JapanTax Obligations Detailed

In Japan, employers have various tax obligations related to payroll, social security, and other contributions.

Payroll Taxes & Withholding

• Income Tax: Japan's income tax system is progressive, with rates from 5% to 45% for 2025, plus a 2.1% surtax based on the calculated income tax. Non-residents are taxed at a flat rate of 20.42%. Employers withhold income tax monthly and remit it by the 10th of the following month. Year-end tax adjustments and reporting are due by January 31st. As of January 1st, 2026, there will be an increase to the basic deduction for income tax and minimum guaranteed amount for employment income deductions, and new special deductions for specified relatives will also be implemented. In particular, the basic deduction will rise from JPY 480,000 to JPY 580,000 for those earning under JPY 23.5 million annually.
• Local Inhabitant Tax: Employers also withhold local inhabitant tax based on the employee's income for the previous year. The municipality notifies employers of the annual amount, which is then withheld monthly (generally from June of the current year to May of the following year) and remitted by the 10th of each month. For employees eligible for a tax rebate due to their annual local tax amount, the rebate is usually factored in, and deductions are typically made from July of the current year to May of the following year, skipping June.
• Social Security: Employers and employees share social security contributions. Employer contributions range from 16.62% to 26.74% of the employee's salary, depending upon the local prefecture's contribution rates. These contributions cover health insurance, pension, unemployment insurance, and workers' accident compensation insurance.

Consumption Tax (Similar to VAT/GST)

• Consumption Tax: Similar to a Value Added Tax (VAT) or Goods and Services Tax (GST), Japan levies a consumption tax on most goods and services. The general rate is 10%, with a reduced rate of 8% for certain food items, beverages (excluding restaurant purchases and alcohol), and some newspaper subscriptions. Exports and services to non-residents are zero-rated. The Qualified Invoice System (QIS), effective from October 2023, requires specific invoicing for claiming input tax credits.
• Filing and Payment: Consumption tax returns are typically filed annually by the end of February, with possible extensions. Provisional returns might be required monthly, quarterly (May, August, November), or annually by August's end, depending on the business's size and prior tax amounts.

Other Employer Obligations

• New Office/Business Commencement/Closure/Relocation: Businesses starting with a payroll must submit a "Notification on the establishment of a salary paying office" within one month. Similar notification is required for office relocation, business closure, or when ceasing to have employees.
• Year-end Tax Adjustments/Reporting: Income tax reports must be submitted to the tax authorities and issued to employees by January 31st.

It is important to remember that this information is based on the data available as of today, February 5, 2025, and might change due to legal updates or other revisions. Consulting with tax professionals or legal advisors is highly recommended for specific situations.

In 2025, Japan's income tax system introduces several key changes affecting deductions, impacting resident taxpayers.

Deductions

• Basic Deduction: Increased to a maximum of JPY 580,000, up from JPY 480,000. The amount of the basic deduction starts decreasing when your taxable income is over 23.5 million yen, decreasing eventually down to 0. It decreases down to 480,000 yen if your total taxable income is between 23.5 million and 24 million yen. It decreases down to 320,000 yen if your total taxable income is between 24 million and 24.5 million yen. It decreases down to 160,000 yen if your total taxable income is between 24.5 million and 25 million yen. If your total taxable income is over 25 million yen then the amount of deduction is zero.

• Employment Income Deduction: The minimum deduction rises from JPY 550,000 to JPY 650,000. The deduction is calculated based on income brackets and is capped at JPY 1.95 million. The calculation is as follows:

  • Up to JPY 1,625,000: JPY 650,000
  • JPY 1,625,001 - JPY 1,800,000: 40% of employment income - JPY 100,000 (minimum JPY 650,000)
  • JPY 1,800,001 - JPY 1,900,000: 30% of employment income + JPY 80,000
  • JPY 1,900,001 - JPY 3,600,000: 30% of employment income + JPY 80,000
  • JPY 3,600,001 - JPY 6,600,000: 20% of employment income + JPY 440,000
  • JPY 6,600,001 - JPY 8,500,000: 10% of employment income + JPY 1,100,000
  • Over JPY 8,500,000: JPY 1,950,000

• Deduction for Dependents: A new deduction of JPY 630,000 is introduced for dependents aged 19-22 with income up to JPY 1.5 million. This deduction decreases gradually if the dependent's income surpasses JPY 1.5 million.

• Social Security Contributions: Fully deductible.

• Medical Expenses: Deductible with limitations. Expenses are deductible irrespective of where they were paid.

• Charitable Contributions: Deductible for designated charities, primarily in Japan, with limitations. The deduction is generally limited to 40% of income, less JPY 2,000, for contributions exceeding JPY 2,000.

• Life Insurance Premiums: Deductible up to a certain limit for premiums paid to Japanese agencies in local currency. Earthquake insurance premiums are also deductible up to a limit.

• Mortgage and Home Renovation: Deductions related to these are extended through 2025 for those with dependent children.

Tax Return Deadlines and Requirements

• The deadline for the final income tax payment is March 15th of the following year.
• Those with income exceeding JPY 20 million, multiple jobs, non-resident status, side income exceeding JPY 200,000, capital gains on shares, or foreign stock-based compensation must file a tax return regardless of withholding. Local taxes are calculated annually by local tax offices.

Other

• The individual income tax rates remain the same in 2025, however, tax credits and deductions can be availed by certain resident tax payers fulfilling the necessary requirements and criteria, some of which are described above, and some will be described here: tax credit for housing loans, tax credit for home renovation, and deduction for life insurance premiums. These tax rates are divided into several brackets, ranging from 5% for income up to 1,950,000 yen, 10% for incomes between 1,950,001 and 3,300,000 yen, 20% for incomes between 3,300,001 and 6,950,000 yen, and going up to 45% for incomes over 40 million yen.
• In the realm of retirement income, it's noteworthy to highlight that overlapping periods of service are now excluded from the retirement income deduction calculation for payments made on or after January 1, 2026.

This information is current as of February 5, 2025, and might be subject to change. Always consult with a tax professional for personalized advice.

Japan's Consumption Tax (similar to VAT/GST) is a 10% levy on most goods and services, with a reduced rate of 8% for specific items. Businesses exceeding the taxable sales threshold must register and file returns, while those below the threshold may voluntarily register. A new Qualified Invoice System is in effect as of October 1, 2023, impacting input tax credits. As of January 1, 2025, non-resident app stores are included in the Consumption Tax regime. Future changes regarding tax refunds for foreign visitors are scheduled for fiscal year 2026.

Consumption Tax Rates

• Standard Rate: 10% (7.8% national, 2.2% local) applies to most goods and services.
• Reduced Rate: 8% (6.24% national, 1.76% local) applies to:
  • Food and beverages (excluding restaurant dining and alcoholic beverages)
  • Newspaper subscriptions (published at least twice weekly, covering general topics).

Registration Threshold

• Businesses with taxable sales exceeding JPY 10,000,000 in the base period (two years prior to the tax year) must register for Consumption Tax.
• Businesses below the threshold may voluntarily register and remain registered for at least two years.
• New businesses (except subsidiaries of large corporations) have a two-year exemption, regardless of sales, but can opt into the system.

Filing and Payment

• Taxable Period: Typically one year, with options for shorter periods (monthly or quarterly) under specific circumstances.

• Filing Deadlines:

  • Corporations: Within two months after the fiscal year end.
  • Individuals/Sole Proprietors: March 31 of the following year.

• Interim returns and payments may be required based on the previous year's tax liability.

Exempt Goods and Services

• Sales/lease of land (excluding certain short-term rentals)
• Residential building rentals
• Loan interest and deposit receivables
• Insurance premiums
• Medical services covered by social insurance
• Public services
• Securities transfers (excluding golf club memberships)
• Postage stamps and revenue stamps.

Qualified Invoice System (QIS)

• Effective from October 1, 2023.
• Requires registered Qualified Issuers (QIIs) to issue qualified invoices with their QII number.
• Input tax credit is generally available only with qualified invoices.

Platform Taxation

• Effective from April 1, 2025.
• Places Consumption Tax liability on digital platform operators for specific sales made through their platforms.
• Aligns with OECD recommendations for VAT/GST on online sales.

Tax Refunds for Foreign Visitors (Effective Fiscal Year 2026)

• Shifting from in-store deductions to a refund system at the point of departure.
• Removal of minimum and maximum spending limits.
• Simplified packaging rules for consumables.
• Refunds processed by customs at airports upon departure within 90 days of purchase.

An overview of Japanese tax incentives for 2025 is provided below. Please note that as of today, February 5, 2025, the information below is up-to-date, however regulations are subject to change. Always consult with a tax professional for the most current details.

Corporate Tax Incentives

• Regional Investment Promotion Tax Measure: This measure offers special depreciation or tax credits for capital investment in designated areas. The required investment has been raised to JPY 100 million. Special depreciation rates for machinery, equipment, and fixtures are reduced to 35% (previously 40%). A new "super" tax measure offers 50% special depreciation or a 5% tax credit for investments exceeding JPY 1 billion in specific industries.
• Resource Recycling Investment Promotion: New measures provide a 35% special depreciation for investments related to resource recycling, effective from February 1, 2025, until March 31, 2028, subject to approval.
• SME Business Enhancement Tax Incentive: Buildings are now included as eligible assets for this incentive, encouraging SMEs aiming for sales exceeding JPY 10 billion. The 15% reduced corporate tax rate for SMEs is maintained for two years, with exceptions. SMEs with taxable income exceeding JPY 1 billion will face a 17% rate.
• Open Innovation Tax Incentive: Companies investing in startups can deduct 25% of their share purchase amounts. Large companies must purchase JPY 100 million or more, while small companies must purchase JPY 10 million or more in startup shares.
• Defense Capabilities Enhancement Surtax: A new 4% surtax on corporate tax income (after deducting JPY 5 million), effective from April 1, 2026, is estimated to increase the effective corporate tax rate by approximately 1 percentage point.

Individual Tax Incentives

• Basic Income Tax Deduction Increase: The basic income tax deduction is raised to JPY 100,000 for all income brackets. Additional deductions are available for those with dependent children, starting in the 2025 income year. The income-based basic deductions are:
  • Less than JPY 23,500,000: JPY 580,000
  • JPY 23,500,000 to JPY 24,000,000: JPY 480,000
  • JPY 24,000,000 to JPY 24,500,000: JPY 320,000
  • JPY 24,500,000 to JPY 25,000,000: JPY 160,000
• Home-Related Deductions: Mortgage and home renovation deductions for those with dependent children are extended through 2025.
• Angel Tax System: The reinvestment period under the Angel Tax System, supporting individual venture capital investors, is extended to a maximum of two years, introducing a carry-back refund system.
• NISA (Nippon Individual Savings Account): Enhancements are made to NISA to improve convenience, aiming to promote investment. This includes increasing the upper limit of the minimum trading unit for ETFs within the regular investment framework.
• Donations to Educational Institutions: Individuals donating to approved educational institutions can choose between tax credits (capped at 25% of income tax) or income deductions (capped at 40% of gross income from the preceding year).

Other Tax Incentives

• Foreign Income Tax Credit: Japanese corporations can claim a tax credit against corporation and inhabitant's taxes for foreign income taxes paid.
• R&D Tax Credit: This non-refundable credit is calculated as a percentage of R&D expenses (between 1% and 14%), capped at 25% of corporate income tax liability before credits (potentially increased to 45% under specific conditions).
• Financial Start-Up Support Program: This program offers financial support up to JPY 20,000,000 (70% of approved invoices) for establishing asset management businesses or financial professional offices in Japan. The program ends on March 31, 2025.

This information is for general guidance only and does not constitute professional tax advice. Consulting a tax advisor is essential for accurate and personalized advice.