Worldwide VAT, GST and Sales Tax Guide
non-established supplier of the service may be required to register for CT in every jurisdiction where it has customers that are not taxable persons. In Japan, no services are subject to the “use and enjoyment” provisions.
Transfer of a going concern. Transfer of going concern rules do not apply in Japan. As such, CT applies to all sales of a business or part of a business capable of separate operation, including assets.
Transactions between related parties. In Japan, there are no specific rules that indicate the value for CT purposes for transactions between related parties.
C. Who is liable
A “taxable person” is any business entity or individual that makes taxable supplies of goods or services in the course of doing business in Japan.
However, the CT legislation provides for a small business exemption, the application of which depends on the taxable sales realized in previous fiscal years.
An entity qualifies for this exemption and is therefore not considered as a taxable person if it meets both following conditions:
• The taxable supplies (sales) in the “base period” (i.e., the fiscal year two years prior to the current fiscal year) did not exceed JPY10 million.
• The taxable supplies (sales) in the “specified period” (i.e., the first six months of the previous fiscal year, subject to exceptions) did not exceed JPY10 million. As an alternative condition, the enterprise may instead refer to the salary paid in Japan during that period. (*1)
Notwithstanding the above, a newly established company having no base period for that year and either of the conditions below, the company qualifies as a taxable person for the year:
• The share capital of the company is JPY10 million or more at the beginning of the fiscal year. (*2)
• The controlling person or its companies related to the controlling person had taxable supplies in Japan exceeding JPY500 million during the period corresponding to the base period of the newly established company. (*2) (*3)
Moreover, if a newly established company purchases certain assets during its first two years, it may not qualify for exemption in the three years, including the year in which the purchases are made. (*2)
The following revisions apply to taxable periods beginning on or after 1 October 2024: (*1) Specified period rule: A foreign company can no longer refer to the salaries paid in Japan (i.e., only taxable sales are considered) under the condition in the specified period.
(*2) Share capital rule for newly established companies: When a foreign company starts a business in Japan, it is also necessary to determine the applicability of this rule, as a company that does not have a base period.
(*3) Capital relationship rule for newly established companies: This rule is also applied under the condition that the controlling person or its companies related to the controlling person had total amount of sales, income and other revenue, including that from foreign source exceeding JPY5 billion during the period corresponding to the base period of the newly established company. In addition, when a foreign company starts a business in Japan, it is also necessary to determine the applicability of this rule as a company that does not have a base period.
Exemption from registration. Aside from the small business exemption (see detail above), the CT law in Japan does not contain any provision for exemption from registration.
Changes to CT registration details. A notification form should be promptly submitted (by paper or online) when any of the following details have changed: registered address, name of the business, name of the tax representative, address of the tax representative, fiscal year or the amount of share capital.
The CT law in Japan does not stipulate a specific deadline to notify such changes to the tax authorities.
D. Rates
The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of consumption tax.
The CT rates are:
• Standard: 10% (7.8% national tax and 2.2% local tax)
• Reduced: 8% (6.24% national tax and 1.76% local tax)
Examples of goods and services taxable at 8%
• Supplies of food and drinks, excluding alcoholic beverages and dining out
• Subscriptions to newspapers (limited to newspapers that are issued at least twice a week and feature information on general topics such as politics, economics, society and culture)
The term “exempt-with-credit supplies” refers to supplies of goods and services that are not taxed but do give rise to a right of input tax deduction.
Examples of exempt-with-credit supplies of goods and services
• Exports of goods
• Exports of services
• International transportation of passengers and cargo
• Sales in export shops
• Supplies to foreign embassies and legations situated in Japan
The term “exempt supplies” refers to supplies of goods and services that are not taxed and that do not give rise to a right of input tax deduction.
• Bank interest
• Insurance
• Educational services
Examples of exempt supplies of goods and services
• Sales and leases of land
• Social welfare services
Option to tax for exempt supplies. The option to tax exempt supplies is not available in Japan.
E. Time of supply
The time when CT becomes due is called the “time of supply” or “tax point.” CT is generally chargeable when ownership of goods is transferred, when a service is performed or when foreign cargo is removed from bonded areas.
Deposits and prepayments. The payment of deposits and prepayments is not subject to CT in Japan, but the payment of the original price is subject to CT depending on the type of the original transaction.
Continuous supplies of services. The time of supply rules for continuous supplies is generally when all the supplies have been delivered or completed.
Goods sent on approval for sale or return. The time of supply rule for supplies of goods sent on approval for sale or return is when ownership of the goods is transferred.
Reverse-charge services. There are no special time of supply rules in Japan for supplies of reversecharge services. As such, the general time of supply rules apply, as outlined above.
Leased assets. For finance lease transactions that are deemed as a transfer of leased assets under the provision of Japanese income tax law or corporate tax law, in principle, the time of supply is when the lessor delivered the leased assets to the lessee. For operating lease transactions, the time of supply is when the lessor should receive the lease fee.
Imported goods. For import CT, the time of supply for imported goods is the time when the goods are removed from bonded areas. For the domestic CT, there are no special time of supply rules in Japan for supplies of imported goods. As such, the general time of supply rules apply.
F. Recovery of CT by taxable persons
A taxable person has the right to recover input tax on imports and taxable supplies of goods and services made to it. Input tax is recovered by way of deduction from output tax.
The time limit for a taxable person to reclaim input tax in Japan is five years. This time limit runs from the filing deadline.
To be able to deduct input tax, the goods and services must be used for business purposes. The taxable person is required to keep books, qualified invoices and customs documents. The purchase statements and purchase calculation statements that were prepared by a business making taxable purchases and include certain information (applicable to documents confirmed by suppliers of the taxable purchases) can also be used as a record required for input tax credit purposes.
Nondeductible input tax. Input tax may not be recovered on purchases of goods and services that are not used for business purposes (for example, goods acquired for private use by an entrepreneur).
Examples of items for which input tax is nondeductible
• Purchase of goods and services from a business not registered as a qualified invoice issuer, although transitional measures may apply until 30 September 2029.
Examples of items for which input tax is deductible (if related to a taxable business use)
• Purchase, lease, hire, maintenance and fuel for cars, vans and trucks
• Conferences and seminars
• Accommodation
• Mobile phones
• Business gifts
• Travel expenses
• Business entertainment
Partial exemption. A taxable person carrying out nontaxable activities is subject to a limitation of the amount to deduct CT if:
• Its taxable sales ratio is below 95%. Or
• Its taxable turnover exceeds JPY500 million.
The JCT legislation allows different methods to calculate the input tax credit:
• Proportional method (general pro rata method): the tax deductible is calculated by multiplying the total input tax by the “taxable sales ratio,” i.e., the ratio between the turnover of taxable/ exempt sales and the total turnover.
• Itemized method (direct allocation method): input tax attributable to taxable transactions can be fully deducted, while input tax attributable to nontaxable transactions is not deductible. Input tax relating to both categories of transactions can be credited according to the taxable sales ratio. Taxable persons can apply an alternative ratio based on reasonable factors, subject to prior authorization from the tax authorities.
Approval from the tax authorities is not required to use the proportional method or itemized method in Japan. Special methods are not allowed in Japan (aside from the Simplified credit –see the subsection below). To use either the proportional or itemized methods, a taxable person simply checks a box on the CT return for which method they choose (proportional or itemized).
Simplified credit. A taxable person with annual sales not exceeding JPY50 million may use a simplified formula to calculate the deductible CT by filing an application form of simplified credit system in advance to the jurisdictional tax office. Under this system, the deductible tax is calculated by multiplying the output tax by a deemed purchase ratio. This ratio ranges from 40% to 90%, depending on the type of sales. A taxable person that elects to use the simplified formula must use it for a minimum period of two years.
The criteria have been revised to reflect that foreign businesses without permanent establishments are no longer eligible for the simplified credit system. Additionally, the transitional measure under the qualified invoice system, commonly referred to as the special 20% measure, has been adjusted in accordance with the changes to the system.
These revisions are applied for taxable periods beginning on or after 1 October 2024.
Capital goods. There is no definition or special treatment for “capital goods” in Japan. As such, input tax recovery on capital goods (i.e., the sale and lease of property, large equipment and computers) are computed in accordance with the normal input tax recovery rules as outlined above, except for special treatment for residential rental properties. Certain types of capital goods (e.g., the sale and lease of land) is exempt and no CT is charged.
Refunds. If the amount of input tax creditable in a taxable period exceeds the amount of output tax, the excess is refundable. In this case, an additional form that indicates certain transactions should be filed together with the tax return. The tax refund is made to the bank account stated on the tax return.
Pre-registration costs. Input tax incurred on pre-registration costs in Japan is not recoverable.
Bad debts. In the case of write-offs of bad debts due to the Confirmation of Rehabilitation Plans (which is an agreement on write-offs of bad debts under plans for reorganization bankruptcy, etc., in accordance with certain regulations/laws) and other certain reasons, CT on such bad debts are deductible in the taxable period in which such event occurs. Documentary evidence should be maintained.
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not deductible in Japan.
G. Recovery of CT by non-established businesses
Input tax incurred by non-established businesses that are not registered for CT in Japan is not recoverable.
H. Invoicing
CT invoices. The qualified invoice system was introduced with effect from 1 October 2023. The system is a method to receive tax credit for CT corresponding to multiple tax rates on purchases. Under the system, for the buyer to deduct CT on purchases, as a general rule, keeping qualified invoices issued by qualified invoice issuers is required. For the seller to issue a qualified invoice,
Electronic archiving. Electronic archiving is allowed in Japan. Generally, invoices received in paper form need to be kept in paper form, however, keeping them in scanned copies is acceptable if specific requirements are met. Additionally, invoices received in electronic form are allowed to be kept in electronic form if specific requirements are met.
I. Returns and payment
Periodic returns. Taxable persons must file CT returns annually. An individual entrepreneur must file its CT return by 31 March of the year following the end of the calendar year. A corporation must file its annual CT return within two months after its fiscal year-end. A taxable person may opt to file tax returns monthly or quarterly instead of annually.
The filing and payment due dates for consumption tax are two months from the end of the tax period. Effective from the fiscal year that ends on or after 31 March 2021, corporations that are granted extension of the filing of the corporate tax return are allowed to extend their CT return filing deadline for one month (i.e., three months after its fiscal year-end), if it submitted the CT Filing Deadline Extension form by the end of the fiscal year. The CT Filing Deadline Extension application form must be submitted by the end of the fiscal year in which the taxable person intends to apply the extension.
Periodic payments. An individual entrepreneur must pay the CT due by the same date as the annual /monthly/quarterly CT return submission deadline, i.e., for the annual CT return, the payment must be made by 31 March of the year following the end of the calendar year or within two months after the end of the respective tax period for other filing frequencies. Similarly, a corporation must pay the CT due by the same date as the annual/monthly/quarterly CT return, i.e., within two months after the end of the respective tax period. CT due in Japan can be paid by the following methods:
• Direct payment (the tax can be paid online via “direct payment” using the e-Tax system, which is a direct deduction from the taxable person’s bank account)
• Internet banking
• Credit card (accessed by the “National Tax Credit Card Payment Site”)
• Convenience stores (only for tax payments of up to JPY300,000 in total amount per slip)
• Account transfer
• Over-the-counter payment
Electronic filing. Electronic filing is mandatory in Japan for certain taxable persons. For the fiscal year that starts on or after 1 April 2020, Japanese corporations whose amount of capital exceeds JPY100 million, insurance companies or other certain corporations are required to file the tax return electronically. Other taxable businesses and sole proprietorships can use electronic filing system under certain conditions, such as obtaining an ID number.
Payments on account. Depending on the previous year’s tax liability, a taxable person may be required to make interim CT returns and payments:
• If the national tax due exceeds JPY480,000: semiannually.
• If the national tax due exceeds JPY4 million: quarterly.
• If the national tax due exceeds JPY48 million: monthly.
A taxable person who is not subject to this obligation may voluntarily make interim tax returns and payments.
Special schemes. No special schemes are available in Japan.
Annual returns. Annual returns are not required in Japan. See Periodic returns above.
Supplementary filings. No supplementary filings are required in Japan.