Taxation in Japan

Japanese Tax System (1998 edition prepared by Tax Bureau, Ministry of Finance JAPAN)
Overall aspects of the tax system, individual income tax , corporate tax , consumption tax , property-based tax and other

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I.Corporate income taxes

I-1 Corporate status

For the purpose of Japanese corporate taxes, foreign enterprises operating in Japan are classified as domestic corporation and foreign corporation.

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I-2 Normal corporate income taxes

Japanese corporate income taxes consist of corporation tax (national tax) under the Corporation Tax Law, and local taxes under the Local Tax Law, which are business tax (prefecture tax), prefectural inhabitant tax and municipal inhabitant tax. The rates of such taxes for each accounting period are as shown below.

Corporation tax:(currency:Yen:\)

April 1,1998
Effective for
fiscal period beginning
on or after April 1, 1999
Effective for
fiscal period beginning
on or after April 1, 2012
Effective for
fiscal period beginning
on or after April 1, 2015
If the corporation's capital is more than \100million 34.5% 30% 25.5% 25.5%
@Revival special tax : 10% of Normal tax 2.55%
If not:
Taxable income up to \8million a year 25.0% 22% 15%x110%=16.5% 15%
Excess over \8million 34.5% 30% 25.5%x110%=28.05% 25.5%

Business tax:

In case of "Paid in capital of \100million or less":

Effective for
fiscal period beginning
on or after April 1, 1999
Effective for
fiscal period beginning
on or after April 1, 2004
Taxable income up to \4million a year 5.25% 5.0% 6.0%
Excess over \4million and up to \8million a year 7.665% 7.3% 8.76%
Excess over \8million 10.08% 9.6% 11.52%

In case of "Paid-in capital in excess of \100million ":

Effective for
fiscal period beginning
on or after April 1, 2004
Taxable income up to \4million a year 3.8% 4.56%
Excess over \4million and up to \8million a year 5.5% 6.6%
Excess over \8million 7.2% 8.64%
In addition to above:
Added value component (*1) 0.48% 0.576%
Capital component (*2) 0.2% 0.24%

(*1)Added value component: Lobour costs+Net interest payment+Net rent payment+Income/loss for current year
(*2)Capital component : Capital plus capital surplus for tax purposes

Note: Business tax is deductible from income in the accounting period in which it has become due.

Prefectural and municipal inhabitant taxes based on corporation tax:

Prefecture inhabitant tax 5% 6%
Municipal inhabitant tax 12.3% 14.7%
Total 17.3% 20.7%

Prefectural and municipal inhabitant per capita tax:

Prefectural inhabitant per capita tax:
The tax amount varies based on the total of paid-in-capital and capital surplus of the corporation.


Total of paid-in-capital and capital surplus Standard
More than \5billion \800,000
\5billion or less but more than \1billion \540,000
\1billion or less but more than \100million \130,000
\100million or less but more than \10million \50,000
\10million or less \20,000

Municipal inhabitant per capita tax:
The tax amount varies based on the total of paid-in-capital and capital surplus of the corporation and number of staff employed in the municipality concerned.

Total of paid-in-capital and capital surplus
Excess over 50 employees
Up to 50 employees
More than \5billion \3,000,000 \410,000
\5billion or less but more than \1billion \1,750,000 \410,000
\1billion or less but more than \100million \400,000 \160,000
\100million or less but more than \10million \150,000 \130,000
\10 million or less \120,000 \50,000

Effective corporate income tax rate:

The effective corporate income tax rate based on the foregoing tax rates is as shown below, one the assumptions that the amount of paid-in-capital is more than \100 million.

April 1,1998
Effective for
fiscal period beginning
on or after April 1, 1999
to March 31, 2004
Effective for
fiscal period beginning
on or after April 1, 2004
Effective for
fiscal period beginning
on or after April 1, 2012
to March 31, 2014
Effective for
fiscal period beginning
on or after April 1, 2014
Corporate tax 34.50% 30.0% 30.0% 25.5% 25.5%
@@Revival special tax 10“x25.5“ 2.55%
Business tax (Tokyo) 11.60% 10.08% 7.55% 7.55% 7.55%
Inhabitant tax :
34.5%x20.7%(Tokyo)= 7.14%
30.0%x20.7%(Tokyo)= 6.21% 6.21%
25.5%x20.7%(Tokyo)= 5.28% 5.28%
Total 53.24% 46.29% 43.76% 40.88% 38.33%
Effective tax rate :
53.24%/(1+11.60%)= 48%
46.29%/(1+10.08%)= 42%
43.76%/(1+7.55%)= 40.7%
40.88%/(1+7.55%)= 38%
38.33%/(1+7.55%)= 35.6%

Note:Business tax is deductible from income in the accounting period in which it has become due.

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I-3 Privileges under the blueform return system

This system is intended to encourage taxpayers to maintain proper accounting records and apply thereto fair accounting standards. In order to file a blueform return, it is required to submit to the chief of the competent tax office an application for his approval before the commencement date of the accounting period for which such return is submitted, or in the case of the first accounting period, within three months after the establishment date. Once the approval is obtained, no further application is necessary to continue to file blueform returns.

Privileges for corporations filing blueform returns include the following:

a Carryforward of losses for five succeeding years.
b Carryback of losses for one preceding year (not applicable to business and inhabitant tax)
c No correction of income by the tax authorities without physical inspection of the books and records.
d The tax authorities' obligation to state a reason for correction of income (or loss) where correction is made.
e Establishment of reserves.
f Special depreciation,where applicable.
g Tax credit for increase in research and development expenses.

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I-4 Taxable income of Domestic Corporations:

Domestic corporations are liable for corporate income taxes on income for each accounting period at the rates as mentioned above,and on liquidation income upon liquidation. Moreover,certain domestic family corporations are liable for a special tax on retained earnings for each accounting period.

Taxable income represents the net of gross revenue less costs, expenses and losses, no matter where they accrue,calculated in general in accordance with fair accounting standards of Japan and in particular as adjusted in accordance with the requirements of the tax laws of Japan.

Provision and reserves:

The term "provision" herein used refers to those provided for in the Corporation Tax Law which may be established by taxpayer corporations no matter whether they are filing blueform returns or not.
The term "reserve" refers to those in the Special Taxation Measures Law which may be established by corporations filing blueform returns only.
The provisions and reserves are not allowable unless recorded in the books of account and reflected in the financial statements. The reserves may be established, in lieu of charges to income, as appropriations of surplus.

Major provision and reserves are as follows

Provision for bad debts:

The amount of this provision is calculated based on the following alternative methods:

Percentage of receivables outstanding at the end of each accounting period:

This method is eliminated since April 1,1998,but there are transition rates declining for the periods from 1998 to 2002.

Wholesales and retail business 1%
Manufacturing business 0.8%
Banking and insurance business 0.3%
Instalment sales business 1.3%
Other business 0.6%

Percentage of actual bad debts for the preceding 3 years:

A Total bad debts for preceding 3 years x 12/Number of months in accounting periods for preceding 3 year
B Total receivables at the end of each accounting period for preceding 3 years x 1/Number of accounting periods in preceding 3 year
C Allowable percentage C=A/B

In addition to provision for bad debts, the tax administrative rulings provide for provision for amortization of doubtful receivables,which can be established in case the debtors concerned are deemed to be in a serious financial situation such as suspension of banking transactions. The allowable amount is at least 50 percent of the receivables from such debtors.

Provision for employee retirement allowance:

It is a practice in Japan to pay a retirement or severance allowance calculated in accordance with the enterprise's retirement rules. Incidentally, an enterprise which has ten or more regular employees is required to submit its working regulations to the Labor Standard Office for their approval, incorporating the retirement rules,if any.The rates of retirement allowance usually varies, depending on whether retirement is voluntary or involuntary,etc.,and the minimum rate is applied to voluntary retirement.
The allowable limit is calculated on the basis of the annual accrual at the minimum rate(however, it can not exceed six percent of total payroll of the accounting period concerned, in case the retirement rules are not made known to the employees), and the total accumulated allowable amount can not exceed 40 percent (20 percent since April 1,1998,but declining rates,37% in 1999,33% in 2000,30% in 2001, 27% in 2002, 23% in 2003,and 20% in and after 2004 are available as transition )of the accrued retirement allowance at the minimum rate.

Revenue,cost,expenses and losses to be excluded for the purpose of the computation of taxable income:

(a)Revenue to be excluded:

1 Dividend received from domestic corporations less that portion of interest incurred on borrowed funds attributable to the principal amount on which such dividends have been received.
2 Appraisal profits on assets. It is not permissible under the Commercial Code to take up such appraisal profits.
3 Refunds of corporation tax,prefectual and municipal inhabitant taxes,interest on delinquent taxes,penalties,fines,etc.,payments of which are not deductible.

(b)Costs,expense or losses to be excluded:

1 A write-down of assets other than to the market value in the case of damage due to disaster or obsolescence of inventories or fixed assets.
2 The corporation tax,prefectural and municipal inhabitant taxes,interest on delinquent taxes,penalties,fines,etc.paid.
3 Withholding income tax and foreign corporation tax,if credited against Japanese corporation tax.
4 The unreasonably large portion of remuneration or retirement allowances paid to officers(i.e.,members of the board of directors and statutory auditors only). Bonuses paid to officers are not allowable except for a bonus paid to an officer concurrently holding a portion as an employee,whereby the portion deemed to be employee's bones is allowable.
5 With regard to ordinary contributions,the excess over one-half of the total of 2.5 percent of taxable income and 0.25 percent of paid-in capital surplus (per annum).Contributions as designated by the Government,however,are allowable in their entirety. Moreover,those to certain public corporations,etc.making considerable contribution towards the promotion of education or science,etc. in such amount as is equal to the allowable limit for ordinary contributions are allowable.
6 90% (80% since April 1,1998) of entertainment expenses in excess of the following base amounts:
In case paid-in capital is: Maximum limit
March 31,1998
Maximum limit
April 1,1998
Not more than \10million \3.6million \3.2million
More than \10million but not more than \50million \2.7million \2.4million
More than \50million None None

Foreign corporation

Foreign corporations are liable for taxes on income derived from sources within Japan only. The scope of taxable income and the manner in which income taxes are payable differ depending on how they stand for Japanese tax purposes.

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I-5 .Filing of returns and payment of taxes

Corporate income tax returns are required to be filed within two months after the end of each accounting period and taxes paid thereon,unless an extension is applied for and approved by the tax office. A one month extension.if applied,is automatically approved.
A final return must be accompanies by financial statements and supporting schedules.

Non-filing of financial returns will cause a non-filing penalty of 5 or 10 percent and will be a reason for cancellation of the blueform return filing privilege.

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II. Individual income taxes

II-1 Individual income taxes of Japan

Individual income taxes of Japan consist of national income tax and local inhabitant tax. Moreover,those individuals who are operating certain specified businesses of their own at fixed places in Japan are liable for enterprise tax assessable by prefectural governments.

Income tax is payable in accordance with the Income Tax Law,and the taxable year is the calendar year. Income tax return for the calendar year is required to be filed and paid by no later than March 15 of the next year.
Inhabitant tax is assessed by the prefectural and municipal governments,on income for the preceding year in accordance with the provisions of the Local Tax Law.

II-2 Classification of individual taxpayers

In determining the tax liabilities of foreign nationals and method of payment of their taxes ,it is of primary importance to determine the categories into which they should be classified. Depending on the categories ,the scope of their taxable income ,tax rates applicable thereto and the method of tax payment are different.

Categories of individual taxpayers:
According to the Income Tax Law of Japan,there are the following categories of individual taxpayers:

(1) Resident
A resident who has a "JUSHO"(Domicile) in Japan, or has had a "KYOSHO" (Residence) in Japan for one year or more.

Note: Generally speaking, you have a "JUSHO" in Japan if your principal establishment for living is in Japan and you have a "KYOSHO" in Japan if you are staying or living in Japan without "JUSHO".

(a) Non-permanent resident:

A resident who has no intention to reside permanently in Japan, but has had his/her "JUSHO" or "KYOSHO" in Japan for five years or less.

(b) Permanent resident

A permanent resident is a resident other than a non-permanent resident. Therefore,an individual who intends to reside in Japan permanently,or has been domiciled or resident in Japan for a period of more than five years even without intention to reside in Japan permanently,falls under this category.

(2) Non-resident

A non-resident is an individual other than a resident. Therefore,an individual who has no domicile or has not been resident for a continuous period of one year or more in Japan falls under this category.

The following table shows the scope of taxable income according to your resident status.

NON-PERMANENT RESIDENT Taxable Taxable Taxable Only the portion deemed remitted to Japan is taxable.
(This means that the remainder retained abroad in not taxable.)
PERMANENT RESIDENT Taxable Taxable Taxable Taxable
NONRESIDENT Taxable in principle Not taxable

NOTE: As stipulated by Japanese Income Tax Law, salaries, wages or other compensation for personal services performed in Japan are treated as "INCOME FROM SOURCES IN JAPAN", whether they are paid in Japan or abroad.

Filling Income Tax Return

In Japan the individual income tax is based on the self-assessment system, under which each taxpayer is required to compute his/her tax base and tax amount, file a final return with a tax office and pay the tax amount accordingly.
In principle, a taxpayer must add up income for the year, including those income from which taxes were withheld, such as salaries and make a settlement of annual tax liability by filing a Final Tax Return for the year.

Who Must File

You must file a Final Tax Return in principle if you come under any of the following cases.

‚P Employment Income Earner
(Salaries, wages, bonuses and other allowances of the similar nature)

(1) Your total employment income receipts exceeded \20,000,000.
NOTE: In case you receive employment income from one payer in Japan only and the total receipts are equal to or less than \20,000,000, your tax liability for this income is to be settled by the year-end adjustment of withholding tax. So you are not required to file a Final Tax Return.

(2) Your employment income was paid outside Japan.

(3) You received employment income from one payer only in Japan, and your total amount of various kinds of income other than employment and retirement income exceeded \200,000.

(4) You received employment income from two or more payers, and your employment income receipts (excluding employment income subject to year-end adjustment) and total amount of various kinds of income other than employment and retirement income exceeded \200,000.

(5) Others

‚Q Earner whose Income is other than Employment Income

Your "total amount of various kinds of income" exceeded the total of your basic deduction and other deductions from income and, if you are entitled to tax credit for dividends, the amount of your income tax is more than the amount tax credit for dividends.

NOTE: You may claim a tax refund by declaring deduction for medical expenses, etc. on your final tax return, even if you are not required to file a final tax return.
(1) You had income from sources in Japan, such as income from a business carried on in Japan, income from the disposal of assets situated in Japan, income from immovable property situated in Japan.

(2) You had income from personal services performed in Japan such as salaries, wages and other remuneration which are not subject to withholding tax in Japan.

NOTE:In general, you can not file except the above cases (1), (2), because your tax liabilities are settled by separate withholding taxation at source.

When and Where to File

You are required to file your final tax return with your tax office during the period from February 16 to March 15 and to pay the tax by March 15.

In case you are leaving Japan without designating a person to administer your tax affairs, your final tax return must be filed by the time of your departure from Japan.

Estimated Tax Prepayment

As a rule, if your "basic tax amount to be prepaid in a year" comes to \150,000 or more, you must make prepayments of your estimated tax in the year. And the amount will be notified by the tax office.

NOTE: "basic tax amount to be prepaid" is, in short, the tax on total taxable income less the tax withheld in the preceding taxable year. The estimated taxes are to be settled by filing the final tax return for the year.

Penalties on Tax

If you fail to file a correct tax return, you will be imposed an additional tax and a delinquent tax.

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II-3 Taxable income

Taxable income is classified into the following ten categories.

Interest income from deposits,public bonds and debentures and the distribution of gains of a joint operation trust or a public bonds and debentures investment trust. Other interest is included in miscellaneous income shown as No.10 below,if not business income.
Withholding income tax is deducted at source at the rate of 20 percent.
Dividend income such as dividends declared from profits, distribution of gains of a security investment trust,etc.
Taxable dividends income is the gross receipt less interest on borrowings for the acquisition of the principal,and is taxed in the following manner:
(1)Withholding income tax is deducted at source at the rate of 20 percent.
(2)Dividends income ,in principle, is required to be added to ordinary income;however,there are the following exceptions:
(a)Where a dividend received from one domestic corporation does not exceed \50,000 ,such dividend is not required to be declared during the years.
(b)Separate taxation can be applied for at the higher withholding tax rate((35 percent).
3 Real estate income from the lease of real estate,etc.
Gross receipts less necessary expenses are taxable.
4 Business income from business activities.
Gross receipts less necessary expenses are taxable.
5 Employment income includes remuneration,salaries, wages, pensions,bonuses and other allowances of a similar nature.
6 Retirement income includes lump-sum retirement allowances and other allowances of a similar nature.
The retirement income is separately from other income,and the payer of retirement income in Japan is required to withhold both income and inhabitant taxes at source.
The taxable retirement income is 50 percent of the net of the gross receipts less the certain deduction depending on his/her length of services.
7 Timber income is taxed separately from other income,and the taxable amount thereof is the net of the gross receipts less cost and expenses as well as the standard deduction of \500,000.
8 Capital gains represent income derived from the sale or transfer of assets,including the right to use land,other than those falling under other categories of income,such as timber income,business income,etc.,and the amount of such income is computed by deducting from the gross receipts from the assets sold or transferred the total of the acquisition cost and expenses incurred in connection with the sale or transfer.
9 Occasional income is income of an occasional nature,such as prize money,deduction of \500,000 from the net of the gross receipts less necessary expenses. Fifty percent of such amount is added to ordinary taxable income.
10 Miscellaneous income is income other than the foregoing categories of income,and the net of the gross receipts less necessary expenses is added to ordinary taxable income.

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II-4 Ordinary taxable income ,allowable deductions and computation of income tax amount:

A non-permanent or a permanent resident taxpayer who is required to file a final return (other than those who are not required to file such return) should add up various categories of income not subject to separate taxation,deduct allowable deductions from such income and calculate the amount of income tax on the net taxable income. The balance of the deductions,if any ,is deductible from income subject to separate taxation. Such computation procedures are shown on the income tax return form available at the tax office.

Ordinary taxable income:
With reference to II-3 above,the net of the following categories of income (ordinary income) after deduction of applicable cost,expenses and deductions should be added up:

  • Dividend income not subject to separate taxation
  • Real estate income
  • Business income
  • Employment income
  • Occasional income
  • Miscellaneous income
  • Interest income not subject to separate taxation

Computation of taxable income and income tax amount:

Total Ordinary income shown above (A) \xxx
Casualty losses -xxx
Medical expenses -xxx
Social insurance premiums -xxx
Life insurance premiums -xxx
Fire and other household casualty insurance premiums -xxx
Contributions and donations -xxx
Physically handicapped person -xxx
Aged person,widow(or a divorcee),widower -xxx
Working student -xxx
Spouse -xxx
Dependents -xxx
Basic deduction -\380,000
Total deductions
(B) -xxx
Ordinary taxable income (C)=(A)-(B) \xxx
Income tax based on the taxable income (C) above (Tax) \xxx

The following income tax rates are applied to the taxable ordinary income.

Income tax rates from year 2007

Ordinary taxable income
Tax rates Deduction
Not over \1,950,000 5% -
Over \1,950,000, but not over \3.3million 10% \97,500
Over \3.3million, but not over \6,950,000 20% \427,500
Over \6,950,000, but not over \9million 23% \636,000
Over \9million, but not over \18million 33% \1,536,000
Over \18million 40% \2,796,000

Example: If you have \6.5million as ordinary taxable income,then,
\6.5million x 20% -\427,500=\872,500 as income tax amount to be paid.

Computation of tax payable or (refundable)

Income tax based on the taxable income (C)above (Tax) \xxx
Tax credits:
Resident purchase credit -xxx
Foreign tax credit -xxx
Dividend tax credit -xxx
Contribution credit -xxx
Total tax credits (D) -xxx
Withholding tax at sources (E) -xxx
Provisional payments (F) -xxx
Income tax payable or (refund) (Tax)-(D)-(E)-(F) \xxx

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II-5 Inhabitant taxes

Inhabitant tax is assessed by the prefectural and municipal governments,on income for the preceding year in accordance with the provisions of the Local Tax Law.

Prefectural inhabitant tax rate:

Until 2006 From 2007
Taxable income Tax rate Deduction Tax rate
Up to \7million 2% - 4%
Over \7million 3% \70,000

Per capita tax is \700 a year.

Municipal inhabitant tax rate:

Until 2006 From 2007
Taxable income Tax rate Deduction Tax rate
Up to \2million 3% - 6%
Over \2million,but not over \7million 8% \100,000
Over \7million 10% \240,000

Per capita tax is as follows:

City population Per capita tax
Per capita tax
Maximum limit
Over 500,000 \2,500 \3,200
Up to 500,000,over 50,000 \2,000 \2,600
Other than above \1,500 \2,000

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III. Japanese income taxes on Expatriates' Compensation

III-1. Expatriates in Japan

Foreign enterprises have various interests in Japan through their branches,joint ventures with Japanese enterprises,liaison offices,and other forms of business arrangements in Japan. Usually the expatriates' assignment in Japan is for more than one year,and,under the Tax Law of Japan,they are liable for Japanese income taxes as resident taxpayers.

The expatriates no doubt have no intention to reside in Japan permanently,and they are treated as non-permanent resident taxpayers for the first five years of their residence in Japan and as permanent resident taxpayers thereafter.

The scope of taxable income in respect of non-permanent resident taxpayers is different from that of permanent resident taxpayers with respect to income from sources abroad which ,if not paid in Japan or remitted to Japan,is not taxable,while a permanent resident taxpayer is liable for income taxes on his/her entire income.

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III-2 Income taxes due by expatriates

Expatriates are liable for income tax (national tax under the Income Tax Law) and inhabitant tax (prefectural and municipal taxes under the Local Tax Law).

Income tax is payable for each calendar year,however, inhabitant tax for the calendar year is calculated based on taxable income for the preceding calendar year. Moreover,inhabitant tax assessed against residents in Japan as of January 1 of the taxable year,and, therefore,if an expatriate terminates his assignment in Japan and leaves Japan on,for example,the second of January, he/she will be liable for the entire inhabitant tax for the year of his/her departure from Japan based on the taxable income for the preceding year regardless of only two days of residence in Japan for the year of departure.

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III-3 Taxable compensation to expatriates

Compensation to expatriates may include the following items:

  • Basic salary
  • Bonus
  • Cost of living allowance
  • Overseas premium
  • Housing allowance or company housing
  • Servant allowance
  • Children's tuition allowance
  • Exchange allowance
  • Tax equalization programs
  • Company car
  • Home leave transportation
  • Moving expenses
  • Furniture storage
  • Accountant's fee for preparation of income tax return

Compensation received by expatriates is employment income for Japanese tax purposes whether they are made members of the board of directors or not.
The term "employment income" includes salaries,wages,pensions,bonuses and other allowances of a similar nature. Employment income is generally paid in cash,however,is not limited to such. Payments in kind or economic benefits are also included in employment income. Therefore,no matter how the compensation is composed ,the total thereof is subject to income taxes,unless specially exempted from taxes under the laws,regulations or administrative rulings.

Of the various items of compensation as listed above,the following items are exempted from income taxes or special treatment is applicable thereto:

Company housing:

Housing or apartments suitable for expatriates in Tokyo are expensive, and those who live in apartments, the monthly rent of which is \1,000,000($8,333[@\120/$1]),are not few. In case where such housing is provided by the employers, the rent so paid is deductible for the employers' income tax purposes, and the expatriates are not required to include such rent in their taxable income, however, the assessed rental (i.e.,value of taxable economic benefit) is taxable to the expatriates. The following is the formula of the computation of assessed rental.

Taxable value of the building x 0.2% = (A)
\12 x total floor space expressed in "tsubo"(3.3‡u) = (B)
Taxable value of the land x 0.22% = (C)
Monthly assessed rental = (A)+(B)+(C)= (D)


The "taxable value" as referred to above is the taxable basis of the building and land concerned for annual fixed assets tax purposes.
In case the taxable value is amended,the assessed rental is required to be amended in accordance with from the month of May of the year of the amendment.

In case where the expatriates are corporate officers (members of the board of directors and statutory auditors), the above formula is not applicable but the assessed rental applicable to them is calculated as follows:

On the basis of the taxable value of the property:

Taxable value of the building x 12%(or 10% if non-wooden) = (A)
Taxable value of the land x 6% = (B)
Annual assessed rental = (A)+(B) = (C)
Monthly assessed rental = (C) x 1/2 = (D)

On the basis of monthly rental,in case the house is leased from a third party:

Monthly rental paid by the company x 1/2 = (E)

Amount to be repaid by the officer to be the company(or the amount of taxable economic benefit):

If the house is not used for company business:
(D) or (E), whichever is the greater =
If so used :
(F)x 70% =

As rental paid by the company is greater almost without exception,the taxable value corresponding to (G) above usually is 35% of such rental.

"Monthly rental" often includes utility charges, e.g., air-conditioning, electricity, gas and water. Since such utility charges,if paid by the employers,should be included in the expatriates' taxable income,it is advisable that the amount of real rent be clearly agreed upon in a lease agreement to be entered into by the employer with the landlord.

Children's tuition allowance:

Tuition fees for children of expatriates are taxable income to them. However, an exception to such taxable treatment was established by a private tax ruling issued in 1978 with respect to the contribution plan of the American School in Japan under which, if employer companies participate in such contribution plan, the expatriates' dependents may be exempted from tuition fees, the expatriates will not be required to report the benefits as their taxable income. The employer companies are required to treat the contributions as such for corporation tax purposes, the allowable limit of which for their corporate income tax purposes is the total of 1.25% of taxable income and 0.125% of paid-in capital.

Company car:
A company car used primarily for the employers' business is not treated as a taxable economic benefit, even if expatriates sometime use such car for their private purposes.

Home leave transportation:
It has been established that home leave transportation should not be subject to income taxes provided expatriates are not taking home leave more than once a year.

Moving expenses:
Moving expenses fall under non-taxable income under the Income Tax Law.

Furniture storage and accountant's fee:
The tax authorities of Japan have not yet expressed their views as to whether or not these items should be treated as taxable income.

Determination of employment income from sources outside Japan

Expatriates often travel outside Japan on business. Since employment income accrues from the place where employment services are rendered, income corresponding to employment services rendered while they are traveling outside Japan is treated as income from sources abroad. The amount of such income is required to be calculated based on the number of days spent outside Japan by expatriates, and in connection therewith the day of his departure from Japan is not counted as absence from Japan while the day he returns to Japan is counted as absence from Japan. Moreover, in case where expatiates take vacation or home leave, the number of days spent outside Japan is required to be completely eliminated from the computation of allocation of employment income to sources abroad and Japan.

The following is an example of the computation of income attributable to services in Japan:

Total salary and allowances............ $80,000 (A)

Income attributable to services in Japan on the basis of the number of days:

In Japan 275 (B)
Outside Japan:
Business 60
Vacation 30 (C)
Total 365 (D)

(A) x (B)/(D)-(C)= $80,000 x 275/335 =$ 65,672

A non-permanent resident taxpayer is not liable for tax on income from sources abroad,if not paid in Japan or remitted to Japan.

If the total of his compensation paid in Japan and the amount paid abroad and remitted to Japan does not exceed the amount of income attributable to services in Japan, the latter amount will be taxable.
In case,however,where such total exceeds the amount of income attributable to services in Japan,then such total will be taxable. Therefore,it is necessary for non-permanent resident taxpayers to keep a record of remittances to Japan if he receives part of his compensation outside Japan.

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IV. Consumption tax

Effective April 1,1988 the national government imposes 3% consumption tax on all supplies of goods and services in Japan,except for interest,sale or lease of land,etc.
As amended,effective April 1,1997 the consumption tax rate increases to 5% by 2%(1% as national tax plus 1% as prefectural tax).

The rate will be raised to 8 percent on 1 April 2014 and to 10 percent on 1 October 2015.

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Yokoyama CPA Office

Akira Yokoyama
Certified Public Accountant

If you have any questions,please don't hesitate to contact me by E-mail or Fax.

Zip code 270-0034, No.5 A1405,7-173,Shinmatsudo,Matsudo-City,Chiba,Japan
Tel 81+47+346+5214 Fax 81+47+346+9636

Career of Akira Yokoyama,CPA
Graduated from Chuo University ,the faculty of commercial sciences
Joined Peat,Marwick,Mitchell & Co(Now KPMG).,accounting firm ,Tokyo Audit Dept.Audit experiences as U.S.GAAP,including SEC listed companies:Honda Motor Co.,Ltd. Hitachi, Ltd. Mitsubishi Electric Industrial Co.,Ltd.,Caltex Oil Japan,Polaroid Japan,Dodwell&Co.,Fuji Xerox and so on.
Transferred to Toronto, Canada of Peat,Marwick,Mitchell&Co for supporting Japanese Companies entering into business in Canada,and audit
Returned to Peat ,Marwick, Mitchell & Co,Tokyo
Left Peat,Marwick,Mitchell&Co.,Tokyo (Now,KPMG,Tokyo)
Joined Century Audit Corporation as partner (Now,Azusa Audit Corporation)
Left Century Audit Corporation
Open Independent Accounting Office as Yokoyama Accounting Firm
Accounting knowledge
U.S.GAAP, International Accounting Standards and Japanese GAAP well known
Yokoyama's Homepage:
"Taxation in Japan " in English
URL: (This site)
"IAS" in Japanese
"Accounting ,Taxation ,Financial Information (Disclosures)" in Japanese only
and Other approximately 50 sites
"Cash Flow well known by this one book" published by Mikasa Publish Company in Japanese
"How to prepare Cash Flows Statement" published by Ohesu Publish Company in Japanese