Tax Law in Japan

The Structure of Japanese Taxation

Japanese tax law comprises a multi-layered system of national, prefectural, and municipal taxes administered by the National Tax Agency (NTA, Kokuzeichō). The principal national taxes are the Income Tax Act (Shotokuzei Hō, 1965), the Corporate Tax Act (Hōjin Zei Hō, 1965), and the Consumption Tax Act (Shōhi Zei Hō, 1988). Prefectures levy the inhabitant tax (jūminzei) and the enterprise tax (jigyōzei). Article 30 of the Constitution embodies the principle of no taxation without representation, requiring all taxes to be imposed by statute enacted by the National Diet.

Personal Income Tax

The Income Tax Act imposes tax on the worldwide income of residents and on Japan-source income of non-residents. The Act distinguishes permanent residents (eijūsha, taxed on worldwide income), non-permanent residents (hi-eijūsha, taxed on income paid in or remitted to Japan), and non-residents (taxed only on Japan-source income). Residence is determined under Article 2 by reference to domicile (kyojū) and the one-year rule, with presence of 183 days or more in a calendar year creating a rebuttable presumption of residence.

The progressive rate structure ranges from 5% to 45%, with the top rate applying to taxable income exceeding 40 million yen. Taxable income is calculated after deducting allowances including the basic deduction (kiso kōjo) of 480,000 yen, employment income deductions, and social insurance premium deductions. A 2.1% reconstruction surcharge applies to national income tax.

Corporate Tax

The Corporate Tax Act imposes national corporate tax on domestic corporations (head office in Japan) on worldwide income and on foreign corporations on Japan-source income only. The standard rate is 23.2%, reduced from 25.5% in 2015. Combined with enterprise tax (3.3–4.5%) and inhabitant tax, the effective combined rate is approximately 29.7% for large corporations. Japan has implemented the OECD/G20 BEPS minimum standards and adopted Pillar Two global minimum tax rules (15% effective rate) effective for fiscal years beginning on or after 1 April 2024.

Consumption Tax

The Consumption Tax Act introduced VAT on 1 April 1989 at 3%, increased to 5% (1997), 8% (2014), and 10% (October 2019). A reduced rate of 8% applies to food and beverages (excluding alcohol and restaurant dining) and newspapers under subscription. Businesses with taxable turnover exceeding ten million yen must register, collect tax, and file returns. The Qualified Invoice System (Tekikaku Seikyūsho Hōshiki), introduced 1 October 2023, replaced the previous simplified deduction system; only registered businesses issuing qualified invoices may claim input tax credits.

International Taxation

The Special Taxation Measures Law governs Japan’s international tax regime. The foreign tax credit system (Article 95) allows residents and domestic corporations to credit foreign income taxes against Japanese tax, subject to a per-country limitation. The transfer pricing rules (Article 66-4) require arm’s-length pricing between domestic corporations and foreign related parties, following the OECD Transfer Pricing Guidelines. The NTA maintains a dedicated Transfer Pricing Division with industry-specialised examiners.

The thin capitalization rules (Article 66-5) limit interest deductions on loans from foreign controlling shareholders where the loan-to-equity ratio exceeds three to one. The controlled foreign company (CFC) rules (Article 66-6) attribute undistributed income of foreign subsidiaries in low-tax jurisdictions (effective rate below 20%) to the Japanese parent.

Tax Administration and Dispute Resolution

The NTA administers the tax system through a taxpayer self-assessment model, conducting desk audits (naichi chōsa) and field audits (shutchō chōsa). A taxpayer aggrieved by an assessment may request reconsideration within the Regional Taxation Bureau, then appeal to the National Tax Tribunal (Kokuzei Funsō Shinkō Kikō), an independent body conducting evidentiary hearings. Further appeal lies to the District Court, High Court, and Supreme Court. In principle, the taxpayer must exhaust administrative remedies before filing a court action.

Inheritance and Gift Tax

Japan imposes a combined inheritance and gift tax under the Inheritance Tax Act (Sōzokuzei Hō). The progressive rate ranges from 10% to 55%, with the top rate applying to inheritance shares exceeding six billion yen. The 2015 reform reduced the basic deduction from 50 million yen plus 10 million yen per heir to 30 million yen plus 6 million yen per heir, significantly expanding the number of taxable estates. The gift tax mirrors the inheritance tax schedule to prevent avoidance through lifetime transfers.