Hi, my name is Taisei Koshida, and I am a certified public accountant and licensed tax accountant in Japan.
I support foreign business owners and entrepreneurs with accounting and tax matters in Japan, including tax filings and tax planning in English.
There are several legal ways to reduce taxes when running a small business in Japan. In this article, I explain two mutual fund systems that can be particularly useful for small business owners: the Small Business Mutual Aid System (小規模企業共済) and the Management Safety Net Mutual Fund (経営セーフティ共済).
Both can provide tax benefits while also helping business owners prepare for retirement or unexpected financial difficulties.
Small Business Mutual Aid System (小規模企業共済)
By participating in the Small Business Mutual Aid System (小規模企業共済), eligible business owners can deduct their contributions from their individual taxable income. The maximum annual contribution is JPY 840,000.
This system is designed to help small business owners prepare financially for retirement or the closure of their business.
Participants can also borrow money within certain limits based on their accumulated contributions, which can be useful for managing business cash flow.
However, if you voluntarily cancel the system before making contributions for 20 years, the amount you receive may be less than the total amount you contributed.
Participants commonly receive the benefits when they retire or close their business. Depending on the circumstances and how the benefits are received, favorable tax treatment may apply under the Japanese tax system, including the retirement income deduction.
Management Safety Net Mutual Fund (経営セーフティ共済)
By participating in the Management Safety Net Mutual Fund (経営セーフティ共済), eligible sole proprietors and companies can generally treat their contributions as deductible business expenses for tax purposes.
The maximum contribution is JPY 2,400,000 per year, and total contributions can accumulate up to JPY 8,000,000.
This system is designed to protect small and medium-sized businesses from financial difficulties caused by the bankruptcy of a business partner. If you are unable to collect accounts receivable because a business partner goes bankrupt, you may be able to borrow up to ten times the amount of your accumulated contributions, subject to the rules of the system.
Contributions are generally deductible as business expenses. However, when the mutual fund is cancelled and the surrender value is received, the amount received is generally treated as taxable income.
Therefore, from a tax perspective, this system can effectively defer taxation rather than permanently eliminate it.
Also, if you cancel the mutual fund before making contributions for 40 months, the amount refunded may be less than the total amount you contributed.
If you operate a corporation in Japan, there are additional tax planning methods you may be able to use.
For more information, see Part 2:
Effective Ways to Reduce Taxes When Running a Business in Japan – Part 2
Koshida Accounting and Tax Office provides accounting and tax services in Japan for foreign business owners, entrepreneurs, and small businesses.
We provide English support for accounting, tax filings, and tax planning in Japan. If you are looking for an accounting firm in Japan or need advice on legal ways to reduce taxes for your business, please feel free to contact us through the inquiry form.