailed schedules supporting balance sheet & P&L statementDetailed schedule of changes in shareholders equity


Tax and Operational Essentials... Accounting – important issuesAccounting system used needs to accurately record

Consumption taxEntertainment expensesDepreciation


ExpensesCommon Examples

Start-up costsCan be expensed in first fiscal year, orAmortized (expensed) over five years

SalariesGenerally deductibleLimitation on deductibility for salaries paid to relatives

Director’s compensation“Excessive” salaries not deductibleIrregular payments (e.g., bonuses) not deductibleBonus paid in equal monthly instalments in following year may be deductible

Entertainment expensesIn principle not deductibleFor small companies 90% of first JPY4m generally deductible


Tax audits Current focus of the NTA

Economic slow down – impacted on revenue collectionPressure on auditors to collect more taxFocus areas for smaller business

Directors compensationEntertainment expenses


Tax and Operational Essentials... Japan’s Consumption tax


Japan’s consumption taxOverview

Imposed at 5% on:Provision of services or legal transfer of goods in JapanImportation of goods into Japan (removed from bonded warehouse)


Consumption taxObligation to file a return

Taxable enterprise

Taxable sales in excess of JPY 10 million in “base period”base period is entity’s fiscal year two years prior to current fiscal year

Newly established corporationsNo base period for Companies in first or second fiscal year

Rule: Consumption Tax return only required if paid-in capital is JPY10 million or more at beginning of fiscal year


Consumption tax returnsOverviewTiming of returns

Due within two months of end of fiscal periodNo extensionsAnnual, quarterly and monthly filing elections available – based on previous fiscal year’s tax liability


Tax and Operational Essentials... Sharing the wealth


Tax and Operational Essentials... Employee issues

HiringFinding employees Relevance of the entityRelatives..?

FiringAlways get a (second...) legal opinion


Tax and Operational Essentials... Employee issues

ComplianceEmployee filings (tax, social/labor insurance)Monthly payrollWithholding tax requirement (monthly, or semi-annually)End of year adjustment

Sole proprietor needs to file for social/labor insurance on behalf of employees...


Tax and Operational Essentials... Compensation packages

Standard compensation package includesSalaryTransportationSocial/labor insurance

More sophisticated packages include...HousingTuition feesStock optionsHome leave


Common for companies to outsource director role

Employee Director

Irregular payments(e.g., bonus) Generally deductible Generally non-deductible

Housing Generally 5-15% taxable 35% or 50% taxable

Income exclusion for travel outside Japan Generally available Require shareholders’ meeting

approval

Compensation adjustments Flexible Require shareholders’ meeting approval

Activities performed As per employment contract Unlimited

Tax and Operational EssentialsEmployee v. Director


Employee Independent contractor (IC)Standard employment deduction Generally available Unavailable

Ability to claim expenses Unavailable Available

Social & Labor insurance system

Employer & employee obliged to join Only IC obliged to join

Withholding tax Progressive rates Flat rate

End of year adjustment Yes No

Tax and Operational Essentials... Employee v. Independent contractor


Tax and Operational Essentials... Why am I here


Getting profits out of the companyDividend vs salary vs consulting fees

Dividend incomeDividend is paid to shareholder from after-tax profits (retained earnings)Taxed with shareholder’s other incomeDouble taxation issue

Salary incomeEmployee is entitled to receive a salaryTaxed as employment incomeNo double taxation as salary is an expense for the company

Consulting feeGenerally treated as business income for individual


Tax and Operational Essentials... When the music stops


Exit strategiesSale vs. liquidation

SaleShareholder elects to sell his/her interest in the companyJapan tax issue arises BUT may be exempt under Japan/US Tax Treaty

LiquidationShareholder liquidates the companyCash payout generally treated as a dividend Japan tax will arise if seller resident of JapanJapan tax of as low as 5% may be levied if resident of certain jurisdictions (eg. US, UK)


Tax and Operational Essentials... Take aways…?

Key points Clearly understand what your business is aboutThink realistically about your needs (office space, employees etc.)Consider your exit options (will your business be something worth buying?)Always get a second opinion...Understand your US tax implications