Although both Japan subsidiaries (including Kabushiki Kaisha and Godo Kaisha) and Japan branches are subject to Japan Corporation Tax and Japan Consumption Tax, there are several tax differences between them.

Bookkeeping

While the book of a Japan subsidiary is independent of its foreign parent company’s book, the book of a Japan branch is part of the book of its head office. Therefore, for accounting and tax purposes in the home country of the head office, the Japan branch’s book has to be prepared in accordance with the home country’s GAAP (Generally Accepted Accounting Principles). On the other hand, for Japan Corporation Tax purposes, a separate Japan branch’s book is required that has been adjusted to Japan GAAP basis.

Corporation Tax

In the case of a Japan subsidiary, Corporation Tax is imposed on all income earned by the Japan subsidiary (worldwide income taxation). However, if the Japan subsidiary conducts business only in Japan, as a result, Corporation Tax is imposed only on the income from its business in Japan.
On the other hand, in the case of a Japan branch, Corporation Tax is imposed on the income that would be attributed to the Japanese branch if it were treated as a separate and independent entity from its head office. Therefore, internal transactions between the Japanese branch and its head office should be recognized, and the profits and losses related to such internal transactions should be reflected in the income amount of the Japan branch.
In most cases, Corporation Tax paid by Japan branches are eligible for the foreign tax credit system in the countries where the head offices are located. However, since Japanese Corporation Tax rate is often higher than that of other countries, it may not be possible to deduct the entire amount of Japanese Corporation Tax from the corporate income tax amount in the country of the head office.

Per-Capita Tax

Per-Capita Tax is a tax that all the Japan companies/branches have to pay regardless of their amounts of income. The Per-Capita Tax amount is simply determined by a combination of the Capital Amount and the number of employees. Minimum JPY70,000 per year.

In the case of a Japan subsidiary, the amount of Per-Capita Tax is determined based on the amount of Capital Amount of the Japan subsidiary. On the other hand, in the case of a Japan branch, the amount of Per-Capita Tax is determined based on the amount of Capital Amount of the head office. Since the Capital Amount of a head office is generally larger than that of a Japan subsidiary, the Per-Capita Tax amount of a branch tends to be larger than that of a subsidiary.

Size Based Business Tax

Size Based Business Tax is a tax that applied to companies with Share Capital Amount exceeding JPY100 million. Size Based Business Tax is calculated by multiplying Value Added Amount (total amount of salaries, interest, rent, etc. paid by the company) by a certain tax rate.

In the case of a Japan subsidiary, Share Capital Amount of the Japan subsidiary is used to determine whether or not Size Based Business Tax applies, while in the case of a Japan branch, Share Capital Amount of the head office is used. Since Share Capital Amount of a head office is generally larger than that of a Japan subsidiary, a branch is more likely to be subject to Size Based Business Tax than a subsidiary.

 

Tax accountant fee (for your reference)

As mentioned above, a branch tends to require more accounting and tax considerations than a subsidiary, resulting in higher tax accountant fees.

Based on the above, unless there are any special reasons where a Japan branch is necessary, a Japan subsidiary is recommended from a Japan tax perspective.