Basic framework of international taxation systems for economic players pertaining to Japan business.
There are two sides of international taxation systems in Japan. One is Out-bound side in which economic players in Japan invest in overseas entities. The other is In-bound side in which overseas economic players invest in Japan.
In-bound side (Investment in Japan)
Taxation framework in Japan levy overseas companies including their branches in Japan corporate tax only on economic activities in Japan.Taxation framework in Japan offer these international taxation systems aiming at increase of investment in Japan, facilitate e-commerce business and stimulate Japan economy.
- Taxation on income from investment in Japan: Corporate tax act in Japan fundamentally levy corporate tax to overseas companies that have permanent equity (PE) in Japan on economic activities in Japan. On the other hand, overseas companies that do not have permanent equity in Japan shall pay withholding tax pertaining to interest income, allotment from Limited Partnership, land trading and staffing service fee as well as other domestic companies in Japan. Furthermore, as exceptional cases, the overseas companies that do not have permanent equity in Japan shall pay corporate taxes on income from asset trading and holding, land trading, specific stock trading pertaining to real estate or business transfer, staffing services and real estate lending.
- Taxation system for Investment Fund: Tax authority in Japan offer overseas investors taxation system that prescribe taxation on investment funding in Japan. The main issue of taxation on these funds is whether the fund has a permanent equity in Japan. Understanding and judgement of this issue depends on the structure of the fund. Moreover, Tax treaty between Japan and counterparts often plays important roles to stipulate taxation issue pertaining to overseas investment funding in Japan.
- Taxation system on e-commerce: Tax authority in Japan offer overseas companies taxation system that prescribe taxation on e-commerce activity in Japan. The main issues of taxation on e-commerce is whether the overseas company has permanent equity in Japan, what is the permanent equity and whether sales transactions shall be taxable for sales ( consumption) tax in Japan. Understanding and judgement of these issue are now under discussion. Plus, OECD Guidelines for multinational enterprises define that web-site is not a permanent equity and server is a permanent equity.
- Thin capital taxation system: Under this system, interest is partly excluded from a corporation’s deductible expenses when the corporation has borrowed money exceeding three times the amount of its capital from its foreign leading shareholders. This system also aims at preventing escape from taxation in Japan taking advantage of interest payment to overseas parent company or sponsor.
With regard to these four In-bound International taxation systems, there are detailed formula and conditions to apply each taxation system. We recommend you to consult with Certified Public Tax Accountant.
Updated Nov 20, 2012
Certified Public Tax Accountant Jun Domon
Ichiro Sudo, CPA in Japan (2011). CPE Training Text “Basic and Practical International Taxation” : The Japanese Institute of Certified Public Accountant.
Guide to Japanese Taxes:Japan Federation of Certified Public Tax Accountants’ Associations