Under the Japan Consumption Tax (JCT) Law, the JCT status of all companies falls into one of the following categories:

1. JCT Return Filers: the companies with JCT return filing and payment obligations
JCT Return Filers are obligated to declare the Final JCT amount calculated by deducting (2) Purchase JCT from (1) Sales JCT as outlined below, and pay the Final JCT amount to the Japan Tax Office. However, if the result after deducting (2) from (1) is negative, they have the right to a refund from the Japan Tax Office for the negative portion.
(1) Sales JCT
The amount equivalent to 10/110 of the consideration received for JCT Taxable Sales Transactions (transferring assets and providing services) in Japan.
(2) Purchase JCT
The amount equivalent to 10/110 of the consideration paid for JCT Taxable Purchase Transactions (purchasing assets and receiving services) in Japan.

2.Non JCT Return Filers: the companies with no JCT return filing and payment obligations
Non JCT Return Filers are not obligated to declare and pay the Final JCT amount, that is calculated by deducting (2) from (1) above, to the Japan Tax Office. However, they do not have the right to a refund from the Japan Tax Office for any negative amount obtained by deducting (2) from (1).

Therefore, Non JCT Return Filer status is not always advantageous. It is essential to consider the business activities conducted by the Japanese subsidiary to anticipate whether its Final JCT will be in a payment or refund position. Below are explanations regarding the assumed JCT statuses for the first and second fiscal years for newly established Japanese subsidiaries:

1.When the Shi-hon-kin (Share capital amount under the Japanese Companies Act) of the newly established Japanese subsidiary is 10 million yen or more:
The subsidiary becomes a JCT Return Filer from the date of establishment.

2.When the Shi-hon-kin of the newly established Japanese subsidiary is less than 10 million yen:
In principle, a Japanese subsidiary can be a Non JCT Return Filer for its first and second fiscal years. However, depending on the subsidiary’s choice, it is possible to voluntarily opt for JCT Return Filer status by submitting a certain notification within the deadline. Thus, the subsidiary can determine its JCT status at its decision. Below are comments regarding the selection of the JCT status based on the nature of the Japanese subsidiary’s business activities.

1. If the Japanese subsidiary provides services exclusively to its foreign parent company:
   It is anticipated that the Japanese subsidiary will be in a Final JCT refund position. Therefore, it would be desirable to voluntarily opt for JCT Return Filer status. For more information on JCT refund in this scenario, please refer to the following link:
   https://awitax.jp/jp/insight/consumption/21/
   
2. If the majority of the Japanese subsidiary’s customers are business operators:
   In this case, it is anticipated that the Japanese subsidiary will be in a Final JCT payment position. Therefore, from a JCT perspective, Non JCT Return Filer status would be advantageous for the subsidiary.
   However, considering the introduction of the JCT Invoice System in October 2023, that generally disallows the deduction of the Purchase JCT included in the consideration paid to Non JCT Return Filers, in the calculation of the consumers’ Final JCT amount (although 80% of the Purchase JCT amount can be deducted for a certain period from October 2023), it is also anticipated that the subsidiary may receive requests from its customers to become a JCT Return Filer. Therefore, it is advisable to compare the benefits of Non JCT Return Filer status under the JCT Law with the relationship with the customers (reduction in sales by opting for Non JCT Return Filer status) to determine the JCT status.
3. If the majority of the Japanese subsidiary’s customers are end-consumers:
   In this case, similar to scenario 2.(2) above, it is anticipated that the Japanese subsidiary will be in a Final JCT payment position. Therefore, from a JCT perspective, Non JCT Return Filer status would be advantageous for the subsidiary.
   Additionally, it is assumed that the subsidiary will not receive requests from its end-consumers to become a JCT Return Filer. Thus, considering only the JCT benefits, it is advisable to opt for Non JCT Return Filer status.