In Japan, employers play a significant role in contributing towards social security and other mandatory programs on behalf of their employees.

Social Insurance Contributions

Employers are required to make several contributions to social insurance schemes:

• Pension: Employers contribute 9.15% of the employee's salary towards the National Pension Scheme. This is matched by an equal contribution from the employee, for a total of 18.3%.
• Health Insurance: The contribution made by employers varies by prefecture and health insurance scheme. They typically range between 7% and 8.5% of the employee's salary.
• Nursing Care Insurance: All employers contribute 1.0% of the employee's salary towards national nursing care insurance.

Other Mandatory Contributions

There are also other mandatory contributions that employers need to make:

• Employment Insurance: Employers contribute 0.6% of the employee's salary towards unemployment insurance. Employees contribute a lower rate of 0.3%.

Additional Considerations

There are additional considerations that employers need to take into account:

• Workers' Compensation Insurance: While not mandatory, most employers take out private insurance for workers' compensation, covering work-related injuries and illnesses.
• Tax Withholding: Employers are required to withhold income tax and residence tax from employee salaries and remit them to the government.

Japanese employees can reduce their taxable income through various deductions. Here are some key employee tax deductions:

Employment Income Deduction

A standard deduction applied to all salary income. The amount varies depending on annual income, with a minimum deduction of ¥550,000.

Social Insurance Premiums

Contributions made by employees towards pension, health insurance, and nursing care insurance are fully deductible from their taxable income.

Deductions for Dependents

• Spousal Deduction: A deduction is available for a spouse with limited income.
• Deduction for Dependents: Deductions are available for dependent children, parents, and other qualified relatives. The amount varies depending on the dependent's age and relationship.

Other Deductions

• Medical Expenses: Medical and dental expenses exceeding a certain threshold (typically 10% of annual income) can be deducted.
• Moving Expenses: Moving expenses incurred due to a job relocation may be deductible.
• Commuting Expenses: A portion of commuting expenses by public transportation can be deducted.

Donations

Charitable donations to designated organizations are deductible within limits.

Tax Credits

• Residential Loan Deduction: A tax credit is available for interest paid on a mortgage for a primary residence.
• Education Expenses: Tax credits are available for certain education expenses for the taxpayer or their dependents.

Japan's consumption tax functions similarly to a Value-Added Tax (VAT) system in many other countries. The current standard VAT rate in Japan is 10%, applying to the taxable supply of most goods and services provided by businesses in their operations.

Reduced VAT Rate

A reduced VAT rate of 8% applies to specific categories of services, including food and non-alcoholic beverages (excluding restaurant dining) and certain newspaper subscriptions.

VAT Exemptions

Certain services are entirely exempt from VAT. These include financial and insurance services, sales or lease of land, public transportation services, medical and dental services, and educational services.

Determining VAT Status

Understanding your VAT status is crucial for accurate tax compliance. Businesses supplying services must determine if their services are subject to the standard rate, reduced rate, or exempt altogether.

VAT Registration Requirements

Businesses that exceed a threshold of ¥10 million in taxable supplies within a specific period are required to register for VAT. Registered businesses must collect VAT on taxable supplies and file VAT returns with the Japanese tax authorities.

VAT Invoicing

Registered businesses must issue proper VAT invoices for taxable supplies. These invoices need to include details like the VAT amount charged. A new qualified invoicing system was introduced in October 2023, which has specific requirements for VAT invoices.

Special Considerations

The VAT treatment of digital services supplied to residents of Japan can be complex. Businesses supplying such services may need to register for VAT in Japan, depending on the value and nature of the services. VAT implications for services provided across borders can be intricate. Consulting a tax professional is recommended for businesses involved in cross-border transactions.

Japan provides a variety of tax incentives to stimulate business activity and attract investment. These incentives range from tax credits for research and development to special depreciation allowances for certain assets.

Research and Development (R&D) Tax Credit

Companies can claim a tax credit for a portion of their eligible R&D expenses. The credit rate can reach up to 25%, with additional benefits for increased R&D investment.

Special Depreciation Allowances

Businesses can take advantage of accelerated depreciation on qualified assets, which reduces their taxable income in the initial years of ownership. Special depreciation allowances are available for investments in machinery, equipment, and buildings used for specific purposes.

Investment Tax Credits

Tax credits are available for investments in certain industries or regions designated for development by the government.

Tax Incentives for Innovation

There are tax incentives designed to encourage open innovation, such as tax deductions for companies purchasing shares in qualifying startups.

Tax Incentives for Regional Development

Companies that relocate to or expand in designated special economic zones or depopulated areas can benefit from reduced corporate income tax, property tax exemptions, and other benefits.

Regional Headquarters

Foreign companies that establish regional headquarters in Japan can enjoy tax benefits on certain income.

Tax Incentives for Environmental Sustainability

Businesses investing in equipment and technology that promotes energy conservation and reduces greenhouse gas emissions can avail of tax breaks.

Tax Incentives for Small and Medium-Sized Enterprises (SMEs)

Qualified SMEs can benefit from simplified tax filing procedures and reduced tax rates.

Special Measures for Startup Businesses

Startup companies may be eligible for tax exemptions or reductions during their initial years of operation. The "Financial Start-Up Support Program" used to offer financial aid to cover some costs of establishing a business in Japan.