Obligation as a taxpayer for consumption tax
A taxpayer for consumption tax is considered a “business operator,” regardless of whether it is a corporation or individual, domestic or foreign.
In other words, consumption tax occurs as long as taxable transfers of assets occur within Japan, no matter residence is domestic or not.
If the taxable sales during the base period exceed 10 million yen, consumption tax obligation arises. The base period generally refers to the fiscal year two years prior.
Accordingly, in the establishment year and the second year, there is no base period, so the entity is generally treated as a tax-exempt business. However, if its capital is 10 million yen or more, or if its taxable sales exceed 10 million yen within the first six months of the previous fiscal year or the first half of the prior year, it may be classified as a taxable business. Domestic corporations may use total salary payments instead of taxable sales, but non-residents and foreign corporations cannot use this method.
Obligation for foreign corporations
When a foreign corporation begins taxable transactions in Japan and has capital of 10 million yen or more, it becomes a taxable business from its initial business year. The 10 million yen capital threshold should be evaluated based on the corporation’s capital converted to yen using the TTM (telegraphic transfer middle rate) at the start of business in Japan.
Obligation for a new corporation established under a foreign parent
If a non-resident or foreign corporation establishes a new company in Japan, and there exists an entity or individual with controlling interest (more than 50%) over it, and that entity or its wholly controlled subsidiaries had taxable sales exceeding 500 million yen during the base period, the newly established company becomes a taxable business from its inception year.
The base period for this determination is the fiscal year that ended during the period starting from the day before two years prior to the establishment date of the new corporation and ending one year after that date.
Additionally, if the total amount of sales, income, and other revenues of the person or their wholly controlled entities—including those generated abroad—exceeds 5 billion yen, the newly established company becomes a taxable entity from its first year.
These rules determine whether an entity is classified as a taxable or tax-exempt business. However, since tax-exempt businesses are not eligible for input tax refunds, careful consideration is needed when deciding whether to voluntarily opt for taxable business status.
*This information is based on the revised laws effective from October 1, 2024.
For inquiries regarding Japanese consumption tax, feel free to contact BPS International Tax Accountants Corporation.
