With the tax reform in 2024, the scope of foreign companies subject to Japan Consumption Tax filing/payment obligations to the Japan Tax Office (JCT Obligation) has been significantly expanded. Details are as follows.
Please note that “foreign company” in this column refers to the one without a Permanent Establishment in Japan.

1. Before the 2024 Amendment
Even if a foreign company commenced JCT Taxable Transactions (*), the JCT Obligation was exempted for the fiscal year in which the JCT Taxable Transactions commenced (JP business year one) and the following fiscal year (JP business year two), provided certain conditions were met. For example, if a foreign company with fiscal year-ending in December began JCT Taxable Transactions in 2022, the JCT Obligation was exempted for 2022 and 2023 under the certain conditions.

(*)JCT Taxable Transactions primarily include:

1. Transfer or lease of assets located in Japan
2. Provision of services conducted in Japan
3. Provision of digital services to companies or consumers in Japan (e.g., distribution of games or music through internet)

2. After the 2024 Amendment

1. Foreign companies with Shi-hon-kin of JPY10 million or more
   If a foreign company with Shi-hon-kin (*1) of JPY10 million or more starts JCT Taxable Transactions, it will be subject to JCT Obligation from the fiscal year in which the JCT Taxable Transactions commenced (JP business year one). For example, assuming an exchange rate of USD1 = JPY155, a US company with Common stock of USD 65,000 or more would be subject to JCT Obligation from the JP business year one.
2. Foreign companies with Shi-hon-kin less than JPY10 million
   Even after the 2024 amendment, JCT Obligation for the JP business year one and the JP business year two can be exempted under the certain conditions (*2). However, if the foreign company voluntarily obtains a JCT Invoice Number for the purpose of allowing to claim the Purchase JCT credit on the purchaser side of the transaction, the JCT Obligation on the foreign company will not be exempted.

From the above, after the 2024 amendment, many foreign companies starting JCT Taxable Transactions will be subject to JCT Obligations from the JP business year one.

The 2024 amendment applies to the fiscal years of foreign companies starting on or after October 1, 2024. Thus, for companies with fiscal year-ending in December, it applies from January 1, 2025.

(*1) Shi-hon-kin is a concept based on Japanese Companies Act. The Japanese Corporation Tax Law does not clearly stipulate which items in shareholders’ equity in the financial statements of a foreign company constitute Shi-hon-kin. Therefore, strictly speaking, it is necessary to pick out the items from the foreign company’s shareholders’ equity that constitute Shi-hon-kin by comparing “the meaning of Shi-hon-kin under Japanese Companies Act” and “the legal meaning of each item in shareholders’ equity of the foreign company”. However, generally speaking, Share capital and Capital stock should be treated as Shi-hon-kin, while Capital reserve and Capital surplus should not be treated as Shi-hon-kin.

(*2) Although details are omitted here, the certain conditions for JCT exemption have also been tightened to expand the scope of foreign companies subject to JCT Obligation.

3. Procedures When JCT Obligation Arises
When a foreign company becomes JCT Obligation status, the following procedures are necessary:

1. Initial Notifications to the Japan Tax Office
   1. Notification of becoming JCT Obligation status
   2. Notification for appointment of Japan Tax Agent
   3. Application of JCT Invoice Number
2. Annual Tax Filing and Payment
   The foreign company needs to file JCT return and pay the final JCT amount (Sales JCT minus purchase JCT) to the Japan Tax Office within two months from its fiscal year end.

4. Others
JCT is an indirect tax similar to the VAT (Value Added Tax) in Europe rather than the Sales Tax in the US states. Therefore, when foreign companies file JCT returns and pay the final JCT amount, they can claim Purchase JCT credit against the Sales JCT collected on sales.