Starting Operations in Japan 2018

Transcription

1 Starting Operations in Japan 2018 This PwC Tax Japan publication provides general information regarding certain Japanese tax and other administrative considerations for a foreign corporation starting operations in Japan. April 2018

2 INDEX I. Preface 2 II. Overview 1. Representative office (Rep Office) 2. Branch office (JBO) 3. Corporate entities 4. Business considerations III. Corporate tax considerations 1. Rep Office 2. Key taxation differences between a JBO and a corporation 3. Intercompany transaction 4. Filing requirements IV. Payroll related considerations 1. Payroll withholding taxes a. Obligation to withhold taxes b. Payment of withholding tax c. Penalties and interest d. Reporting requirements 2. Social security taxes a. Types and insurance premiums b. Social insurance (Health & Welfare pension) c. Labor insurance (Workmen s Accident Compensation Insurance & Employment Insurance) V. My Number 13

3 I Preface An important aspect of starting operations in Japan is the choice of the corporate structure through which the operations will be conducted. This publication will discuss the activities which may be undertaken by the most common structures and the tax consequences of each. However, in many cases, the appropriate structure will be dictated by the scale and nature of the business itself. In addition, this publication also describes the payroll withholding tax and social securty taxes aspects of hiring employees and directors in Japan.

4 II Overview 1. Representative office (Rep Office) The simplest form of business structure is a Rep Office. The advantage of a Rep Office is that it is not subject to Japanese tax and does not require legal registration as an office in Japan. The disadvantage is that the activities that can be performed by a Rep Office are limited. Under Japanese domestic law, the activities of a Rep Office are limited to purchase/storage of properties or other activities of a prepatatory or auxiliary character, such as market research, advertising, information gathering, and other non-income generating activities performed for the home office of the entity which establishes the Rep Office. For example, Article 5(4) of the US Tax Treaty permits the Rep Office of a U.S. company to: a. use facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b. maintain a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; c. maintain a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d. maintain a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; e. maintain a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; f. maintain a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. As a Rep Office, the home office can only open a nonresident bank account in Japan. In practice, a Japanese bank account used to pay Rep Office expenses in Japan will normally be opened in the name of the Rep Office representative in his/her individual capacity. The home office can transfer funds for the Rep Office activities to the Rep Office representative for deposit into the account (the Rep Office representative will often have a second bank account for personal expenses, salary, etc.).

5 2. Branch office (JBO) A JBO is the simplest form of vehicle through which a foreign company may conduct business in Japan with a physical presence. In summary, a foreign company can establish a branch in Japan by appointing at least one representative (a natural person) who is a resident in Japan and filing the appropriate application with the Legal Affairs Bureau within three weeks of appointing such representative. Upon receiving its commercial registration, the foreign company may engage in business transactions through the branch. Key remarks for JBO registration are as follows:» A JBO representative has to be a Japanese resident.» A public notice of its balance sheet etc is required if a foreign company is equivalent to a KK.» No statutory audit is required. 3. Corporate entities A joint stock company (Kabushiki Kaisha or KK) is the most common Japanese business entity selected for significant business operations in Japan and is the entity most likely to be respected by potential Japanese partner companies, contractors, customers, and employees. Key remarks for KK incorporation are as follows:» All directors of KK can be non-resident.» Annual sharheolders meeting is required.» Public notice of its balance sheet etc is required.» Statutory audit is required for a KK whose stated capital of JPY 500 million or more, or total liabilities of JPY 20 billion or more. 4. Business considerations Theoretically, a JBO, GK and KK should be able to conduct their business in Japan in the same manner. A company entering Japan for the first time will need to assess whether this is true from a commercial standpoint. As a matter of business perception, a KK may convey a more stable commitment to the Japanese market than a JBO. This may facilitate recruiting of personnel. In addition, a KK may be better received by potential Japanese customers than a JBO and it may be easier for a KK to obtain bank financing. Similar perception issues should also be considered if a GK will be established, instead of a KK. A limited liability company (Godo Kaisha or GK) has many attributes similar to a KK, but the incorporation procedures and requirements for operation of the entity are more flexible. Key remarks for GK incorporation are as follows:» All managers/representatives of GK can be non-resident.» No annual sharheolders meeting is required» No public notice of its balance sheet etc is required.» No statutory audit is required.

6 III Corporate tax considerations 1. Rep Office If a foreign corporation operates in Japan through a Rep Office whose activities do not give rise to Japanese taxation, no Japanese corporate tax considerations are taken into account. 2. Key taxation differences between JBO and corporation In terms of tax rates, tax filings and other requirements, the Japanese tax implications of operating through a JBO are generally the same as in the case of a corporation. The actual combined effective tax rate will depend, among other factors, on the amount of enterprise tax paid on the prior year s taxable income, and the amount of the current year s disallowance of entertainment expense deductions, etc. There are several important differences between a JBO and a corporation, including the following: corporation to a foreign shareholder are generally subject to a 20.42% (domestic rate) withholding tax, unless a treaty applies to reduce the withholding tax rate. The US Treaty reduces the withholding tax to 0%, 5% or 10%, depending on various factors. b. Generally, a corporation may not deduct irregular payments (e.g. bonus payments) to directors or deemed directors. In contrast, irregular payments to a JBO manager are deductible. c. A JBO may allocate a portion of its head office administrative expenses to the JBO activities to the extent those expenses are related to Japan operation and sufficient documentation on the nature of transaction with its head office and how the expenses are allocated should be maintained. The benefit of a GK is that for US tax purposes, it can be treated as a passthrough entity (i.e. it is not treated as a per se corporation under the US check-the-box rules) a. A JBO may remit earnings to its home office free of Japanese withholding tax. Dividends paid by a

7 3. Intercompany transaction There are two main methods in which intercompany transactions may be structured. Regardless of the method, the pricing of transactions must conform to the arm s length principles. The two methods are: a. Service fee approach - the JBO or corporation receives a service fee that is equal to the JBO or corporation s costs of conducting the Japan operations plus a reasonable mark-up. This approach is generally acceptable when the JBO or corporation s activities are limited to the performance of services as described below. It is not appropriate for full sales activities. The profit is normally determined as a percentage (e.g. typically in the range of 5% to 10% for liaison activities) of the JBO or corporation s actual costs, depending on the services performed. b. Buy-sell approach - the foreign seller sells their products to the JBO or corporation which takes title as an importer and resells them in Japan. This is the appropriate approach where sales activities take place in Japan. A commission approach in which the JBO or corporation receives a commission based on sales in Japan is generally not recommended because this model creates a permanent establishment( PE ) risk to the foreign selling company. Service fee approach A Japanese entity (either JBO or corporation) which engages in liaison activities on behalf of its foreign affiliate may compute its taxable income under the cost plus mark-up method. The employees of the Japanese entity could engage in advertising activities without being deemed to be a PE of its foreign affiliate, provided the service company does not have or habitually exercise any authority to conclude contracts which would be binding on its foreign affiliate. Although no guidelines exist, a cost plus service fee arrangement should generally be accepted by the tax authorities when the Japanese service provider s services are limited to the performance of auxiliary activities such as: 1. Information gathering; 2. Providing technical assistance to customers; 3. Training customer personnel in the use of products sold; and 4. Performing other service-type activities, etc. If the JBO or corporation engages in any substantive negotiation of sales to customers or distributors on behalf of the foreign seller, it may be deemed to be a PE of the foreign seller under Japanese domestic tax law. An applicable treaty may provide some protection, but this will depend on the particular facts. For example, the US Treaty provides that a Japanese entity will be an agent and thus a PE of the foreign seller if it has, and habitually exercises in Japan, an authority to conclude contracts in the name of the foreign seller. The Japanese tax authorities may interpret the conclusion of a contract to include the negotiation of the principal elements of the contract and would not limit this to only the final signing of the contract. Buy-sell approach When business conditions dictate that the JBO or corporation performs sales activities in Japan, a buy-sell approach is recommended. The JBO or corporation should purchase products in its own name and resell them to customers or distributors in Japan. The purchase price that is paid for the product will have to be determined on an arm s length basis in accordance with Japanese transfer pricing principles.

8 4. Filing requirements The JBO and corporation are required to file final corporate tax returns within two months after the end of its fiscal year. A two month and one month extension to file the branch and corporation returns, respectively, are available upon the filing of the appropriate application. Corporate taxes must be paid within two months after the end of the fiscal year. The JBO and corporation generally file interim tax returns for the first six months of its tax year. The amount of tax that must be paid with the interim return can either be based on one-half of the preceding year s tax liability or on the income generated for the first six months of the current tax year. The interim return must be filed within two months after the six-month period. The JBO or corporation may file a blue form tax return with the approval of the tax office. Approval is normally granted if the application to file a blue form tax return is filed on a timely basis. The JBO or corporation which is permitted to file a blue form tax return must keep a journal, general ledger and other necessary books and records of all transactions which affect assets, liabilities and capital. Moreover, such books and records must be kept according to Japanese tax and accounting principles so that taxable income can be calculated correctly. Privileges granted to blue form return corporations and branches include the ability to carry forward tax losses, claiming special depreciation allowances and tax-deductible reserves, and the requirement that the tax authoriities must provide explanations for any audit tax adjustments. The following link will provide access to additional information on the taxable income computation and other regimes that could be imposed as well as the group taxation rules: Once you access this website, please select Japan as the country that you would like to view tax information for. tax/worldwide-tax-summaries.html Also you can find further newsletters in terms of the Japanese taxation from the below.

9 IV. Payroll related considerations 1. Payroll withholding taxes a. Obligation to withhold taxes The requirement to withhold Japanese national income tax and local inhabitants tax on compensation paid to corporation s employees or directors depends on whether an individual is a nonresident or resident of Japan, whether compensation is paid inside or outside Japan, and whether the employer is a Japanese corporation or a foreign corporation. Withholding is applied as follows: Rep Office or JBO - Paid by head office outside Japan 20.42% - Payment in Japan 20.42% Japanese corporation - Paid by affiliate outside Japan None - Payment in Japan 20.42% None Graduated rates None Graduated rates Nonresident employees A nonresident is an individual who has no domicile in Japan and whose assignment under normal circumstances would not require staying in Japan continuously for one year or more. A nonresident is generally subject to Japanese national income tax at a flat rate of 20.42% on Japan source compensation. This is determined by prorating total remuneration on the basis of the number of days in Japan against the total number of days covered by the payment. The local inhabitants tax is generally not assessed against nonresidents.

10 A nonresident who is exempt from Japanese income tax by application of an income tax treaty should file an application form for income tax convention treatment with the tax office through his/her employing company before the salary is paid to prevent withholding. Resident employees An individual who does not qualify as a nonresident of Japan is a resident. Japanese residents are classified as either nonpermanent or permanent residents. In either case, the employer is generally required to withhold national income tax and local inhabitants tax on total compensation paid in Japan, regardless of Japanese or foreign source, at the graduated Japanese income tax rates. The local inhabitants tax is assessed on an individual who is a resident taxpayer as of January 1. Inhabitants tax is based on the taxable income for the preceding calendar year. If a resident individual receives gross employment income of 20 million or less in Japan, the employer generally settles the individual s final national tax liability through a year-end payroll withholding tax adjustment. b. Payment of withholding tax Tax withheld at source is payable to the tax office (through a bank or post office) by the tenth of the following month in which the salary payments are made. The tax withheld on Japan source income payments made by the head office outside Japan to a nonresident who worked in Japan is payable by the end of the month following the month in which the payments are made. Such payments may be made on a semiannual basis instead of monthly where the number of employees is usually less than ten and an application has been filed with the relevant tax office. In this case, payment of withholding income tax for the 6 months to June 30 is due on July 10, and payment for the second 6 months to December 31 is due on January 20. c. Penalties and interest An employer which fails to pay the correct amount of withholding income tax to the tax authorities on the due date is subject to a 10% penalty on the underpayment. If the employer recognizes and corrects its error prior to being aware of the tax authorities, the penalty is reduced to 5%. In the case of tax evasion, a 35% penalty can be assessed. Interest on the amount of the underpayment is generally assessed at the rate of 2.6% or 8.9% (two months after) per annum (from January 1, 2018) for the period up to one year from the tax payment due date. d. Reporting requirements A summary report for the calendar year of salary payments and the related withholding income tax (the summary report) must be submitted to the relevant national tax office on or before January 31 of the following year. A certificate of salary payments and the related withholding income tax (GENSEN- CHOSHUHYO) should be issued to each employee on or before January 31. A copy must be attached to the summary report if the salary payment exceeds the threshold amount designated by the law. A salary payment report for each employee should be submitted to the local tax office administering the area in which each employee resides as of January 1 so that the local inhabitants tax can be assessed. The summary report also requires disclosure of certain additional information such as rental payments, professional fees, and retirement allowances paid during the year.

11 2. Social security taxes a. Types and insurance premiums The social security program in Japan includes health insurance, long-term care insurance, welfare pension insurance, employment insurance, and workmen s accident compensation insurance. The social security taxes are calculated on an individual s monthly remuneration and bonus in Japan, including fringe benefits, and are borne by both the employee and employer. The employee s premium is collected through payroll withholdings on a monthly basis and through bonus payments. b. Social insurance (Health & Welfare pension) In general, all persons residing in Japan are included in the Japanese social insurance system and may not be excluded simply because they are not Japanese. Therefore, expatriates as well as Japanese citizens who are employed in Japan by a Rep Office, JBO, or corporation are required to participate in the Japanese social insurance system, notwithstanding that they may not receive actual pension benefits in the future. However, Japan has concluded totalization agreements (social insurance reciprocal agreements) with various countries. Under a totalization agreement, employees temporarily dispatched from a business entity in a contracting country to another contracting country (maximum period of time is 5 years) are not required to participate in the social insurance system of the other contracting country. Namely, it is enough for such employees to obtain a certificate of coverage from their home country and also continue to participate in the home country s social security system. In the case where the corporate headquarters in the home country of the expatriate assigned to Japan pays salary and bonus directly to the expatriate, such salary and bonus paid to the expatriate by the corporate headquarthers in the home county is not covered by the social insurance system in general. The Japanese government may change this treatment in the future. The health insurance system covers 70% of the medical expenses of the insured person or their dependents in the event of injury or sickness due to non-occupational causes. The insurance also pays 67% of the average daily wages for a maximum of 18 months while the employee is unable to work due to ongoing medical care. The payment is reduced by the actual amount of salary paid by the employer during this period. Certain other benefits such as cash reimbursement for dependent s medical costs and excessive medical costs, childbirth and nursing allowances and maternity allowances are also provided by this insurance. The welfare pension insurance is a system that provides for old age, disability pension, and survivors basic pension. In the case of old-age, welfare pension insurance provides for a life-time pension with some benefits for person who participated in the program for at least 10 years starting from 65 years old. Survivors of eligible employees are entitled to a life-time pension equivalent to 75% of the old-age pension due to the eligible employee. Many foreign employees are enrolled in the Japanese welfare pension system and contribute part of their monthly salary to it. Since most of them work in Japan for only a few years, they will not be eligible to receive pension payments. However, if they were enrolled in the welfare pension insurance system for at least six months, they are entitled to a lump-sum reimbursement. Refunds are calculated on the basis of six-month periods up to three years and can be made before/after his departure. The refunded amount approximates the employee s contribution to the pension system and can only be claimed by that person within two years from the date of his departure. However, there is the case where under certain conditions, foreign employees can receive pension payments in Japan after aggregating the enrollment period in their home country to that in Japan if their home country has an agreement with Japan regarding the aggregation of the pension enrollment period in both countries. It should be noted that in this case, the enrollment period cannot be aggregated if the lump-sum reimbursement is received. All employing companies must enroll in the social insurance system when operations in Japan commence. For a Rep Office with fewer than five employees, enrollment is optional. Application for enrollment is made with the Pension Office. It can take up to two months for the employer to enroll in the system for the first time since the payroll register together with a withholding tax payment receipt are generally required to be presented to the Pension Office.

12 Until the entity has been enrolled, employees are required to enroll individually in the national health and pension system through their local ward office and pay the premiums personally. In principle, a representative of a Rep Office cannot be enrolled in the social insurance system since he/she would be deemed as an employer for this insurance purpose. Once the entity has been enrolled, premiums are payable monthly against bills received from the Pension Office. A common procedure is to have the bills sent to the employer s bank for automatic withdrawal from the employer s bank account. An annual report, which includes the information required to compute social insurance premiums, must be filed with the Pension Office within the period from July 1 to July 10. The annual report will list the total monthly compensation paid to each employee for the period from April through June. In addition, a report must be filed with the Pesion Office whenever there are significant changes in an employee s fixed compensation, for bonus payments or whenever an employee is hired or resigns. Japanese social security taxes are calculated on an individual s monthly salary and bonus in Japan, including fringe benefits, and are borne by both the employer and employee. The standard premiums for each type of insurance are listed below: Type of Insurance Health (Note 2 & 3) Long-Term Care (Note 4) Employment Welfare pension (Note 5) Workmens Accident Compensation (effective as of March 1, 2018) Employee s Share % Employer s Share % Total % From 0.25 to 6.0 From 0.25 to 6.0 (Notes): (1) The insurance premium for the social insurance which is administered by certain trade associations differs from the above standard rates. (2) The maximum amount of monthly remuneration and a bonus subject to the health insurance premium is 1,390,000 and 5,730,000 of the total annual bonus, respectively. The health insurance premium is shared by both employee and employer. (3) The premium rates shown are applicable to Tokyo and will vary slightly from prefecture to prefecture. (4) The insurance premium for long-term care is calculated at 1.57% of the monthly standard remuneration for health insurance purposes. The premium is payable by those employees whose age is between 40 and 64, and it is shared by both employee and employer. (5) The maximum amount of monthly remuneration and bonus subject to the welfare pension insurance premium is 620,000 and 1,500,000, respectively. The welfare pension insurance premium is shared by both employee and employer. (6) There is no maximum insurance premium for labor insurance. The premium rates depend upon the type of industry. PwC Note: The following link provides access to the Ministry of Health, Labour and Welfare s English language website that contains information for foreigners who are covered by the Japanese pension system.

13 c. Labor insurance (Workmen s Accident Compensation Insurance & Employment Insurance) Labor insurance technically extends to non-japanese citizens working in Japan. However, the Ministry of Health, Labour and Welfare has an internal general rule that the following non-japanese citizens working in Japan shall not receive employment insurance (during periods of unemployment) and therefore shall not be insured: i) A civil servant of a non-japanese government, or ii) A person who is provided with similar insurance by a non-japanese government. Under workmen s accident compensation insurance, non-japanese citizens will be provided with coverage if they work in Japan. However, directors of a company are not generally treated as workers and thus are not covered by labor insurance. Employment insurance benefits are available to an individual who was covered by the insurance for at least twelve months during a two year period before employment ceased. A basic daily allowance of 50% to 80% of the individual s daily average wages (with a minimum of 1,976 and maximum of 8,205 per day, as of August 1, 2017) will be paid for an unemployed period up to a maximum of 150 days to an individual that has 20 years of participation in the system and has voluntarly left the company. For individuals between the ages 45 and 60 years and having 20 years of participation in the system and dismissed from company, the unemployment benefit period maximum is 330 days. Workmen s accident compensation insurance covers medical expenses incurred at designated hospitals for injuries sustained in the course of or due to employment, including commuting (as defined). During absence from work due to an accident, compensation is paid at the rate of 80% of daily average wages based on the most recent three months, if the employer does not pay any remuneration during the period of absence. Compensation is also provided for disability and there are provisions for survivor payments, etc. Application for enrollment in the labor insurance system should be made to the Labor Standards Bureau within 10 days of the commencement of operations in Japan. A return on the estimated labor insurance premiums should also be filed with this office within 50 days from the next day of operations commencing. Application for enrollment in the employment insurance system with a report on the persons to be enrolled should be made with the Labor Employment Office within the first 10 days of the month following that in which the employees join the company. A report of employee changes (newly hired or retired) is also filed with this office. In practice, these filing dates for labor insurance have not been strictly enforced. However, if the filings are late, insurance premiums will be adjusted retroactively as if the filing had been made on the correct date. The payment of the estimated premium for labor insurance for the initial insurance year ending March 31 (regardless of the entity s business year-end) is made at a bank which remits the amount to the Labor Standards Bureau. A return for the final labor insurance premiums for the year, indicating the amount of adjustment from the estimated payment made in advance, is submitted in the period from June 1 to July 10 of the following year. In the same return, an estimate of next year s labor insurance premium is also submitted and paid.

14 V. My Number From January 2016, an Individual Number or commonly referrred to as My Number was enacted to improve the social infrastructure adminstration efficiency, enhance public convenience and realize a just and more fair society. The 12 digit My Number notification card is issued to all Japanese residents including foreign residents, and will be required for administrative procedures related to social security, taxation and disaster response. The notification card can be used for the issuing of a plastic My Number photograoh ID card containing an IC chip which will be needed by the individual to login to the Mynaportal. PwC Note: The following links provide further information regarding My Number.

15 For more information, please do not hesitate to contact one of the following members: PwC Outsoursing Services LLC Kasumigaseki Bldg. 15F, 2-5 Kasumigagaseki 3-chome, Ciyoda-ku, Tokyo Telephone Masanori Kato Partner Kirk Dove Director Manabu Nakamori Director Hiroki Yoshino Manager PwC Outsourcing Services LLC can provide a variety of one-stop services to foreign corporations doing business in Japan, including those related to accounting, payroll and human resources-related administrative work, in cooperation with PwC Tax Japan and PwC Labor and Social Security Attorney Corporation. In accordance with each client s request, we can also provide various other services, as well as introduce lawyers, banks, and real estate agents, on an as-needed basis. This document is for general information purpose only and should not be as a substitute for consultation with professional advisors PwC Outsourcing Services LLC. All rights reserved. PwC refers to the PwC network member firms and/or their specified subsidiaries in Japan, and may sometimes refer to the PwC network. Each of such firms and subsidiaries is a separate legal entity. Please see for further details.