I. Overview of applicable Japanese taxes to a Corporation
■ Types of Business Entities
Depending on a foreign corporation’s objectives, purpose, needs and resources, it may establish its business presence in Japan either as a representative office, branch office or establish a subsidiary. Each type of business entity is briefly discussed as follows:
A representative office is not a legal entity that is required to obtain commercial registration. It represents its foreign Head Office in particular activities but is not authorized to engage in business transactions. It cannot engage into any commercial/sales transactions and its activities are usually limited to market surveys, information gathering, and general liaison with its foreign head office.
As it does not engage into any commercial transaction, a representative office is normally not liable for any Japanese income tax However, in the event that it will engage or undertake activities involving any business or commercial transactions, such as but not limited to execution of contracts, acceptance of orders and invoicing and collection, it shall be subject to taxes and other statutory requirements
A foreign corporation may also opt to establish a Branch in Japan. A branch office is usually an extension office of the Head Office. Branch Office of a Foreign corporation must be established in compliance with the legal requirements of the Japanese corporation law. Unlike representative office, a branch can engage in sales or commercial activities without restriction.
In relation to the branch taxation, the international taxation principle was changed in the 2014 tax reform from entire income principle to attributable income principle. Under the new regulation applicable from the fiscal year beginning on or after April 1, 2016, a Japanese branch and its Head Office shall be treated separately as independent corporations and each shall be subject to taxation. Thus, the taxable income of a Japanese branch shall be the income specifically attributable to its operation independent from the operation of its Head Office. As such, foreign income attributable to the Japanese branch shall be also taxed in Japan. As for foreign income earned by the Branch, foreign tax credits may be applied in order to eliminate double taxation.
A Foreign Corporation may also opt to put up a new corporation or a subsidiary in Japan. To establish a Japanese subsidiary, it must comply with the legal requirements of the Japanese Corporation Law. There are four types of incorporated companies under the Code. Kabushiki Kaisha (limited stock corporation), is the most common form. A subsidiary is authorized to do almost all business operations such as but not limited to manufacturing, trading and services in Japan.
Generally speaking, a Japanese subsidiary is subject to tax on its worldwide income. Foreign tax credits, however, may be applied in order to eliminate double taxation on income.