FOREWORD
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GEOGRAPHY
Japan is an island nation lying to the east of the Asian continent. It is
comprised of four major isles (Hokkaido, Honshu, Shikoku, and Kvushu) and many
small islands. Total land area is approximately 377,000 square kilometres, or
1/25th the size of the United States. The Japanese island chain stretches from
the northeast to the southwest in the distance of about 3,300 kilometres. As a
result, Japan is distinguished by highly diversified climate, ranging from the
bitter cold of the northern regions to the sub-tropical heat of the southern
islands.
About 75% of the Japanese land mass is mountainous or hill terrain, while 87%
of the country's surface is covered with forests.
The population of Japan is 124 million people. The population is heavily
concentrated in its six major cities, Sapporo, Tokyo, Yokohama, Nagoya, Osaka,
and Fukuoka. The 12 million people in Tokyo create an overpopulated density of
over 5,400 persons per square kilometre. As a result, the price of land in the
major cities has skyrocketed. It is quite normal, for example, for a small home
in central Tokyo to be worth five hundred million yen.
The factors in deciding where to conduct business in Japan should include
geography, population densities, ease of people and product transportation, and
economic considerations.
The parliamentarian government of Japan was created after the end of World War
II. The constitution outlines Japan's political system in which its three
branches, Executive, Legislative, and Judicial, are separate and independent.
Executive
The Cabinet is an executive body comprise of the Prime Minister and other
ministers of state. The Prime Minister is elected by the Diet from the
political party in power at the time. A term of office is not definite. His
specified duties include making treaties, appointing various ministers, and
executing and enforcing the laws of the government. Japan has developed an
extremely strong bureaucratic mechanism, with bureaucrats playing a vital role
in energizing the economy and determining the political flow.
Legislative
Japan's National Diet is a legislative body comprised of the House of
Representatives and the House of Councilors. The House of Representatives has
511 members, each serving four-year terms. The Prime Minister, however, has the
right to dissolve the House at any time. The House of Councilors has 252
members, each serving six-year terms and can not be dissolved. The major role
the House of Councilors is to re-examine decisions handed down by the House of
Representatives. For legislation to be enacted, it must be passed by both the
House of Representatives and Councilors. The Prime Minister can veto a bill
with dissolution of the House of Representatives.
Judicial
Japan's judicial power is exercised by the Supreme Court and the lower courts.
The Supreme Court is the court of last appeal and as such determines which
cases from lower courts it chooses to review (writ of certiorari). The Supreme
Court can rule if laws passed by the Diet conform with intent and meaning of
the Constitution.
Local Governments
Japan is divided into 47 local units (prefectures). Each local unit has many
cities. towns and villages and has its own legislative bodies.
Political Parties
There are five major parties in Japan - the Liberal Democratic Party (LDP),
Japan Socialist Party (JSP), clean Government Party, Japan Democratic Socialist
Party and the Japan Communist Party (JCP). Among them, the LDP has been the
dominant party and ruled the political affairs of Japan since post war era.
However, because of constant power struggle within the LDP, the party has lost
its majority to the coalition of opposing parties in recent election. The
present government is lead by the coalition of the JSP and other parties
including some LDP members. Currently there have been any political split up
within the LDP and the JSP and as a result, there is no majority party in the
Diet.
Japanese is the single language used among the Japanese people. As a second
language, English language education begins for Japanese children in most
junior high schools. By the time young people graduate from high school, they
have six years of English language education. English language education in
Japan emphasize more on grammatical rules and writings than on speaking
ability. But in recent years, as Japan finds itself doing more and more
international business, there is growing demand for English speaking persons
and as a result, many junior schools has started English conversation classes.
The Bank of Japan now issues three types of currencies (10,000 yen, 5,000 yen,
and 1,000 yen) and six types of coins (500 yen, 100 yen, 50 yen, 10 yen, 5 yen
and 1 yen). Japanese currencies are internationally traded and can be exchanged
in major cities around the world. Foreign currencies or traveller checks may be
exchanged for Japanese yen at banks with exchange counters.
TRAVEL TO JAPAN
Visas
Non-immigrant travellers to Japan must obtain a visa which is appropriate to
the nature of their visit. Under the reciprocal agreement which Japanese government
contracted with other countries, citizens of certain countries, including the
United States and most countries in Europe may enter Japan without visas if
they have tickets to return home within 90 days. Visas are obtained from the
Japanese consulate office in the traveller's home country.
Business visitors obtain a 4-1-4 tourist visa. The temporary business visitors
may use a 4-1-4 visa to negotiate contracts, consult with associates, attend a
convention, perform research, and engage in litigation. If the visitor receives
any payment, other than reimbursed expenses, he may not qualify under the 4-1-4
visa category and must obtain a work visa. 4-1-4 visas can be granted for up to
90 days.
Other visas are issued for the purposes of traders, investors, employees, etc.
and are discussed in the booklet under the heading "Employees and
Investors."
ECONOMIC ARRANGEMENTS
Japan is a member of the General Agreement on Tariff and Trade (GATT), and in
principle, supports free trade doctrine. However, in reality, many bureaucratic
regulations blocks the country from importing certain goods from foreign
countries. Because of the political pressure from farmers, there are strict
regulations imposed on imports of rice, oranges and certain other agricultural
products. There are also very complicated distribution system which prevents
foreign goods to reach consumers freely. While the export has overgrown, the
import has not grown as expected and this trade unbalance is causing a serious
criticism against Japan from other countries.
Trade surplus has been increasing steadily and reached US $107 billion in 1992
within US$ 340 billion in export and $233 billion in import. Major goods for
import are crude oil and oil products1 fish, pulp, lumber and other raw
materials. Major goods for export are automobiles, computers, electric
appliances, machineries end other high-tech products. Its major export trading
partners, in order of volume, are the United States, the European Economic
community, Taiwan, Hong Kong, South Korea, Singapore and People's Republic of
China. Its major import trading partners, in order of volume, are the United
States, the European Economic Community, People's Republic of China, Australia,
Indonesia, South Korea and Saudi Arabia.
The
Japanese government allows foreign investment to Japan without much
restrictions and treats the foreign owned business same as the domestic
business by applying the same rules and regulations.
For doing business in Japan, foreign entity is required to register in Ministry
of Finance. Defense related industries and banking industries are subject to
restrictions and the free entry doctrine does not apply in general.
A foreign subsidiary operating in Japan is entitled to obtain for itself the
same government sponsored assistance to business (such as special loan for the
small business) which exists for domestic operators and receive same tax
treatments.
SOURCE OF FINANCE
An investor should review the availability of government sponsored financing.
Information on financing is available through banks, investment institutions,
chamber of commerce and small business administration office.
Banks and other financial institutions
Banks are regulated by the Ministry of Finance and its policies are guided by
the Bank of Japan. Banks which have overseas branches are required to keep
capital adequacy requirement as set by the Bank of International Settlements.
1. Commercial Banks
Commercial banks engage both in wholesale and retail banking. In wholesale
banking, the funds are generated through inter-banks and other money market and
deal mostly with institutional investors national companies and governmental
agencies. In retail banking, the funds are generated through deposits from
customer and deal mostly with individuals and small to mid-size business. Most
of the lending activities in Japan are done through commercial banks.
2. Long-term credit banks
Long-term credit banks generate funds by issuing bank debentures. They
specialize in long-term lending to accommodate long-term projects.
3. Trust banks
Trust banks are established under the banking law of Japan. They are segregated
from other commercial banks mainly because they generate fund from trust fund
management on long-term basis. Their lending activities are focused on large
corporations which need heavy capital infusion.
4. Foreign banks in Japan
Foreign banks are allowed to open its branches in Japan once registered. Their
activities are similar to the other commercial banks.
5. Financing institutes for the medium and small sized companies
These institutes are subsidized by the government to promote growth of medium
and small sized companies which are vital to the Japanese economy. Financing
Institute for Citizens and Financing Institute for the medium and small
business are the two major institutes. Requirements for borrowing are more
lenient than banks.
6. Insurance companies
They offer variety of financial products, ranging from life, health, disability
insurance, annuities and investment fund, etc. These institutions invest vast
amounts in stocks, bonds, real estate, mortgage loans, etc. while they await
eventual long-term claims.
7. Stockbrokerage Houses
They represent customers for whom they purchase and sell stocks, bonds, and
other investments and earn a commission in doing so. These institutions also
function as advisers for businesses in a variety of sophisticated financial
transactions and as investors or sales representatives for companies which
obtain equity by issuing their stock to the public. They are governed by the
security exchange law and licensed by the Ministry of Finance. They also
function as underwriters for new issues of stocks, bonds, and stock warrants.
Borrowing
In Japan, a bank borrowing is made through the use of a signed loan agreement
or a note payable promising to repay the loan on a certain date (or dates if
monthly, quarterly, or annual pavments are made) at a defined interest rate.
The banks require the debtor to pledge real estate or marketable securities as
a collateral at the inception of the loan. As a foreign investor does not have
a plenty of real estate or marketable securities in Japan, the banks require
the guarantee of the parent company or owner. The forms of lending commonly
used are:
1. Loan on bills
This type of loan is made by issuing the promissory note from the debtor to the
bank. Notes may be issued for 90 or 180 day periods. Since this loan is
short-term in nature, it is most commonly used to finance seasoned cash flow
requirements to meet working capital needs. Notes may be renewed at maturity
date.
2. Loan on deeds
This loan is made by signing the loan agreement between the bank and the
debtor. This loan is used to finance the capital project. Therefore this loan
is long-term in nature.
3. Discounting of bills
In Japan, sellers often receive the promissory note maturing within 90-180 days
for the payment. The banks finance the sellers to discount the promissory notes
prior to their maturity dates. This is commonly practiced by many wholesalers
to finance their working capital needs.
4. Leasing
This is one alternative to capital investment which require often lump sum cash
payment at the beginning. Under an operating lease, the lessee makes rental
payments for a certain period and at the end of the period the asset is
returned to the lessor. Under a capital lease, the lessee makes payments under
a non-cancellable agreement and has the option to purchase the asset at the end
of the lease for relatively small amount. Interest imputed under the lease
arrangement is usual higher than regular loans.
5. Raising Equity
If equity financing is desirable in place of or in addition to debt financing,
a company may issue and distribute its stock. It may "go public".
This generic term is synonymous with the term "flotation" and means
selling shares of stock to "The Public" is a narrow technical term
which generally means outside investors who are not presently owners of the
business. Stock of a company which has gone public can be easily transferred or
sold because it is normally valued in some market. A company which has gone
public is referred to as a "publicly-held" company. The company may
sell to the public stock that is traded "over-the counter" (OTC).
This market, referred to as the OTC market is operated by the security dealers
under regulation by the Securities and Exchange Law and the Japanese
Association of Securities Dealers.
"Going public" requires filling of "registration
statements" with the Japanese Association of Securities Dealer and the
Ministry of Finance. This process requires audited financial statements and
vast disclosures about the company, "the registrant". Some companies
which start on the OTC market ultimately grow and seek a listing on one of the
prominent stock exchanges. Many large well known companies sell shares of stock
to investors through stock exchanges such as the Tokyo Stock Exchange and the
Osaka Stock Exchange. Listing is possible only after meeting strenuous exchange
listing requirements as well as providing very substantial accounting and other
disclosures through annual statements filed with the Ministry of Finance. It is
important to understand that "closely-held" companies which issue and
distribute stock may be required to comply with the Securities and Exchange
Law. The basic rule in Japan is that no stock may be offered or sold unless the
offering company has filed a registration statement with the Ministry of
Finance and the registration statement has become effective, or unless the
security is exempt from registration. If a limited number of investors or very
sophisticated investors (such as financial institutions) are asked to consider
making an investment, or if the equity to be raised is less than specified
amounts, the stock can be exempt from registration.
In general, there are no exchange control regulations or restrictions imposed
on foreign investors. There are prior reporting requirements for following
activities:
1) Lending activities to/from a non-resident.
2) Acquisition of real property in Japan by a non-resident.
3) Direct investment in Japan by a non-resident.
Therefore, a foreign investor can repatriate capital1 loans, and income. Some
payments, such as dividends, interest, royalties, and service income may be
subject to a withholding tax. The rate of exchange between the Japanese yen and
other currencies is not controlled by Bank of Japan (Japanese National Bank);
the Japanese yen is valued in relationship with other currencies in a worldwide
market.
FOREIGN EMPLOYEES AND
INVESTORS
As previously mentioned, all visitors must have a valid passport and proper
visa to enter Japan. There are no exceptions to this requirement. But if a
person is from one of about fifty countries that have reciprocal agreements
with Japan, she or he can get temporary tourist visa when entering the country.
As the list is constantly changing, with new countries entering into reciprocal
arrangements and others revoking them, those who are planning to visit Japan on
business should check with their local Japanese Embassy or with tourist
information office beforehand. Those who wish to work in Japan or live in Japan
as traders or investors are required to obtain visas authorizing such activities.
Until mid-1980, there were eighteen visa classifications, and most working
foreigners fell under the catchall 4-1-16-3 category. In December of 1989, the
government passed a bill to create ten new categories so that the lawyers,
accountants, teachers, etc. that used to all be lumped together would have
separate visa classifications. Proper visas for management, trade, capital
investment, study or research, working etc. are as follows:
4-1-5 visa (traders, investors and inter-company transferee)
This visa is given to the aliens engaging in management of business, foreign
trade, or capital investment activities. This visa is available for up to three
years.
4-1-6 visa (students)
This visa is available for students engaging in study or research at the junior
college level or above. Is visa is issued for a one year period.
4-1-6-2 visa (trainees)
This category is for persons accepted by a public or private organization in
Japan to acquire industrial techniques or skills. The time period for the
training will not exceed one year.
4-1-12 visa (workers having high-level skill and experience)
This visa category is used for a foreigner invited by public or private
organizations in Japan for the purpose of furnishing high-level or specialized
skills and experience. This visa is issued for a three year period.
4-1-13 visa (workers having specialty occupations)
Workers in speciality occupations (e.g. cooks in Chinese or French restaurants.
Western-style confectioners, etc.) can be admitted to Japan under this visa. This
visa is available for up to one year.
4-1-14 (permanent residence)
Persons seeking to reside permanently in Japan must get this visa category.
This visa is very limited in its issuance.
4-1-16-3 (temporary workers and other)
This category is for persons who do not fall under any other categories but are
permitted to reside at the discretion of the Minister of Justice. The time
period allowed for this visa shall be determined on a case-bycase basis up to
three years.
SOLE PROPRIETORSHIP
A single individual owns and operate the business. The proprietor is personally
responsible for all liabilities accruing to the business, is entitled to all
the income from it1 and pays individual income taxes on that income. No legal
procedures are required to establish a sole proprietorship other than
registering at the tax office.
There are no governmental fees to establish a sole proprietorship. This
informal business needs to maintain adequate records in order to calculate net
income for tax purposes, such records may consist of worksheets summarizing
income and expenses using sales slips. invoices, bank statements, and similar
items to document transactions. There are no statutory audit requirements.
Some foreigners who want to become sole owners of their businesses have had
trouble with the immigration office to obtain or renew their visas. For these
reasons, entrepreneurs generally choose incorporate.
CORPORATIONS
The incorporated business is a distinct entity from its owners, the "stockholders"
or "shareholders", who are not personally liable for the debts and
actions of the corporation. This is the most formal means of conducting
business and is preferred by foreigners and foreign companies doing business in
Japan because the corporations "(Kabushiki Kaisha or K.K. in
Japanese)" are regarded to be more stable, dependable, permanent, and
prestigious entity that the Japanese can trust. Corporation, once incorporated
under the Commercial Code by notarizing "Articles of Incorporation"
by a public notary and filing them with the Office of Records, will exist
perpetually even when the stockholders transfer their ownership to others.
Incorporation costs (for notary public, attorney's fees, registration fees,
etc) run to 500,000 yen or more, depending on the amount of capital. Once
established, corporations are required to keep formal accounting records
utilizing a double entry accounting system. In addition to directors, one or
more internal statutory auditors are required. Corporations are subject to the
statutory audit by internal auditors.
Publicly held corporations and other corporations with large capital (over 500
million yen) or with large debt (over 20 billion yen) are subject to audit by
independent certified public accountants. The minimum capital requirement for a
corporation is 10 million yen.
LIMITED LIABILITY CORPORATIONS
(Yugen Kaisha in Japanese)
A Yugen kaisha is a widely used and simplified form of corporation. A vugen
kaisha is very similar to a corporation except that the shareholders are called
"partners" and the number of partners is limited to fifty whereas
there is no limit to the number of owners for a regular type of corporation.
The minimum capital requirement for a yugen kaisha is 3 million yen. There is no
statutory audit requirements for a yugen kaisha.
BRANCHES
A foreign corporation may operate its business in Japan in the form of a
branch. A corporation must register its branch as a "foreign
corporation" with registration office. For registration. the corporate certificate
of good standing or notarized affidavit showing the address. directors' name,
auditors' name and the amount of capital is required. The branch is subject to
the usual corporate laws and corporate income taxes. As a branch operation. the
liabilities of the branch are the responsibility of the corporate owner.
The
general law of national tax contains common and fundamental provisions in all
aspects of taxation, aiming primarily at the simplification of the tax system
as well as classification of the legal basis of taxation. The articles of the
tax law cover procedural matters, such as determination of the taxable income,
tax assessment, refunds, tax disputes and appeals. The general laws of national
tax consist of individual income tax law, corporation tax law, inheritance tax
law and land value tax law and others which levy the specified taxes.
SYSTEM OF TAX LAWS AND
REGULATIONS
The National Tax Administration System is headed by the Ministry of Finance.
National taxes are levied and collected by the National Tax Administration. The
National Tax Administration has one central office, 12 regional bureaus, and
519 tax offices.
The legislative work on the tax system is executed by the Tax Bureau of the
Ministry of Finance. The Commissioner of the National Tax Administration issues
directives to officials of the National Tax Administration and its local
offices for the uniform interpretation and application of laws. These
directives are generally made public and play an important role in tax
administration.
Taxes on the income of foreign individuals, as well as foreign corporations,
are examined by the official of a regional taxation bureau.
In addition to the National Tax Administration Office, local organizations such
as the Tokyo Metropolitan Office and Prefectural Offices have their own local
tax system to levy and collect local taxes for their need.
Individuals are subject to income tax at national level and prefectural
inhabitant tax and municipal inhabitant tax which are based on their income at
local level. Income tax is composed of withholding income tax and assessment
income tax. Withholding income tax is withheld at source from payments to
individuals. Payments such as salaries, bonuses, royalties, dividend and
interest are usually subject to withholding at source, as well as payments to
non-resident aliens.
Tax rate for resident taxpayer, individual domiciled, or resident for 1 year or
longer within Japan, and non-resident taxpayer who possess a permanent
establishment in Japan are as follows:
Total Taxable Income Tax Rate
Not over 3,000,000 Yen (US $28,571) 10%
Over 3,000,000 Yen 20%
6,000,000 Yen (US$ 57,142) 30%
10,000,000 Yen (US$ 95,238) 40%
20,000,000 Yen (US$190,476) 50%
Converted at 105 Yen/USD
Certain expenses and deductions are allowed in arriving a taxable income. Some
of the major items for deductions are:
1) Employment income deduction, minimum of 570,000 yen to higher amount based
on income,
2) Retirement income deduction. 50% after special deductions.
3) Capital gains. 50% deducted after special deductions.
Personal exemptions are also allowed in arriving at taxable income as follows:
Basic Deduction 350,000 Yen
Deduction for spouse 350,000 Yen
Additional Deduction for spouse 350,000 Yen *
Deduction for dependents 350,000 Yen
* Applicable
to those whose annual income is less than 10 million yen
Tax Return Due Date and Payments
The assessment of income tax is based on a calendar year. The taxpayer must
file his returns by March 15. Estimated tax for the current year is due on July
1 and November 1. Each payment is based on 113 of the assessed tax of preceding
year if it exceeded 150,000 yen. The amount of the estimated tax is determined
by the district tax office.
Most of the salary and wage earners in Japan are not required to file the
return unless the taxpayer has some side business, large capital gain
transactions, foreign source income or expect refund by filing. The income tax
matters for salaried workers are finalized by withholding and year-end
adjustments by employers.
Separate Treatment of Capital Gains
Taxpayers must treat capital gains separately instead of including them in
gross income. If the taxpayers's income bracket is high, the separate treatment
of capital gains will result in less tax to him. Long-term capital gains after
the ordinary deduction of 1 million yen and increased deduction of 5 million
yen to 50 million yen depending on the types of transfer or assets are taxed at
a flat rate of 30%.
Long-term gain is usually refereed to the transfer of land and building with
holding period over 10 years.
If the holding period of land and building is over 2 years but less than 10
years, the capital gains are referred as short-term and the tax rate is 40%
after special deductions. If the holding period of such assets is less than 2
years, the capital gains are referred as super short-term and the tax rate is
50% after special deductions.
Capital gains derived from the transfer of securities are normally taxed at 20%
after deducting expenses incurred for the transfer.
Both domestic and foreign corporations are subject to income tax at national
level and prefectural inhabitant tax, municipal inhabitant tax and enterprise
tax based on their income at local level. Foreign corporations are taxed in the
same manner as domestic corporations on their income from sources with Japan.
Tax rate for various type of income are as follows:
Ordinary Income:
1) Ordinary corporation
a) with capital over 100 million yen 37.5%
b) with capital not more than 100 million yen
Annual income not more than 8 million yen 28.0%
Annual income more than S million yen 37.5%
2) Special corporation (e.g. corporation in public interest, cooperative
association, etc.) 27.0%
Liquidation Income:
1) Ordinary corporation 33.0%
2) Special corporation 24.8%
3) Additional tax on short-term
capital gains from transfer of land 20.0%
(in case of super short-term capital gains 30%)
Tax Return Due Date and Payment.
A corporation is required to file a final return within two months after the
end of its fiscal year. A final return must be accompanied by the corporation's
financial statements. The interim return and payment is also required for the
first six months of operation.
Enterprise tax is levied by the local government (e.g. Tokyo metropolitan
government, prefectural offices, etc.) to individuals who carry on business and
to corporations. Tax is based on the income from the business, including
liquidation income. Mining and forest industry are exempted. Tax rate for
individuals and corporations by different category of business are as follows:
Individual
* Type I include most of commercial business, retail & wholesale,
manufacturing, transportation, hotels, etc.
5.0% (Max 5.5%)
2) Type II include most of primary industries, fishing, livestock, bee farrns,
etc. 4.0%
3) Type Ill include all professional services, Physicians, lawyers,
accountants, hair-dressers, etc. 5.0%
Corporation
1) Utility companies, life & casualty insurance companies (levied on gross
proceeds) 1.5%
2) Other business (levied on net income):
for net income under 3.5 million yen 6.0%
for net income over 3.5 million yen but
not over 7 million yen 9.0%
for net income over 7 million yen 12.0%
3) Special corporations - Cooperatives, medical care corporation (levied on net
income):
for net income under 3.5 million yen 6.0%
for net income over 3.5 million yen 8.0%
The above
rate are standard rate. Prefectures may tax up to maximum of 110% of standard
rate in some cases.
Foreign individuals are categorized into two classes for tax purposes, 1)
resident and 2) non-resident. Resident taxpayers are further broken into two
classes, permanent resident and non-permanent resident.
RESIDENT
An individual who has his domicile in Japan is a resident. The term
"domicile" is defined as the taxpayer's center of living. An
individual who has had his residence in Japan for one year or more is also
defined as a resident under the Japanese income tax laws. When a foreigner
enters Japan with his family with an intention to have his home in Japan and is
actually in Japan for one year or more, he is domiciled in Japan.
Permanent Resident
All residents other than nonpermanent residents are classified as permanent
residents. A permanent resident is subject to income tax on his wodd-wide
income from sources in any country. He or she is taxed in the same manner as a
Japanese citizen.
Nonpermanent Resident
A resident taxpayer who has no intention of living permanently in Japan is a
nonpermanent resident, unless he has had domicile or residence in Japan for
more than 5 years. For the purpose of Japanese taxation, a nonpermanent
resident belongs to the resident taxpayers group, but his tax liability on
income from foreign sources is limited to the amount actually paid in Japan or
remitted to Japan. Thus, unlike in the case of permanent residents, the foreign
source income of nonpermanent residents is taxed only when transferred to
Japan.
NONRESIDENT
All individuals who are not residents are nonresidents. A nonresident taxpayer
is subject to Japanese income tax only on income derived from sources in Japan.
The tax is usually collected in the form of withholding.
FOREIGN CORPORATION
Under the Japanese corporation tax law, a foreign corporation is defined as a
corporation which has its head office outside of Japan. A foreign corporation
is subject to Japanese income tax only on income derived from sources in Japan.
The tax is usually collected in the form of withholding, unless the corporation
has a branch office, agent, etc. in Japan, in which case the corporation is
required to file an income tax return for its income derived from sources in
Japan.
WITHHOLDING OF PAYMENTS TO FOREIGN TAXPAYERS
The following items of income paid to a nonresident taxpayer or a foreign
corporation are subject to Japanese withholding income tax at a rate of 20% (or
rate so specified by tax treaties for certain countries):
(1) interest on:
a) bonds or debentures issued by the Japanese government, local government in
Japan. or a Japanese domestic corporation;
b) deposits with a bank situated in Japan
c) loans extended for business carried on in Japan
(2) Dividends paid by a Japanese domestic corporation
(3) Rent for real property located in Japan
(4) Lease or rent for industrial or commercial equipment used by an enterprise
in Japan
(5) Lease or rent for a Sup or aircraft rented to a Japanese resident
(6) Salaries, wages and other compensation for services performed in Japan
(7) Retirement allowances or pensions paid for past services performed in Japan
(8) Contract fees paid to a person performing specialized services in Japan
(entertainers, athletes, etc.)
(9) Royalties or capital gains derived from patents. know-how, copyright,
movies., etc. used for business carried on in Japan
(10) Commercial prizes and awards
(11) Proceeds from sale of real estates located in Japan. (10%) This applies
only when the value of the real estate is over 100 million yen and the property
is investment real estate.
TAX TREATIES WITH FOREIGN COUNTRIES
Japan has concluded tax treaties with 38 countries. Tax treaties have
special provisions to avoid double taxation and inequity in taxes between
contracted countries. Such provisions are usually granted to a resident
individual or a resident corporation of a foreign country which has concluded a
treaty with Japan, if they are not at the same time a resident in Japan or a
Japanese domestic corporation according to Japanese tax laws.
Countries which Japan has concluded tax treaties with, in order of the date of
signature of the original treaty, are:
1. U.S.A.
2. Sweden
3. Pakistan
4. Norway
5. Denmark
6. S. India
7. Singapore
8. Austria
9. United Kingdom
10. New Zealand
11. Thailand
12. Malaysia
13.Canada
14. France
15. Germany
16. Brazil
17. Sri Lanka
18. Belgium
19. Egypt
20. Italy
21. Australia
22. Zambia
23. The Netherlands
24. Republic of Korea
25. Switzerland
26. Finland
27.Spain
28. Ireland
29.Romania
30. Czechoslovakia
31. Philippines
32. Hungary
33. Poland
34. Indonesia
35. China
36. Bangladesh
37. Bulgaria
38. Russia
Some of the treaty provisions are summarized as follows.
Numbers refer to the countries listed above.
|
Type of income |
15% withholding |
12% withholding |
10% withholding |
|
Interest |
(7) (13) |
(24) |
(1) (2) (9) |
|
Dividend |
1. (2) (7) (9) |
(24) |
to subsidiary |
OTHER TAXES
1) Inheritance and Gift Taxes (Levied at national level)
The Japanese inheritance tax system is based on the theory that an inheritance
is supplementary income to the recipient and as such, it is levied on heirs,
legatees, etc., but not on the deceased's estate itself. If a taxpayer inherits
property while he or she is a resident in Japan. inheritance tax is fully
levied on the property inherited regardless of the situs of the property and
regardless of the tax home of the decedent. If a taxpayer is nonresident.
inheritance tax is levied only on the property situated in Japan.
Computation of inheritance tax is complicated because of the exclusions and
exemptions for certain type of properties. The tax rate for the taxable
inheritance proceeds runs by increments of 5% starting from 10 % to 70
Gift tax is levied on a person who received a gift. If a donee is a resident of
the situs of the property and regardless of the tax home of the donor. A
nonresident donee is subject to gift tax only for properties located in Japan.
The tax rate for the taxable gift runs by increments of 5 %, starting from 10 %
to maximum rate of 70 %.
2) Property Taxes
Property taxes are assessed on various type of properties, both by national and
local governments.
Land Value Tax (levied at national level)
Starting from January 1,1992, the New Land Value Tax is imposed to individuals
and corporations who own land in Japan. The tax is based on the value of the
land owned at every
January 1. The evaluation is made under the used for the Inheritance and Gift
Tax Law. The term "land" for the Land Value Tax include leasehold as
well as actual land.
Land used for the public welfare as well as land used for agricultures and
forest are exempted.
The tax is based on the assessed value of the lend as of January 1 of each
year. The basic deduction is higher of:
1) 1 billion yen (1.5 billion yen for individuals or for corporations with
capital not over 100 million yen) or
2) 30,000 yen x area of land (in square meters)
The tax rate is 0.3%
The payment of tax is due in 2 instalments, October 31 and March 31.
Fixed Assets Tax (levied at local level)
Fixed Assets tax is assessed by municipal government to the Registered owners
of land, buildings, ships or any other depreciable assets owned at January 1 of
each year. The term
"registered owner" means the person legally registered as the owner
of such property in the registration book maintained by a national registry
office.
No Fixed Assets Tax is levied on automobiles or other vehicles which are
subject to automobile license tax.
The annual tax rate is 1.4%. In some municipalities, the rate can go higher but
not more than 2.1%.
The payment of tax is due in 4 instalments, April, July, December, and February
of the following year.
Special Land Holding tax levied at local levet)
Special Land Holding Tax is levied on both the holding and acquisition of land.
It is levied by the municipality in which the land is located. This tax was
introduced to discourage a person from buying and selling a piece of land for
speculation of mere holding a land for future appreciation in value.
Tax rate:
Holding of land 1.4%
Acquisition of land 3.0%
The payment of tax is due on May 31, for holding land.
The payment of tax for acquisition is due on February 28 if the land is
acquired within a year preceding January 1, or on August 31 if the land is
acquired within a year preceding July 1.
3) Consumption Tax (levied at national level)
Consumption Tax is tax assessed on transfer of taxable assets, and services
performed. It is similar to the sales tax except that it includes services,
interest and rate for the properties. Almost all commercial transactions
performed in Japan are subject to the Consumption Tax.
Tax rate is 3% for the taxable sales and receipts. The tax is charged to a
customer at the time of sale.
The return is filed quarterly with payments. The final return is due within two
months after the end of the year.
TAX DISPUTES
Tax dispute between tax payer and tax office are usually settled at
Administrative appeal level and seldom go to the court.
1) Administrative appeal
When a tax payer believes that the tax was assessed on unreasonable ground, he
can file his appeal with the administrative agency which made the original
assessment within two month after the assessment was made.
If a tax payer is not satisfied with the decision made by the administrative
agency, he can still file for a reconsideration with the National Tax Tribunal
Office within one month after such decision was made.
Even if an appeal is filed, the validity and execution of the original action
is not suspended.