Taxes in Japan: Which types and how to pay them

Are you a fan of Japanese culture? Japan is one of the most captivating countries in Asia, attracting many people eager to dive into its vibrant cities, imperial palaces, shrines, temples, cuisine, and the anime lifestyle. If you’re dreaming of experiencing it all, there’s another important side to consider: taxes in Japan.

To have a fully positive experience living abroad, it’s crucial to research the financial laws of the country. This will ensure you meet all the tax requirements set by the Japanese government, whether you’re a business owner or an individual. In this blog, we’ve compiled all the information you need about taxes in Japan. Ominogashinaku!

Taxes for individuals or natural persons in Japan

Japan’s financial system can be somewhat complicated, as it involves multiple levels of taxation for everyone, both foreign residents and nationals. People who move to Japan come from all backgrounds: students, workers, digital nomads, retirees, and more. Like Japanese citizens, they are all subject to taxes such as income tax, consumption tax (VAT), social security contributions, and local and property taxes. In this post, we’ll go over each of these taxes in detail, including the latest rates and practical examples, so you can have a better understanding of your tax responsibilities.

Income tax

Income tax is one of the main taxes for individuals in Japan, and it follows a progressive system. This means the tax rate increases as the taxpayer’s income goes up. It applies to all earnings received during a fiscal year, including salaries, investment income, pensions, and other personal income sources. The tax is split into two sections:

• National income tax: This is levied by the central government at progressive rates between 5% and 40%, depending on the taxpayer’s annual income.
• Local income tax: It is managed by the prefectural and municipal governments. The tax is usually around 10% of income, though it can vary slightly depending on the region.

The application of the national income tax rate would be as follows:

For example, a worker earning 5,000,000 yen ($34,400) a year would be taxed like this. On top of that, a 10% local tax would be added, which would amount to an additional 500,000 yen ($3,440):

• 97,500 yen ($670) for the first 1,950,000 yen at 5%.
• 135,000 yen ($930) for the next 1,350,000 yen at 10%.
• 340,000 yen ($2,340) for the last 1,700,000 yen at 20%.

Consumption tax (VAT)

In Japan, VAT is a significant cost for consumers. The current rates reflect the government’s effort to balance the tax burden across different economic groups. To achieve this, they apply lower rates on essential products while still ensuring enough revenue to meet growing budget needs. VAT in Japan has two different rates:

• Standard rate of 10%: It applies to most goods and services, such as clothing, appliances, transportation, entertainment, luxury items, and professional services.
• Reduced rate of 8%: This rate was introduced to ease the burden of VAT on essential products like food, non-alcoholic drinks, and newspaper subscriptions (both print and digital, with certain conditions).
• Exemptions: Certain services and transactions are exempt from VAT, such as essential medical services, educational services, and residential property rentals.
• Examples: A grocery store purchase of 10,000 yen ($69) would have a tax of 800 yen ($5.50) with the reduced 8% rate. On the other hand, a dinner at a restaurant for the same price would have a tax of 1,000 yen ($6.90), as the standard 10% rate would apply.

Property tax

Property tax is an annual charge that property owners must pay on real estate, such as apartments, houses, or land. It’s calculated based on the assessed value of the property, which the local government determines using factors like location and size, and is typically lower than the market value. This tax is a major source of income for local governments and their financial services. Here are its main features:

Contributions to the social security system

This tax plays a key role in Japan’s system to support foreign residents and workers, ensuring they have access to national health insurance, pensions, unemployment benefits, and long-term care. Self-employed individuals are required to cover the full cost of health insurance and pension contributions, while some foreigners may be exempt depending on the agreements Japan has with their home country.

Taxes for legal entities or companies in Japan

Companies are also required to report various taxes in Japan, at both the national and local levels. These taxes, imposed by the Japanese financial system, differ based on the size and income of each business. Here are the main ones:

Corporate income tax

​​This tax is levied on the net profits a company makes throughout the fiscal year. It’s a direct tax and one of the most important in Japan’s tax system. There are two different rates, depending on the company’s size:

• Standard rate: 23.2% for large companies.
• Reduced rate: 15% for small and medium-sized enterprises (SMEs), whose income does not exceed 8,000,000 yen ($55,150) per year.
• Example: A company with annual profits of 20,000,000 yen ($137,800) will pay 4,640,000 yen ($31,970) in corporate tax. In contrast, a small or medium-sized business with earnings of 6,000,000 yen ($41,400) will pay 900,000 yen ($6,210) thanks to the reduced tax rate.

Excise tax

The consumption tax in Japan is similar to VAT in other countries. It applies to the sale of goods and services, with businesses collecting the tax from consumers and passing it on to the government. Companies must track their taxable transactions and calculate the tax by deducting the VAT paid on purchases from the VAT collected on sales. Let’s take a look at the tax rates:

• Standard rate: 10% for most products and services.
• Reduced rate: 8%, applied to food, non-alcoholic beverages and newspaper subscriptions.
• Examples: A company that sells 1,000,000 yen ($6,890) worth of goods in a month must pay 100,000 yen ($690) as standard consumption tax.

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Tax on fixed assets

A company’s fixed assets are those used in its business operations, such as machinery, equipment, or real estate. This tax is based on the declared or assessed value of these assets and is applied annually. In addition to reporting these assets to local authorities, businesses may also qualify for reductions if they use eco-friendly technology or renewable energy.

• Standard rate: 1.4% of the value of the asset.
• Example: An industrial machine valued at 10,000,000 yen ($68,900) will have a tax cost of 140,000 yen ($965) per year.

Tax benefits in Japan

Japan’s tax system is designed to be progressive, offering various incentives to encourage savings, investment, and the growth of foreign businesses. These tax advantages apply to both individuals and companies.

Japan also provides tax exemptions for foreigners to promote international investment and foster a favorable environment for innovation and economic growth. In general, expats who move to Japan can benefit from various tax incentives during their first few years of living there. Some of the most significant deductions include:

• Contributions to the pension system: For residents, contributions to public pensions are fully deductible from the taxable income.
• Health insurance: Premiums for health insurance, which are compulsory for all workers and residents, are also deductible.
• Mortgage expenses: If you purchase a home in Japan with a mortgage, you can deduct the interest paid during the entire tax year.
• Income tax exemptions: Foreigners may benefit from a temporary exemption of up to five years on income earned outside Japan.
• Special economic zones: Deductions are available to encourage foreign direct investment (FDI) and stimulate development in specific regions. These benefits include reduced tax rates, property tax exemptions for a certain period, and tax credits for businesses investing in technological innovation and research activities.

Now that you’re familiar with your tax responsibilities in Japan, whether as an individual or a business, it’s time to pack your bags and start your new adventure. The Land of the Rising Sun is waiting for you! Sayonara.

Frequently asked questions about taxes in Japan

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