Consumer demand fuels Japan’s lucrative markets

As the third largest economy in the world, and with steady consumer demand for Western products and services, Japan is a potentially lucrative market for UK businesses.

By Helen Cowley, tax partner at Cassons, part of the Baldwins Group.

For tax purposes, there are two categories of corporations in Japan: domestic and foreign.

A Japanese incorporated subsidiary of a foreign company will be regarded as a domestic corporation and will pay Japanese taxes on its worldwide income, whilst a foreign corporation is only liable to Japanese corporate taxes on Japan-source income.

Foreign corporations are broadly those with a branch or manufacturing facility established in Japan, whether or not a branch has been formally registered.

Certain construction projects may result in a Japanese branch depending on the length of the project, as may contract negotiations undertaken by agents or employees on behalf of a foreign company, or the storage of assets for specified periods of time.

The four main corporate taxes are national corporation tax, local corporate inhabitant tax, enterprise tax and special local corporate tax.

The latter is to be abolished from October 1, 2019 when it will be replaced with an increase in the enterprise tax rate.

For SMEs operating in Tokyo, those taxes currently result in an overall effective rate of up to 34.6 per cent, depending on the amount of paid-in capital.

The most suitable structure to establish a base in Japan will depend on a mixture of many tax, legal and commercial factors, such as the utilisation of anticipated start-up losses, minimum capital requirements and protection of the UK company from Japanese liabilities.

Professional Japanese and UK advice is strongly recommended before deciding on a structure and in advance of starting operations. It is also important that you take specialist Japanese advice prior to entering into contract negotiations so you understand fully your Japanese tax obligations.