Choosing the Best Fiscal Year-End for a New Company in Japan
【Koshida Accounting Firm Column Date:】
Hi, my name is Taisei Koshida, and I am a Certified Public Accountant and Licensed Tax Accountant in Japan.
I assist foreign entrepreneurs and small business owners with accounting and tax matters in Japan, with support available in English.
When establishing a company in Japan, you need to decide which month will be the end of your fiscal year.
In Japan, a company does not have to use December or March as its fiscal year-end. When establishing a company, you can generally choose the fiscal year-end that fits your business.
This decision affects more than the date of your corporate tax return. Your busy season, annual profit forecast, corporate tax planning, accounting workload, the length of your first fiscal year, and some tax deadlines should also be considered.
Here are the practical points I recommend considering before choosing your company’s fiscal year-end.
If Your Business Has Seasonal Fluctuations
It is generally advisable to avoid setting your fiscal year-end during your busiest sales season.
If sales increase significantly in the final month of your fiscal year, it becomes difficult to estimate annual profits before the year closes. As a result, you may miss opportunities for tax planning or discussions with your bank.
For example, if December is by far your strongest sales month, a December fiscal year-end may leave very little time to estimate the final annual profit before the fiscal year closes.
For a small business, I recommend choosing a fiscal year-end that gives you enough time to estimate annual profit and consider corporate tax planning before the year closes.
If You Have Peak Seasons
You should also consider how busy you will be immediately after the fiscal year-end.
Closing the books, checking accounts, preparing financial statements, and filing corporate tax returns all require time after the fiscal year closes.
In Japan, corporate tax returns are generally due within two months after the end of the fiscal year. For example, if your fiscal year ends on December 31, the corporate tax return is generally due by the end of February.
Therefore, even if your year-end month itself is relatively quiet, it may not be a good choice if the following two months are your busiest period.
I recommend looking not only at the fiscal year-end month itself but also at the two months that follow it.
Consider the Length of Your First Fiscal Year
For a newly established company, choosing the fiscal year-end also determines the length of the first fiscal year.
For example, if you establish a company shortly before the fiscal year-end you choose, your first fiscal year can be very short.
This matters because some tax deadlines are connected to the end of the first fiscal year.
One important example is the Blue Form (Aoiro Shinkoku) application. For a newly established corporation, the application deadline for the first fiscal year is generally the day before the earlier of three months after incorporation or the end of the first fiscal year.
A short first fiscal year can therefore bring the Blue Form application deadline much earlier than expected.
For more details, see Blue Form (Aoiro Shinkoku) in Japan: Benefits and Deadlines.
Director Compensation Should Also Be Considered
The fiscal year is also relevant when deciding director compensation.
An ordinary annual revision of director compensation is generally made within three months from the beginning of the fiscal year. For a newly established company, the director’s compensation should be determined within three months after incorporation.
Once the amount has been determined, it generally cannot be changed freely during the fiscal year while maintaining full deductibility for corporate tax purposes.
For more information about determining the amount, see Director’s Compensation in Japan: A Key Step When Starting a Company.
Consumption Tax Can Also Affect the Decision
Consumption tax is another point to consider when establishing a company and deciding its first fiscal year.
The company’s taxable status depends on several factors, and a newly established company may be exempt from consumption tax in its early period. However, there are exceptions, and registering as a Qualified Invoice Issuer generally makes the business subject to consumption tax even when it would otherwise be exempt.
For this reason, the fiscal year-end and consumption tax position should be considered before the company starts operating rather than after the first tax return is due.
For more information, see Should a New Business in Japan Register for Consumption Tax?.
Does the Fiscal Year-End Affect the Timing of Tax Audits?
The timing of a company’s fiscal year-end can sometimes affect when its tax return becomes available to the tax office during the audit selection cycle.
In practice, tax offices plan and conduct many corporate tax audits according to their own annual work schedule. As a result, the timing of a company’s fiscal year-end can have some practical relationship with when the company may be considered for an audit.
For example, based on my experience, companies with a January fiscal year-end can sometimes fall into a timing that makes them slightly less convenient to select for an ordinary tax audit cycle.
However, I would not choose a fiscal year-end mainly for this reason. The tax office considers many factors when selecting companies for tax audits, and the fiscal year-end is only one practical consideration.
Your business cycle, workload, profit forecasting, tax planning, and filing schedule are more important when choosing the fiscal year-end.
If you are interested in how Japanese tax audits work in practice, see How Are Tax Audits Conducted in Japan?.
There Is No Single Best Fiscal Year-End for Every Company
March and December are familiar fiscal year-ends, but that does not mean they are the best choices for every company.
For a small business, I recommend considering:
- When sales and profits are highest
- Your busiest operational period
- The two months following the fiscal year-end
- How easily you can forecast annual profit
- Corporate tax planning
- The length of the first fiscal year
- Blue Form and other tax deadlines
- Director compensation
- Consumption tax
The fiscal year-end is easy to decide when incorporating a company, but it affects accounting and tax procedures every year after that. I recommend choosing it based on how the business will actually operate rather than simply copying the fiscal year-end used by another company.
For the other important tax matters to consider immediately after incorporation, see Starting a Company in Japan: 3 Essential Tax Steps for Foreign Entrepreneurs.
For a broader overview of accounting in Japan, bookkeeping, payroll, consumption tax, corporate tax planning, and other issues for foreign business owners, see Starting & Running a Business in Japan: Tax and Accounting Guide for Foreign Business Owners.
Frequently Asked Questions
Can a Japanese Company Choose Any Month as Its Fiscal Year-End?
Generally, yes. A company in Japan is not required to use March or December as its fiscal year-end. A new company can generally choose a fiscal year-end that fits its business cycle and operations.
Is March the Best Fiscal Year-End Because Many Japanese Companies Use March?
No. March may be suitable for some companies, but there is no tax rule requiring a company to use March. For a small business, the busy season, ability to forecast annual profit, accounting workload, tax planning, and filing schedule are usually more useful factors to consider.
Should I Choose a Fiscal Year-End Immediately Before My Quietest Month?
Not necessarily. Remember that accounting work and corporate tax preparation continue after the fiscal year closes. I recommend looking at the fiscal year-end month and the following two months rather than considering only one month.
Can I Change My Company’s Fiscal Year-End Later?
Yes, a company can change its fiscal year-end later by completing the necessary corporate procedures and tax notifications. However, the change affects the company’s accounting period and tax filing schedule, so choosing a practical fiscal year-end when the company is established is simpler.
Accounting and Tax Support for Foreign Business Owners in Japan
My main areas of expertise are accounting and taxation.
I assist foreign entrepreneurs and small businesses with accounting in Japan, corporate tax returns, consumption tax, payroll-related tax matters, and corporate tax planning, with support available in English.
When establishing a company, I recommend considering the fiscal year-end together with the first-year accounting and tax schedule rather than choosing the month automatically.
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