Japan’s 2024 tax reform, which was approved by the Diet on 28 March 2024, includes important modifications to the Japanese Consumption Tax (JCT) exemption, as well as the introduction of rules that require platform operators to remit JCT on behalf of foreign digital services businesses (for prior coverage, see the article in the January 2024 issue of Indirect Tax News). The changes to the JCT exemption rules will apply to tax periods starting on or after 1 October 2024 and the new measures on platform operators will apply as from 2025.
Note 2: The specified period is the first six-month period in the tax year immediately prior to the tax year in question. Even if the entity’s taxable sales exceed JPY 10 million during the specified period, if the entity’s total personnel costs do not exceed JPY 10 million during the specified period, the entity can be exempt from the JCT obligation.
Since a newly incorporated company does not have a base period or a specific period, the company does not fulfil condition a). If the company’s paid-in capital is below JPY 10 million (i.e., the company does not fulfil condition b)) and does not make a voluntary election for JCT payer status (i.e., the company does not fulfil condition c)), the newly incorporated company is not required to file JCT returns for the first and second tax years. However, under a special rule for newly incorporated companies, and even though a new company does not have paid-in capital of JPY 10 million or more, if its parent company (including a foreign parent) has taxable sales exceeding JPY 500 million for JCT purposes during its base period, the company cannot enjoy the JCT exemption for newly incorporated companies.
Kenichiro Kishi
BDO in Japan
Current rules
Under current JCT law, an entity (including a foreign entity) is treated as a JCT payer (i.e., the entity must file a JCT return and pay net JCT payable (or can claim a JCT refund) to the Japanese tax office) for a fiscal year if it satisfies any of the following conditions:- Its taxable sales for JCT purposes in the “base period” (Note 1) or the “specific period” (Note 2) are in excess of JPY 10 million;
- It is a newly incorporated company with no base period and has share capital of at least JPY 10 million (or the equivalent); or
- It has made a voluntary election for JCT status.
Note 2: The specified period is the first six-month period in the tax year immediately prior to the tax year in question. Even if the entity’s taxable sales exceed JPY 10 million during the specified period, if the entity’s total personnel costs do not exceed JPY 10 million during the specified period, the entity can be exempt from the JCT obligation.
Since a newly incorporated company does not have a base period or a specific period, the company does not fulfil condition a). If the company’s paid-in capital is below JPY 10 million (i.e., the company does not fulfil condition b)) and does not make a voluntary election for JCT payer status (i.e., the company does not fulfil condition c)), the newly incorporated company is not required to file JCT returns for the first and second tax years. However, under a special rule for newly incorporated companies, and even though a new company does not have paid-in capital of JPY 10 million or more, if its parent company (including a foreign parent) has taxable sales exceeding JPY 500 million for JCT purposes during its base period, the company cannot enjoy the JCT exemption for newly incorporated companies.
Proposed rules
To combat potential tax avoidance, the 2024 tax reform revises the above JCT exemption rules as follows:- For a foreign entity, “personnel costs” incurred during the specific period cannot be taken into account in determining whether the entity fulfils the JPY 10 million in annual taxable sales condition. This means that a foreign entity with annual taxable sales during the specific period exceeding JPY 10 million will have a mandatory JCT obligation even though the foreign entity’s annual personnel costs during that period do not exceed JPY 10 million.
- With respect to condition b), even though a foreign entity has its base period (i.e., the foreign entity is not a newly incorporated entity) and its annual taxable sales during the base period are below JPY 10 million, when the foreign entity newly starts to conduct business activities in Japan, it will need to determine whether condition b) is fulfilled for the first tax year, i.e., the foreign entity will have a mandatory JCT obligation if its paid-in capital is JPY 10 million or more.
- Even though a newly incorporated entity’s paid-in capital is not JPY 10 million or more and its (foreign) parent company does not have taxable sales exceeding JPY 500 million during the base period, if the (foreign) parent company’s annual sales (both domestic and foreign) exceed JPY 5 billion, the newly incorporated entity will have a mandatory JCT obligation as from the first tax year.
Kenichiro Kishi
BDO in Japan