AWI Tax Consulting

Reduced Corporation Tax Rate Applicable to Japanese SMC

By Ryohei Yanagihara

SMCs (Small and Medium-sized Companies) can apply the following reduced Corporation Tax rate.
– Standard tax rate: 23.2%. Applicable to Large Companies (companies other than SMCs).
– Reduced tax rate: 15%. Applicable only to the taxable income up to JPY 8 million in a year for SMCs. The Standard tax rate is applied to the taxable income in excess of JPY 8 million for SMCs.
(Note) Please note that the above Standard/Reduced tax rates are the National Corporation Tax rates, and there are other Local Corporation Taxes imposed by prefectural and municipal governments.

A SMC is a company that satisfies both (1) and (2) below.

  1. The Shi-hon-kin (Share capital amount under the Japanese Companies Act) of the Japanese subsidiary is JPY100 million yen or less.
    When establishing a Japanese subsidiary, there are few cases where the Shi-hon-kin is set at more than JPY100 million, and most Japan subsidiaries are expected to satisfy the requirement (1).
  2. The 100%-relationship direct/indirect parent company’s Shi-hon-kin is less than JPY500 million.
    Regarding (2), the following three points should be noted.

    1. The above-mentioned Shi-hon-kin is a concept based on the Japanese Companies Act. The Japanese Corporation Tax Law does not clearly stipulate which items in shareholders’ equity in the financial statements of a foreign parent company constitute Shi-hon-kin.
      Therefore, strictly speaking, it is necessary to pick out the items from the foreign parent company’s shareholders’ equity that constitute Shi-hon-kin by comparing the following:

      • the meaning of Shi-hon-kin under Japanese Companies Act
      • the legal meaning of each item in the foreign parent company’s shareholders’ equity

      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. In calculating the foreign parent company’s Shi-hon-kin, the amount in foreign currency picked out as the Shi-hon-kin of the foreign parent company is converted at the exchange rate at the end of the Japanese subsidiary’s fiscal year. Therefore, it should be noted that even if the JPY-translated Shi-hon-kin of the foreign parent company at the end of a fiscal year of the Japanese subsidiary is less than JPY500 million, the JPY-translated Shi-hon-kin of the following fiscal year may exceed JPY500 million if the yen is weakening toward the end of the following fiscal year.
    3. Determining whether a Japanese subsidiary is a SMC (or a Large Company) become complicated when there are multiple parent companies. Assuming that the readers are non-tax specialists, we will skip the detailed articles here and present our conclusions for each case, which we hope you can apply to your company’s case.


The information contained in this website is for general information purposes only and is not guaranteed to be accurate or complete. In addition, explanations may be simplified, such as omitting references to exceptions, in anticipation of non-specialist readers. Also, the information in this website is subject to change from the date of publication and its application may vary from case to case. Therefore, please be aware that we cannot be liable for any damages arising from the use of the information contained in this website.