This country-specific Q&A provides an overview to tax laws and regulations that may occur in the Japan.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-4th-edition/
How often is tax law amended and what are the processes for such amendments?
In general tax laws are amended once a year as a regular process. Major tax laws, for example, corporate tax law, income tax law, inheritance tax law and consumption tax law, are amended once a year, however, minor tax laws such as the stamp duty law and tobacco tax law are not amended annually.
In summer each year, various industry groups make requests for tax reform to the competent governmental authorities (e.g., the Ministry of Economy Trade and Industry in the case of manufacturing, trade and IT industries). Such governmental authorities then consider the tax requests from industry groups and summarize the requests for tax reform and commence negotiations with the tax department of the Ministry of Finance. In parallel, the Research Commission on the Tax System considers and discusses tax amendments in relation to such tax reform requests. In around December of each year, the Research Commission on the Tax System publishes an outline of the tax reform for the following year. The bill of amended tax statutes drafted by the Ministry of Finance is subsequently deliberated by the Diet in around March and the amended tax statutes are published around the end of March each year.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
In this response we will focus on corporate taxpayers. Such entities are required to file a corporation tax return within two months (which may be extended to three months) from the end of their fiscal year. Further, corporate taxpayers should keep books and records and attach them to their corporate tax return. Corporate taxpayers should also file a consumption tax return within two months (no extension available) from the end of their fiscal year. Particular corporate taxpayers are also required to file interim tax returns regarding corporate tax and consumption tax.
Corporate taxpayers are obligated to maintain such books and records for seven years and must provide the same to the tax authorities when so requested upon a tax audit.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The National Tax Agency (NTA) of Japan is responsible for the enforcement of tax laws in Japan and consists of the NTA, 12 regional tax bureaus and 524 local tax offices. The regional tax bureaus have general jurisdiction over companies whose capital amount is over one million Japanese yen, and the local tax offices have jurisdiction over other companies.
Taxpayers are able to ask regional tax bureaus or local tax offices inquiries on various tax issues and may receive nonbinding advice. In general, if taxpayers provide written inquiries and admit the disclosure of their name and the content of the inquiries, they can receive formal advice from the tax authorities.
Regional tax bureaus and local tax offices conduct tax audits against taxpayers around every two or three years for large companies, and around every five years for middle and small-size companies. The topics of the tax audits on companies involve various kinds of taxation, such as corporate tax, consumption tax, international taxation, withholding tax, stamp duty, etc.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Yes, it is possible for tax disputes to be adjudicated by the National Tax Tribunal and the courts, independent of the tax authority.
A taxpayer may file either: (i) a request for reinvestigation with the regional tax bureau or the local tax office; or (ii) a request for reconsideration with the National Tax Tribunal, within three months from receiving notification of taxation by the regional tax bureau or the local tax office. A taxpayer firstly files a request for reinvestigation or reconsideration, and can then file a lawsuit after obtaining the outcome of such request.
The National Tax Tribunal is independent of the tax authority and has the power to investigate taxpayers and judge the legality of taxation. In general, a review by the National Tax Tribunal lasts for one year on average.
If a taxpayer does not prevail at the National Tax Tribunal, such taxpayer can then proceed to file a lawsuit to withdraw taxation by the tax authority; however, if the taxpayer prevails, the tax authority is prevented from filing any such lawsuit.
Tax lawsuits are judged in a three-tier court system, such as the three levels of district court, appeal court and supreme court. Further, tax lawsuits tend to continue for around 1.5 to 3 years at the district court level, around 1 year for the appeal court level, and around 1 year for the supreme court.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Yes, there are set dates for the payment of tax for corporate taxpayers and individual taxpayers. For example, for corporate taxpayers, corporation tax and consumption tax should be paid within two months from the tax return filing date (a one-month extension is available only for corporation tax). In addition, particular corporate taxpayers should pay interim tax for corporate tax and consumption tax if they paid at least a certain amount of corporate tax and consumption tax in the previous fiscal year.
Even if taxpayers file a grievance, such as a request for reinvestigation, a request for reconsideration or a tax lawsuit, the tax authority may still enforce collection of tax over an objection by the taxpayer according to Japanese tax law. Therefore, taxpayers usually pay the tax amount at first and then file the grievance. Of course, when the taxpayers finally emerge victorious in the claim, they can recover the paid tax amount plus interest calculated at a designated rate.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government? Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public register of beneficial ownership?
Yes, under the Japanese system, taxpayer data is recognized as being highly confidential and is adequately safeguarded against disclosure to third parties. Each tax investigator who belongs to the National Tax Agency owes a non-disclosure obligation and disclosure of taxpayer data may constitute a criminal offence under Japanese law. Moreover, taxpayer data is maintained within the National Tax Agency for the purpose of tax investigation and other parts of the Government are basically prevented from making contact with it. Despite the strict confidentiality policy for taxpayer data, taxation imposed on major companies is sometimes leaked and then published by the press.
Japan is a signatory to the Common Reporting Standard (“CRS”) and has already promulgated and enforced domestic legislation to implement the CRS. The National Tax Agency has started analyzing the data obtained from other signatory countries due to the CRS and recently arrested an individual for tax evasion based on the analysis of the data obtained under the CRS.
There is no public register of beneficial ownership in Japan.
What are the tests for residence of the main business structures (including transparent entities)?
The main business structures used in Japan are corporate forms such as a Kabushiki Kaisha and Godo Kaisha. Transparent entities such as Kumiai (partnerships) are not common in business in Japan, although they are used for investment vehicles.
The residence of the main business structure is judged by the location of incorporation under Japanese corporate tax law. If a corporation is incorporated in Japan, it is regarded as having Japanese residence. Similarly, a corporation incorporated under the laws of countries other than Japan is classified as a foreign corporation for Japanese tax purposes, even if the foreign corporation has a principal place of management and control within Japan.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Cross-border transactions within an international group have been one of the most important targets under Japanese tax laws in recent times. In particular, after the introduction of documentation on transfer pricing, areas such as intra group services and lending and borrowing among international groups have been highly focused on during tax audits.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
A CFC regime, Thin Cap regime and transfer pricing regime are all stipulated in Japanese tax laws. It is possible to obtain an advance pricing agreement (“APA”).
To summarize briefly, Japanese CFC rules apply if: (i) Japanese resident individuals and Japanese corporations collectively hold, directly or indirectly, more than 50% of the total shares; (ii) a particular Japanese resident individual or a Japanese corporation (which is the subject taxpayer) holds, directly or indirectly, 10% or more of the total shares; and (iii) the rate of tax burden of that foreign corporation in a given fiscal year is less than (a) 30% for certain shell-company controlled foreign companies (“CFCs”) and cash-box-company CFCs, or (b) 20% for all other CFCs.
Even if all the conditions mentioned above are met, there is still an exemption for active business. The requirements for meeting such exemption are all four of the following: (a) the principal business of the CFC is other than financial investments in shares, bonds or IPs or leasing of vessels; (b) the CFC maintains physical fixed premises such as offices and factories within the jurisdiction of its incorporation that is necessary to do its business; (c) the CFC is managed and administered on its own within the jurisdiction of its incorporation, rather than from Japan; and (d) depending on the type of business, the CFC conducts business principally within the jurisdiction of its incorporation (e.g., manufacturing) or deals with unrelated third parties to account for 50% or more of the total business transactions. If all these requirements are satisfied, the CFC’s income to be aggregated with the Japanese shareholder’s income will be limited to passive income, such as dividends, capital gains from shares, interest on deposits, bonds and loans, royalties and disposition gains from IPs, etc.
B. Thin Cap Regime
Thin capitalization rules apply if the debt giving rise to the interest is owed to a foreign corporation, which is a controlling shareholder (directly or indirectly owning 50% or more of the total shares) of the Japanese corporation, and in general, interest payable upon the portion of the debt exceeding three times the shareholders’ equity of the Japanese corporation will be nondeductible. The thin capitalization rules apply in the case of direct financing by the controlling shareholder as well as in other similar cases, such as financing by third parties with a guarantee provided by the controlling shareholder.
C. Transfer Pricing Regime
A transfer pricing regime is stipulated in Japanese law and the transfer pricing guidelines have been published by the NTA. The tax authority has enforced these provisions mainly against large international companies, and the amount of taxation is sometime over 10 billion Japanese yen. The transfer pricing regime in Japan closely follows the latest OECD transfer pricing guidelines, for example, introducing documentation rules, DCF methods for calculation of arm’s length price and the commensurate with income rule for hard to value intangibles.
Taxpayers may request the tax authority to issue an APA, although it takes a substantial amount of time (one to two years), cost and burden to negotiate with the tax authority to obtain an APA. There are two types of APA which may be issued; namely, a unilateral APA (an APA only with the Japanese tax authority) and a bilateral APA (an APA between the Japanese tax authority and a foreign tax authority). The APA has effect for three to five years and the taxpayer may renew a previous APA.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
(i) Anti-Avoidance Rule for Closely-Held Corporations
Under the Japanese Corporation Tax Act, when it is found that any acts conducted or calculations made by a closely-held corporation would, if allowed, unreasonably reduce the burden of corporate tax, the Japanese tax authority may calculate the tax base of corporate tax for the corporation, the net operating loss, or the amount of corporate tax based on their own understanding, notwithstanding the acts or calculations. Similar anti-avoidance rules are stipulated by the Japanese Income Tax Act and Inheritance Tax Act. A “closely-held corporation” means, in simple terms, a corporation owned or controlled by three shareholders or fewer and persons who have a special relationship with such shareholders.
The meaning of “unreasonably reduce the burden” is not specifically stipulated under the tax law. However, a recent High Court Decision held that acts or calculations will unreasonably reduce the burden of the tax if such acts or calculations would be unreasonable or unnatural if taken by a truly economic person from an economic and reasonable viewpoint. Such unreasonable or unnatural acts or calculations include acts or calculations that are different from those usually conducted between equal and independent persons without a mutual, special relationship.
This rule has been frequently raised by the tax authority, and there are many court precedents where the enforcement of this rule was litigated.
(ii) Anti-Avoidance Rule for Corporate Reorganization
Under the Japanese Corporation Tax Act, when it is found that any acts conducted or calculations made by the corporation would, if allowed, unreasonably reduce the burden of corporate tax due to (1) a decrease in the amount of profit or an increase in the net operating loss on the transfer of assets and liabilities as a result of a merger, etc. (i.e. merger, company split, contribution in kind, distribution in kind, share exchange, or share transfer), (2) an increase in the amount to be credited from corporate tax, (3) a decrease in the amount of profit or an increase in the net operating loss on the transfer of shares of a corporation that is a party to the mergers, etc., (4) a decrease in the amount of dividends, or (5) other grounds, the Japanese tax authority may calculate the tax base of corporate tax for the corporation, the net operating loss, or the amount of corporate tax based on their own understanding, notwithstanding the acts or calculations.
The words “unreasonably reduce” are not specifically stipulated. However, the Supreme Court recently held that, if the acts or calculations reduce the burden of corporate tax by abusing the tax rules for corporate reorganization, they are considered to “unreasonably reduce” the burden of corporate tax. Whether the tax rules are abused is determined by whether the acts or calculations are subject to or exempt from such tax rules in a way that deviates from the original intent or purpose of the rules, taking into consideration (i) whether the acts or calculations are natural and (ii) whether there is a reasonable business purpose therefor.
The Japanese tax authority has recently been enforcing this rule frequently, and taxpayers should be careful in tax planning for corporate reorganizations, as the criteria provided by the Supreme Court are not abundantly clear.
(iii) Anti-Avoidance Rule for Consolidated Tax Returns
Under the Japanese Corporation Tax Act, when it is found that any acts conducted or calculations made by the corporation would, if allowed, unreasonably reduce the burden of corporate tax due to (1) an increase in the amount to be deducted from the income or consolidated income, (2) an increase in the amount to be credited from corporate tax, (3) a decrease in the amount of profit, or (4) an increase in the net operating loss on the transfer of assets between consolidated corporations, the Japanese tax authority may calculate the tax base of corporate tax for the corporation, the net operating loss or consolidated net operating loss, or the amount of corporate tax based on their own understanding, notwithstanding the acts or calculations.
The words “unreasonably reduce” are not specifically stipulated, and there has been no court precedent to clarify the interpretation of the words to our knowledge.
Have any of the OECD BEPS recommendations been implemented or are any planned to be implemented and if so, which ones?
Yes, most of the OECD BEPs recommendations have been implemented or are planned to be implemented in Japan. The following recommendations have been or will be implemented:
(i) BEPS Action 1:
In 2015, the Consumption Tax Act was amended to enable the taxation of the consumption tax on digital services provided from overseas to Japanese residents.
Regarding the digital taxation that was discussed at the G20 in 2019, Japan has not yet expressed its policy.
(ii) BEPS Action 2
In Japan, the dividends from overseas corporations received by a Japanese corporation are almost entirely exempt from corporate tax under certain conditions. However, after the amendment to the Corporation Tax Act in 2015, such exemption does not apply to dividends that are deductible from the income of the overseas subsidiary under the tax law of its jurisdiction.
(iii) BEPS Action 3
In 2015, the Japanese CFC rules were significantly amended. Some of the amendments were implemented to make the rules more consistent with the BEPS Action 3. For example, Japan has introduced de facto control test to supplement the legal test and economic test to determine whether a foreign corporation is controlled.
(iv) BEPS Action 4
In 2019, the Japanese earnings-stripping rules were amended to be more consistent with the recommendations on BEPS Action 4 in many aspects. For example, the maximum amount of interest to be deducted was 50% of the adjusted income, but the ratio has been amended to 20%.
(v) BEPS Action 6
Japan already has an LOB or PPT clause in its tax treaties with some countries (e.g. France, UK, US). In 2018, Japan signed the MLI and chose to apply PPT to tax treaties with some other countries.
(vi) BEPS Action 7
In 2018, Japan amended the permanent establishment rules to make them consistent with the recommendations for BEPS Action 7. The rules regarding agent PE and the exclusion of preparatory or ancillary activities from PE were amended.
(vii) BEPS Action 8-10
In 2019, Japan amended its transfer pricing rules. After the amendment becomes effective, it will be possible to apply the DCF method to the price calculation for transactions of intangibles that do not have comparable transactions. It will become also possible to apply commensurate with the income standard to hard-to-value intangibles, if certain requirements are met.
(viii) BEPS Action 13
In 2015, the transfer pricing documentation rules were amended to be consistent with BEPS Action 13. Japanese corporations that are ultimate parent corporations of a company group the consolidated sales amount of which is JPY 100 billion or more, is required to file a country-by-country report, and Japanese corporations that belong to such a group need to file a master report with the Japanese tax authority. The local filing system in Japan has become more consistent with the BEPS recommendations through the amendment.
(ix) BEPS Action 15
Japan signed the MLI in 2018. Certain provisions of MLI are now applied to the tax treaties between Japan and some countries (e.g. Australia, France, Singapore, UK).
In your view, how has BEPS impacted on the government’s tax policies?
The BEPS has significantly impacted the Japanese government’s tax policies. As we explained in 11 above, Japan has already implemented most of the BEPS recommendations by amendments to the domestic tax law. Japan has become a party to the MLI. Recent amendments to the Japanese international tax law have been mainly driven by the BEPS recommendations.
Does the tax system broadly follow the recognised OECD Model? Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties? If so, what are the current rates and are they flat or graduated?
Yes, the Japanese tax system broadly follows the recognized OECD model. Especially in the area of international taxation, Japan enters into tax treaties essentially based on the OECD model tax treaty and amends the tax law based on the BEPS recommendations.
A. Taxation of Business Profits
Under the Income Tax Act, business profits earned by Japanese resident individuals are subject to (i) income tax at the progressive tax rate, which is 45% at the maximum, (ii) special reconstruction tax at the rate of 2.1% of the amount of income tax, (iii) local residence tax at the rate of 10%, and (iv) local business tax, the tax rate of which depends on the type of business.
Under the Corporation Tax Act, business profits earned by Japanese domestic corporations are subject to (i) corporate tax, (ii) local corporate tax, (iii) local residence tax, and (iv) local enterprise tax. The effective tax rate applied to Japanese domestic corporations for the business years starting on or after October 1, 2019, will be approximately 30.62%, if such corporations are located in Tokyo and their paid-in capital exceeds JPY 100 million.
Non-resident individuals and foreign corporations shall be subject to such Japanese tax only on business profits attributable to their permanent establishment in Japan.
B. Taxation of Employment Income and Pensions
Under the Income Tax Act, employment income is usually classified as salary income and is subject to the (i) income tax, (ii) special reconstruction tax, and (iii) local residence tax at the tax rate mentioned above. If employment income is categorized as retirement income, a more favorable tax treatment will be applied.
Pensions are usually classified as miscellaneous income and subject to the above taxes (i), (ii), and (iii).
Employment income paid to non-resident individuals for their work in Japan and pensions are subject to the withholding tax at the rate of 20.42%.
C. VAT (or other indirect tax)
Business operators who engage in selling products, renting assets, or providing services in exchange for consideration as a business in Japan (“Taxable Sales”) are obliged to pay the consumption taxes on the Taxable Sales in general. Business operators whose Taxable Sales during the base year (i.e. the business year that is second preceding business year of the relevant year ) and during the first 6 months of the preceding business year is respectively JPY 10 million or less are not required to pay the consumption tax for the relevant business year.
The tax rate is currently 8%, but it will increase to 10% on October 1, 2019.
D. Taxation of Savings Income and Royalties
Under the Income Tax Act, savings income is usually classified into interest income. Japanese resident individuals are subject to the withholding tax on interest income at the flat tax rate of 20.315%, separately from other income. Royalties are generally classified into business income or miscellaneous income and subject to taxation in substantially the same way as business profits.
Under the Corporation Tax Act, Japanese domestic corporations are subject to savings income and royalties taxation in substantially the same way as business profits.
Non-resident individuals and foreign corporations without a permanent establishment in Japan are subject to the withholding tax at the rate of 15.315% on savings income and 20.42% on the royalties for intellectual property, if they are sourced in Japan, unless such taxation is exempt or reduced under the applicable tax treaty.
E. Taxation of Income from Land
Under the Income Tax Act, rents from land will be usually categorized as business income or real estate income and taxed at the progressive tax rate. Japanese domestic corporations will be taxed on such income in substantially the same way as business profits.
Non-resident individuals and foreign corporations are subject to the withholding tax at the rate of 20.42% on such income in general, if it is sourced in Japan, unless such taxation is exempt or reduced under the applicable tax treaty.
b Capital Gains
Individuals are subject to income tax on capital gains from the transfer of land separately from income at a flat rate. If the individual has owned the land for 5 years or more until January 1 of the year during which the land is transferred, the tax rate will be 20.315%, while, in other cases, the tax rate will be 39.63%. Please note that, if a non-resident individual without a permanent establishment in Japan transfers land in Japan, a withholding tax will be imposed on the purchase price for the land at the rate of 10.21% in general.
Corporations are subject to taxation on capital gains in substantially the same way as business profits, while a withholding tax will be imposed on the purchase price paid to foreign corporations at the above rate.
F. Taxation of Capital Gains
Japanese resident individuals will be subject to the tax on capital gains from the transfer of securities separately from other income at the flat rate of 20.315%. Japanese corporations are subject to taxation on capital gains in substantially the same way as business profits.
Non-resident individuals and foreign corporations without a permanent establishment in Japan are subject to the tax on capital gains of shares of a Japanese corporation only when (i) they owned 25% or more of the shares of the corporation sometime during the three-year period before the end of the business year and have sold 5% or more of the shares during the business year or (ii) such Japanese corporation is a real estate-holding corporation, unless such taxation is exempted under the applicable tax treaty.
G. Stamp and/or Capital Duties
Japan has a stamp tax that is imposed on certain types of documents (e.g. loan agreements) executed in Japan. The tax rate depends on the type of documents and the amount of the object of the agreement.
Japan does not have capital duties, although a registration tax will be imposed on the amount of paid-in capital registered on the commercial registry at the flat rate of 0.7%.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes, the corporate tax is levied on, broadly, the revenue profits of a business, as calculated according to the Generally Accepted Accounting Principles, although substantial adjustments will be made to such profits in order to calculate the income for the purposes of the tax law.
Under the Corporation Tax Act, the income of a corporation shall be calculated in accordance with GAAP, unless otherwise defined under the law. The tax law has many provisions to adjust the profits of a business in accordance with GAAP for the purposes of tax law (e.g. exclusion of certain dividends from income, limitation on the deduction of certain remuneration to directors, etc.).
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Under the Corporation Tax Act, corporations are recognized as taxable entities while partnerships are as transparent for tax purposes, and trusts are also transparent for tax purposes in general.
(i) Under the Companies Act, there are several types of corporation, such as stock corporations (kabushiki kaisha) and limited liability companies (godo kaisha). All types of corporations are recognized as taxable entities under the Japanese Corporation Tax Act. Among such types of corporations, the stock corporation (kabushiki kaisha) is the most popular, while limited liability companies are often chosen when a foreign corporation establishes a subsidiary in Japan, due to its flexibility in the corporate governance system and tax treatment under foreign tax law.
(ii) There are several types of partnerships under Japanese law, such as civil law partnerships (kumiai) or limited liability partnerships for investment business (toshijigyo yugensekinin kumiai). All types of partnerships formed under Japanese law are treated as transparent under Japanese tax law in general. Foreign partnerships are not always transparent under Japanese tax law. There is a Supreme Court case where a Delaware LPS was not considered transparent under Japanese tax law.
(iii) Trusts are transparent under Japanese tax law in general. However, collective investment trusts are not transparent, and the profits of such trusts are not subject to taxation until such profits are distributed to beneficiaries. In addition, the corporation-type trust is treated as a corporation for corporate tax law purposes and thus is not transparent.
Is liability to business taxation based upon a concept of fiscal residence or registration? If so what are the tests?
Yes. Japanese domestic corporations are liable to business taxation on all income, while foreign corporations are liable to business taxation only on income sourced in Japan. Whether corporations are domestic is determined not by concepts of fiscal residence, but by the jurisdiction of incorporation. For example, corporations incorporated under the Companies Act of Japan are treated as domestic corporations for the purposes of corporate tax.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Japan has National Strategic Special Zones system. 10 regions are designated as National Strategic Special Zones by the Japanese government. In the National Strategic Special Zones, certain special tax measures are applied to designated corporations engaging in certain types of business (e.g. special depreciation or tax credit for investment in certain facilities).
Japan also has the International Strategic General Special Zones system. Asian regions headquarter special zones established by the Tokyo Metropolitan Government is one such Zone. Foreign corporations that incorporate subsidiaries in the zones are entitled to special depreciation or tax credits, if certain requirements are met.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
No. In Japan, there are no particular tax regimes applicable to intellectual property. Japan does not have a patent box system.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Yes, Japan has a consolidated tax system. Japanese corporations may choose to use the system, subject to approval by the tax authority. Under the system, a Japanese corporation and its directly or indirectly wholly-owned Japanese subsidiaries constitute a consolidated tax group. Only Japanese corporations can be members of such consolidated tax groups. All the directly or indirectly wholly-owned Japanese subsidiaries are required to be members of the consolidated tax group.
The corporate tax to be paid by the consolidated tax group is calculated based on the consolidated income of the group and paid by the ultimate parent company of the group to the tax authority.
Japan also has a group taxation system. The group taxation system mandatorily applies to a Japanese corporation and its directly and indirectly wholly-owned Japanese subsidiaries. Under the system, the realization of income or loss arising from the transfer of certain assets (e.g. fixed assets, land, certain securities), the book value of which is JPY 10 million or more, will be deferred until a taxable event occurs (e.g. depreciation, further transfer of such assets). In addition, a member corporation of such group is not subject to tax on donations made from another member corporation under the system. Please note that income and loss is not set off among the member corporations under the group taxation system.
Are there any withholding taxes?
Yes. However, the types of payments that are subject to the withholding tax are different depending on whether such payments are made to residents or non-residents.
Resident individuals and corporations will be subject to the withholding tax only on limited types of payments, such as interest on bonds and dividends. Resident individuals will be also subject to the withholding tax on payments such as salary and certain types of remuneration.
Non-resident individuals and corporations will be subject to withholding tax on broader types of income (e.g. royalties from intellectual property, interest on loans, rent fees for real property) sourced in Japan, unless exempted under the applicable tax treaty.
Are there any recognised environmental taxes payable by businesses?
No. Japan does not have environmental taxes.
Japan has, however, introduced the Taxation System for Global Warming Measures. Under the System, the rate of petroleum and coal tax imposed on petroleum, oil-related products, hydrocarbon gas, and coal is increased so that such tax is imposed at the rate of JPY 289 per 1 ton of carbon-dioxide emitted from such fossil fuels.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not, how is it taxed?
Japanese residents are subject to income tax on dividend income received from Japanese corporations and foreign corporations, while dividend-received deductions will be applied to the dividend income received from Japanese corporations.
Japanese corporations are wholly or partly exempt from corporate tax on income received from another Japanese corporation.
If a Japanese corporation has owned 100% of shares of another Japanese corporation during the entire calculation period, the dividend income is wholly excluded from the income.
If a Japanese corporation has owned more than one third of shares of another Japanese corporation during the entire calculation period, 100% of the dividend income minus the amount of interest on debt allocated to the dividend income is excluded from the income.
If a Japanese corporation owns less than 5% of shares of another Japanese corporation on the base date with regard to the dividend, only 20% of the dividend income is excluded from the income.
If a Japanese corporation receives dividend income from another Japanese corporation in any case other than the above, 50% of the income is excluded from the income.
Japanese corporations are subject to tax on the dividend income received from foreign corporations in general. However, if a Japanese corporation has owned 25% or more of the shares or voting rights of a foreign corporation for 6 months or more until the date when the obligations to pay a dividend is fixed, 95% of the dividend income received by the Japanese corporation from the foreign corporation will be excluded from the income of the Japanese corporation.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?
We believe that such an international group will usually consider re-locating activities from the UK to a country in Europe.