National and local taxes, effective tax rate, and key traps for foreign-owned subsidiaries
Last updated: May 2026 | Applicable to fiscal years beginning on or after 1 April 2025
- Introduction
- Overview: Japan’s Multi-Layered Corporate Tax System
- Corporate Tax (法人税)
- National Local Corporate Tax (地方法人税)
- Enterprise Tax (法人事業税)
- Special Corporate Business Tax (特別法人事業税)
- Inhabitants’ Tax (法人住民税)
- Special Corporation Tax to Strengthen Defence Capabilities — New from April 2026
- Effective Statutory Tax Rate
- Key Considerations for Foreign-Owned Companies
- Conclusion
Introduction
One of the most common questions from overseas headquarters is: “What is the corporate tax rate in Japan?” The honest answer is that there is no single number — Japan’s corporate tax system is structured in multiple layers, and the tax that ultimately reduces your company’s bottom line is the effective tax rate, not the statutory headline figure.
A company operating in Japan should be subject to four main categories of corporate tax:
- Corporate tax (法人税) — national
- National local corporate tax (地方法人税) — national surcharge
- Enterprise tax (法人事業税) — prefectural
- Inhabitants’ tax (法人住民税) — prefectural and municipal
This article explains each component, how they interact, and how to calculate the all-in effective tax rate. It also highlights the issues most relevant to foreign-owned Japanese subsidiaries — including common traps that are easy to miss at the planning stage.
Overview: Japan’s Multi-Layered Corporate Tax System
Before looking at individual taxes, the table below shows the full picture at a glance.
| Tax | Tax base | Representative rate | Category | Filed with |
|---|---|---|---|---|
| Corporate tax | Taxable income | 23.2% | National | National tax office |
| National local corporate tax | Corporate tax liability | 10.3% | National | National tax office (same return) |
| Enterprise tax | Taxable income | Up to 7.0% (graduated) | Local (prefectural) | Prefectural tax office |
| Special corporate business tax | Income base of enterprise tax | 37% | National (via local return) | Prefectural tax office |
| Inhabitants’ tax | Corporate tax liability | 7.0% (1.0% + 6.0%, standard rates) | Local (prefectural + municipal) | Prefectural/municipal tax office |
The corporate tax return (for corporate tax and national local corporate tax) and the prefectural/municipal return (for enterprise tax, special corporate business tax, and inhabitants’ tax) are filed separately.
Corporate Tax (法人税)
Who Is Subject to Corporate Tax?
A domestic corporation (a company incorporated in Japan) should be subject to corporate tax on its worldwide income. A foreign corporation should generally be subject to Japanese corporate tax only on its Japan-source income. Where a foreign corporation has a permanent establishment (PE) in Japan — such as a branch — it should be taxable on income attributable to that PE.
For a detailed comparison of the branch and subsidiary structures from a tax perspective, see our article: Branch vs. Subsidiary in Japan — Tax Comparison.
Corporate Tax Rates
The following rates apply to fiscal years beginning on or after 1 April 2025.
| Company type / Income bracket | Corporate tax rate |
|---|---|
| Large corporations (paid-in capital over JPY 100 million) — all taxable income | 23.2% |
| SMEs* (paid-in capital JPY 100 million or less): first JPY 8 million per annum | 15% / 17%** / 19%*** |
| SMEs*: taxable income exceeding JPY 8 million per annum | 23.2% |
* SME status: the reduced rate is NOT available to a company wholly owned by a corporation with paid-in capital of JPY 500 million or more.
** 17% applies where annual taxable income exceeds JPY 1 billion; 15% applies otherwise.
*** 19% applies to excluded enterprises (適用除外事業者): companies whose average annual taxable income over the preceding three fiscal years exceeds JPY 1.5 billion.
National Local Corporate Tax (地方法人税)
National local corporate tax is a national surcharge calculated at a fixed rate of 10.3% of the corporate tax liability (not of taxable income). It is filed and paid together with the corporate tax return to the national tax office.
For a company subject to the 23.2% corporate tax rate, this adds approximately 2.39 percentage points to the effective burden (23.2% × 10.3% = 2.39%).
Enterprise Tax (法人事業税)
How enterprise tax is calculated depends on company size. For companies with paid-in capital of JPY 100 million or less, tax is levied on income only (income-based enterprise tax). For companies with paid-in capital exceeding JPY 100 million, tax is levied on three separate bases — income, value added, and capital. The 2024 Tax Reform also extended the size-based rules to certain subsidiaries of large foreign groups; see below.
Income-Based Enterprise Tax (SMEs)
For companies with paid-in capital of JPY 100 million or less (subject to the 2024 reform described in the section below), enterprise tax is calculated on income only. Each prefecture sets its own rate within a statutory range. The table below shows the standard rate (標準税率) and the excess rate (超過税率) applied by Tokyo, for fiscal years beginning on or after 1 April 2025. The excess rate applies where taxable income exceeds JPY 25 million or gross revenue exceeds JPY 200 million.
| Income bracket | Standard rate | Excess rate |
|---|---|---|
| First JPY 4 million | 3.5% | 3.75% |
| Next JPY 4 million (JPY 4M–8M) | 5.3% | 5.665% |
| Over JPY 8 million | 7.0% | 7.48% |
Important: Enterprise tax is deductible for corporate income tax purposes in the fiscal year in which the tax return is filed. In practice, the deduction in a given fiscal year consists of: (i) the enterprise tax liability for the prior fiscal year (deducted when the prior year’s final return is filed), and (ii) the interim enterprise tax payment for the current fiscal year (deducted when the interim return is filed).
Size-Based Enterprise Tax (Large Corporations)
For companies with paid-in capital exceeding JPY 100 million, enterprise tax is calculated on three separate bases. The rates below are the excess rates (超過税率) applied by Tokyo:
| Tax base (課税標準) | Excess rate — Tokyo |
|---|---|
| Value added base (付加価値割) | 1.26% |
| Capital base (資本割) | 0.525% |
| Income base (所得割) | 1.18% |
For the income base, the standard rate (標準税率) is 1.0%. Tokyo always applies the excess rate of 1.18%. Note that the standard rate of 1.0% — not the excess rate — is used as the base for calculating the special corporate business tax described in the next section.
Key implication: A loss-making large corporation may still owe enterprise tax on its value-added and capital bases. The value-added base is broadly calculated as: operating income + labour costs + net interest expense + net rent expense. The capital base is broadly calculated as paid-in capital plus capital surplus.
2024 Reform: Size-Based Enterprise Tax Now Reaches More Subsidiaries
Prior to the 2024 Tax Reform Act, the size-based enterprise tax applied only to companies with their own paid-in capital exceeding JPY 100 million. Under the reform, a company may now be subject to size-based enterprise tax even if its own paid-in capital is well below JPY 100 million, if:
- it is wholly owned by a corporation whose total paid-in capital and capital surplus exceeds JPY 5 billion, and the company’s own total paid-in capital and capital surplus exceeds JPY 200 million; or
- it was subject to size-based enterprise tax in the prior fiscal year (even if capital subsequently fell below the threshold), and its own total paid-in capital and capital surplus (on an accounting basis) exceeds JPY 1 billion.
This change directly affects many Japanese subsidiaries of large foreign multinationals. The practical consequence: a loss-making subsidiary may owe enterprise tax on its value-added and capital bases. A transitional tax credit is available for certain taxpayers for fiscal years beginning on or before 31 March 2028.
Special Corporate Business Tax (特別法人事業税)
Special corporate business tax is technically a national tax but is filed and collected through the prefectural enterprise tax return. It is calculated as a percentage of the income base of enterprise tax:
| Company type | Rate (multiplied by income-base enterprise tax) |
|---|---|
| SMEs (income-based enterprise tax) | 37% |
| Large corporations (size-based enterprise tax) | 260% |
Example (large corp, Tokyo): special corporate business tax is calculated on the standard rate income base (1.0%), not the excess rate (1.18%). Therefore: 1.0% × 260% = adds approximately 2.60 percentage points to the statutory total before the deductibility adjustment.
Inhabitants’ Tax (法人住民税)
Income-Based Levy (法人税割)
Inhabitants’ tax includes an income-based component calculated as a percentage of the corporate tax liability. In Tokyo’s 23 special wards, the prefectural and municipal portions are assessed and collected together by the Tokyo Metropolitan Government. The applicable rates are as follows:
| Standard rate (標準税率) | Excess rate (超過税率) | |
|---|---|---|
| Tokyo 23 wards (combined prefectural + municipal) | 7.0% (1.0% + 6.0%) | 10.4% (2.0% + 8.4%) |
The excess rate of 10.4% results in an effective inhabitants’ tax of approximately 2.413% of taxable income for a company at the 23.2% corporate tax rate (23.2% × 10.4%).
Per Capita Levy (均等割)
In addition to the income-based levy, a flat per capita levy is imposed regardless of whether a company is profitable. The levy is basically determined by the company’s paid-in capital plus capital surplus, and the number of employees at each registered location. The table below shows the amounts applicable to a company with its principal office in Tokyo’s 23 special wards:
| Paid-in capital + capital surplus | Employees ≤ 50 | Employees > 50 |
|---|---|---|
| JPY 10 million or less | JPY 70,000 | JPY 140,000 |
| Over JPY 10M to JPY 100M | JPY 180,000 | JPY 200,000 |
| Over JPY 100M to JPY 1 billion | JPY 290,000 | JPY 530,000 |
| Over JPY 1 billion to JPY 5 billion | JPY 950,000 | JPY 2,290,000 |
| Over JPY 5 billion | JPY 1,210,000 | JPY 3,800,000 |
A company with offices in multiple locations pays the per capita levy at each location. The amounts for branch offices (従たる事務所) within the 23 wards differ from those shown above.
Special Corporation Tax to Strengthen Defence Capabilities — New from April 2026
Effective for fiscal years beginning on or after 1 April 2026.
- Calculated as: 4% × (base corporate tax liability − JPY 5 million basic deduction)
- The return is filed together with the existing corporate tax return.
- For a company at the 23.2% corporate tax rate, this adds approximately 0.928 percentage points to the effective tax burden (23.2% × 4%).
Effective Statutory Tax Rate
Why the Effective Rate Is Lower Than the Sum of Statutory Rates
Enterprise tax and special corporate business tax are deductible for corporate income tax purposes in the fiscal year in which the tax return is filed. In practice, the deduction in a given fiscal year consists of the enterprise tax for the prior fiscal year (deducted when the prior year’s final return is filed) and the interim enterprise tax payment for the current fiscal year (deducted when the interim return is filed). This deductibility is what makes the effective tax rate lower than the sum of all statutory rates.
The standard formula is:
Effective Tax Rate = Total Statutory Tax ÷ (1 + Enterprise Tax Rate + Special Corporate Business Tax Rate)
Effective Tax Rate Table (Tokyo, Standard Rates)
The following table summarises the effective statutory tax rates for companies operating in Tokyo for fiscal years beginning on or after 1 April 2025. Source: PwC Worldwide Tax Summaries — Japan (last reviewed January 2026).
| Tax component | SMEs (capital ≤ JPY 100M)* | Large corps (capital > JPY 100M) |
|---|---|---|
| Corporate tax | 23.2% | 23.2% |
| National local corporate tax | 2.39% (23.2% × 10.3%) | 2.39% (23.2% × 10.3%) |
| Enterprise tax — income base | 7.48% (Tokyo top bracket) | 1.18% (flat) |
| Special corporate business tax | 2.59% (7.0% × 37%) | 2.60% (1.0% × 260%) |
| Inhabitants’ tax | 2.413% (23.2% × 10.4%) | 2.413% (23.2% × 10.4%) |
| Defence capabilities tax (from April 2026) | 0.928% (23.2% × 4%) | 0.928% (23.2% × 4%) |
| Total (statutory sum) | 39.00% | 32.71% |
| Effective statutory tax rate | 35.43% | 31.52% |
* The reduced 15% SME rate is not reflected, as it may not be available to foreign subsidiaries depending on ownership structure (see The SME Rate May Not Be Available below).
** The defence capabilities tax applies from fiscal years beginning on or after 1 April 2026. Companies whose fiscal year began before 1 April 2026 should apply the prior-year rates.
*** The large corporation column does not include the value-added or capital bases of enterprise tax, which can add meaningful cost for loss-making or capital-intensive companies.
Worked Example (Large Corporation, Tokyo)
The following example illustrates the approximate tax calculation for a large corporation (paid-in capital over JPY 100 million) operating in Tokyo with taxable income of JPY 100 million, for a fiscal year beginning on or after 1 April 2025.
| Tax component | Amount (JPY) |
|---|---|
| Taxable income | 100,000,000 |
| Corporate tax (23.2% × JPY 100M) | 23,200,000 |
| National local corporate tax (10.3% × JPY 23.2M) | 2,389,600 |
| Enterprise tax — income base (1.18% × JPY 100M) | 1,180,000 |
| Special corporate business tax (260% × JPY 1.0M*) | 2,600,000 |
| Inhabitants’ tax — prefectural (2.0% × JPY 23.2M) | 464,000 |
| Inhabitants’ tax — municipal (8.4% × JPY 23.2M) | 1,948,800 |
| Defence capabilities tax (4% × (JPY 23.2M − JPY 5M)) | 728,000 |
| Total (approx.) | approx. JPY 32,510,400 |
| Statutory tax rate (approx.) | ~32.5% |
* Special corporate business tax is calculated on the standard rate income base (1.0% × JPY 100M = JPY 1,000,000), not the excess rate.
This example excludes: (i) the value-added and capital bases of enterprise tax, and (ii) the per capita inhabitants’ tax levy. Actual liability will vary by location, employee count, and other factors. Always verify rates before filing.
Key Considerations for Foreign-Owned Companies
The SME Rate May Not Be Available
The 15% reduced corporate tax rate on the first JPY 8 million is frequently cited when explaining Japan’s tax system. However, the reduced rate is not available to companies wholly owned by a corporation whose paid-in capital is JPY 500 million or more. Foreign subsidiaries should not assume the SME rate applies without first confirming the ownership structure.
Branch vs. Subsidiary
The rates in this article apply to domestic corporations (subsidiaries). A foreign corporation operating through a PE such as a branch should be subject to corporate tax only on Japan-source income attributable to the PE, but similar local taxes should apply. See our detailed comparison: Branch vs. Subsidiary in Japan — Tax Comparison.
Pre-Incorporation Tax Planning
As discussed in this article, the amount of paid-in capital — more precisely, paid-in capital plus capital surplus — has a significant impact on the applicable tax rates. It determines whether the company is subject to income-based or size-based enterprise tax, affects the per capita inhabitants’ tax levy, and governs eligibility for the SME reduced corporate tax rate. These are important factors to consider at the time of incorporation.
For a broader checklist of tax issues to address before establishing a Japanese subsidiary — including entity type selection, capital structure, and initial registrations — see: Tax Issues to Decide Before Setting Up a Japanese Subsidiary.
For post-incorporation procedures, see: Post-Incorporation Tax Procedures Checklist (English version: coming soon).
Conclusion
Japan’s corporate tax burden is best understood through the effective statutory tax rate, which accounts for the deductibility of enterprise tax. For companies operating in Tokyo under standard rates:
- Large corporations (paid-in capital over JPY 100 million): effective rate of approximately 31.5%
- SMEs (paid-in capital JPY 100 million or less, income-based enterprise tax): effective rate of approximately 35.4%
Three points stand out for foreign-owned subsidiaries in particular:
- The SME reduced corporate tax rate (15%) is not available to companies wholly owned by a corporation with paid-in capital of JPY 500 million or more.
- The 2024 Tax Reform expanded the scope of size-based enterprise tax — loss-making subsidiaries of large foreign parents may now face additional enterprise tax burden.
- A new defence capabilities surcharge (4% on base corporate tax) applies from April 2026, adding roughly one percentage point to the effective burden.
Tax rates and rules are subject to annual change under Japan’s Tax Reform Act cycle. Always verify current rates with a qualified tax advisor before making financial decisions or filing.
Disclaimer: This article is for general informational purposes only and does not constitute tax or legal advice. Tax laws change frequently. Please consult a qualified tax professional before making any decisions.
コメント