Japan ends the JCT small-business exemption for foreign corporations with JPY 10 million capital that start business in Japan

What changed in detail

The FY2024 tax reform act, 所得税法等の一部を改正する法律 (Act No. 8 of 2024), passed the House of Councillors on 28 March 2024 and was promulgated on 30 March 2024. It amends the Consumption Tax Act with effect for business years beginning on or after 1 October 2024, under supplementary provisions Art. 1(3) and Art. 13(1)–(2).

• Art. 12-2(3) (new). A foreign corporation that has a base period but starts taxable business in Japan after that base period has ended is treated as having no base period. The new-corporation rule in paragraphs 1–2 then applies. If its share capital is JPY 10 million or more at the start of the business year, it is not exempt from consumption tax.
• Art. 12-3(5). The same deeming applies to the specified-new-corporation rule, which covers corporations controlled by a large group.
• Art. 9-2(3). When testing the exemption by the specified period, a business may use salary paid instead of taxable sales. That option now belongs only to businesses other than foreign businesses (国外事業者). Domestic businesses keep it.

Before the amendment, a foreign corporation whose taxable sales in Japan during its base period were low or nil could start Japanese business exempt, whatever its capital.

What it means

The rule is in force and has not been amended since. A foreign corporation with JPY 10 million or more in capital that starts selling into Japan is a taxable business from its first business year there. To issue qualified invoices it also has to register as an invoice issuer, which the exemption used to let it postpone.

The rule works on a corporation’s share capital, not its Japanese turnover, so a foreign corporation should check its capital before entering Japan. Foreign businesses with less capital can still be exempt, but they lose the salary alternative when the specified-period test is run.