Hello, my name is Taisei Koshida, and I am a certified public accountant and tax accountant.
I aim to assist non-Japanese business owners who need help with reading or writing in Japanese. If you find the Japanese tax return system challenging, I can help you with your tax filings.
Starting a business in Japan can be exciting, but many foreign entrepreneurs are surprised by how different Japan’s tax system is from that of their home country.
Some rules that seem unusual at first can significantly affect taxes, cash flow, and business planning.
In this article, I introduce five unique Japanese tax rules that foreign business owners should know before starting a business in Japan.
Many foreign entrepreneurs assume that Japan’s tax system is similar to that of their home country.
In practice, however, Japan has several unique tax rules that can significantly affect business owners, investors, and long-term residents.
1. Withholding Tax for Directors’ Fees
In Japan, companies must withhold income tax from directors’ compensation, just as they do for employees’ salaries.
Many foreign entrepreneurs are surprised because this rule is different from that in many other countries.
2. Fixed Director’s Fees
Unlike in many countries, Japanese companies generally cannot freely increase or decrease directors’ compensation during the fiscal year.
To deduct directors’ compensation as a business expense, the amount generally must be fixed within three months after the beginning of the fiscal year.
Unexpected bonuses are usually not deductible for corporate tax purposes.
3. Deductibility of Entertainment Expenses
Japan’s tax rules allow a relatively wide range of business-related entertainment expenses to be treated as deductible business expenses. Examples include business meals with clients, golf outings, and certain gifts, provided they are incurred for legitimate business purposes.
For small and medium-sized companies, up to ¥8 million of entertainment expenses may generally be deductible each fiscal year (subject to the applicable tax rules). Larger companies are generally allowed to deduct 50% of qualifying entertainment expenses.
Many foreign entrepreneurs are surprised that expenses such as client dinners or golf outings can be tax-deductible in Japan. However, it is important to keep proper records and be able to demonstrate the business purpose of each expense.
4. The Year-End Tax Adjustment
In Japan, employers are responsible for performing a year-end tax adjustment (Nenmatsu Chosei) for most employees.
Instead of requiring employees to file an annual income tax return, employers calculate each employee’s final income tax liability at the end of the year. Any overpaid or underpaid tax is then adjusted through the employee’s December salary or a later payroll.
Many foreign business owners are surprised by this system because, in many countries, employees are generally responsible for filing their own tax returns. Understanding this obligation is essential for employers operating a business in Japan.
5. Japanese Consumption Tax (VAT) Exemption
Generally speaking, small businesses in Japan with annual taxable sales of ¥10 million or less may qualify for an exemption from Japanese consumption tax. This often reduces the administrative burden for newly established businesses.
However, there is an important exception that surprises many foreign entrepreneurs. Even if a business makes significant investments during its first year, it generally cannot claim a refund of Japanese consumption tax unless it has voluntarily registered as a taxable business in advance.
Choosing whether to remain exempt or voluntarily become a taxable business can have a significant impact on cash flow. Therefore, it is important to consider this decision carefully before starting a business in Japan.
For many years, our accounting and tax office has been helping foreign business owners in Japan with their accounting and tax needs.
In addition to tax and accounting services, we work closely with trusted specialists in immigration, company registration, social insurance, and legal matters, allowing us to provide comprehensive support for establishing and operating your business in Japan.
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