Starting a business in Japan – Tax merit (a corporate or an individually owned business?)

Posted on 10/09/2012 by Koji Takahashi

Case 7
When starting a business, could you tell me whether a corporate or an individually owned business has more tax merit?

It is difficult to say which style has more merit for tax purposes as it depends on the amount of taxable incomes. If a business has a strong profitability and recognizes a large profit from the beginning, starting a business by a corporation is one a viable option.

If the taxable income is over JPY 10,000,000, doing business as a corporation might be better. The Effective Tax Rate of Corporate Tax is nearly fixed however, that of Individual Income Tax adopts a progressive tax rate system. Consequently, if the taxable income is beyond a certain amount, Individual Income Tax would be higher than Corporate Tax. The following is the tax rates for each type.


Brackets of taxable income

Up to 4 million yen

4 million yen

to 8 million yen


8 million yen

Corporate tax

Inhabitant taxes

1. Prefectural

2. Municipal

Enterprise tax

Special local corporate tax
















Total tax rate




Effective tax rate





Additionally, a corporate inhabitant tax of between JPY 70,000 to JPY 3,800,000 is a per capita levy that is imposed each tax year based upon the amount of capital and the number of employees.


Brackets         of       taxable      income

Tax rates

                Or under 1,950,000 yen


Over 1,950,000 yen

Or under 3,300,000 yen


Over 3,300,000 yen

Or under 6,950,000 yen


Over 6,950,000 yen

Or under 9,000,000 yen


Over 9,000,000 yen

Or under 18,000,000 yen


Over 18,000,000 yen


Local tax consists of “Individual inhabitant tax” and “Enterprise tax”. Individual inhabitant tax is the collective term for prefectural tax and municipal tax on individual income. Individual inhabitant tax consists of an income-graded component and a flat-rate (fixed amount) component etc.

Taxable income for enterprise tax purposes is generally calculated in accordance with the provisions for calculating income for income tax purposes. Standard rates of individual inhabitant tax (income-graded component) are as follows.

Prefectural tax rate   4%

Municipal tax rate    6%

(1)  Standard rate of tax for the flat-rate component

It is 1,000 yen for prefectural inhabitant tax and 3,000 yen for municipal inhabitant tax. Tax rates may differ from the standard tax rate depending on the local government concerned.

(2)  Enterprise tax

The tax rates range is from 3% to 5%, depending on the type of business.

Comparison of total taxes in case of JPY 10,000,000 income

JPY 4,000,000    JPY 4,000,000×24.87% = JPY 994,800

JPY 8,000,000    JPY 4,000,000×26.48% = JPY 1,059,200

JPY 10,000,000  JPY 2,000,000×35.64% = JPY 712,800

Per capita levy on corporate inhabitant tax   JPY 70,000

Total taxes                                 JPY 2,836,800


  1. Effective tax rate is used.
  2. Additional tax rate is imposed on corporate tax for 3 years commencing April 1, 2012 of business years, so the actual effective tax rate is 38.01%.
  3. The minimum per capita levy of the corporate inhabitant tax is imposed in this case.

Several deductions from income are possible in the calculation of individual taxes. The total taxes are calculated with the assumption of the following deductions.

Basic deduction: JPY 380,000, Deduction for blue tax: JPY 650,000, Deduction for social insurance: JPY 800,000, Deduction for spouse: JPY 380,000,

The total deductions: JPY 2,210,000

JPY 7,790,000 ×33% = JPY 2,570,700  (National tax)

JPY 7,790,000 ×10% = JPY 779,000  (Inhabitant tax)

Flat-rate component    JPY 3,000

JPY 7,790,000 × 3% = JPY 233,700    (Business tax)

Total taxes            JPY 3,586,400

Establishing corporations are superior to individually owned business based upon a JPY 10,000,000 income.



Starting a business in Japan – Business operation 25/10/2012
Starting a business in Japan – Blue tax return for Income tax 11/10/201
Starting a business in Japan – Opening bank accounts and borrowing money 28/09/2012
Starting a business in Japan – Consumption tax 03/09/2012
Starting a business in Japan 18/08/2012

By Certified Public Accountant (CAP) & Tax Accountant, Koji Takahashi
Tokyo & Yokohama

1 Comment

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