Setting Up Business In Japan Tec 28 Jan 10 (Sirius)

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Setting Up Business In Japan Tec 28 Jan 10 (Sirius)

  1. 1. Setting up Business in Japan<br />The Executive Centre, Shibuya<br />
  2. 2. Tax and Operational Essentials... Agenda<br />Who am I – (Individual tax overview)<br />What can I become – (Forms of doing business in Japan)<br />My debt to society – (Corporate Tax essentials)<br />Accounting for change – (Accounting/Expenses)<br />Sharing the wealth – (Employee-related issues)<br />Why am I here – (Getting profits out of a company)<br />When the music stops – (Exiting from the business)<br />Take aways…<br />Page 2<br />Setting Up Business In Japan<br />
  3. 3. Tax and Operational Essentials... Who am I<br />Page 3<br />Setting Up Business In Japan<br />
  4. 4. Individual Tax OverviewClassifications<br />For Japan tax purposes, individuals are classified as either:<br />Non-resident<br />No intention to reside in Japan, and<br />In Japan less than twelve months<br />Non-permanent resident<br />Intention to reside in Japan, or<br />In Japan more than twelve months but less than five years in previous ten years<br />Permanent resident<br />Intention to reside permanently in Japan, or<br />In Japan for more than five years in previous ten years<br />Page 4<br />Setting Up Business In Japan<br />
  5. 5. Individual Tax OverviewScope of taxation<br />Tax classification determines what income is taxed in Japan and at what rate…<br />Non-resident<br />Only Japan source income subject to tax at flat 20% (on gross)<br />Exempt from Japan tax if conditions under a Tax Treaty are met<br />Non-permanent resident<br />Japan source income plus any income remitted into Japan<br />Taxed at progressive rates (0% to 50%)<br />Permanent resident<br />Income earned anywhere in the world<br />Taxed at progressive rates (0% to 50%)<br />Page 5<br />Setting Up Business In Japan<br />
  6. 6. Individual Tax OverviewVlSAs<br />Important to consider…<br />Does the individual meet VISA requirements where<br />He/she leaves company employment<br />Hires someone from abroad <br />Example<br />Bob works for US investment bank – investor/manager VISA , intra-company transferee visa, specialist visa<br />He sets up his own consulting firm<br />When his current VISA expires...<br />Page 6<br />Setting Up Business In Japan<br />
  7. 7. Tax and Operational Essentials... What can I become<br />Page 7<br />Setting Up Business In Japan<br />
  8. 8. Tax and Operational Essentials... Choice of entity<br />Forms of doing business in Japan<br />Individual (sole proprietorship)<br />Corporate entity (KK, GK)<br />Branch<br />Page 8<br />Setting Up Business In Japan<br />
  9. 9. Entity taxationSole Proprietorship<br />Simplest form<br />Individual is the business <br />Business expenses claimed as a deduction<br />Taxed at applicable progressive rate <br />Issues include...<br />Legal liability<br />Leasing property<br />Attracting employees<br />Page 9<br />Setting Up Business In Japan<br />
  10. 10. Entity taxation Corporate entities – overview <br />Japanese corporations taxed on worldwide income <br />Two common types:<br />1. Joint Stock Co. (aka kabushikikaisha, “KK”)<br />2. Limited Liability Co. (aka godokaisha, “GK”) <br />Page 10<br />Setting Up Business In Japan<br />
  11. 11. Using a corporationIssues to consider<br />Page 11<br />Paid in capital<br />Representative Director<br />Choosing fiscal year<br />Setting Up Business In Japan<br />
  12. 12. Entity taxationKK – kabushikikaisha<br />Commercial/Legal considerations<br />Can undertake any business activity<br />Only type of company which can be listed in Japan<br />Most used form of business entity in Japan – prestige factor<br />Shareholders have limited liability<br />Tax considerations<br />Taxed on worldwide income<br />Directors bonuses generally non-deductible<br />Dividends paid to non-resident shareholders incur 20% WHT (unless reduced under applicable DTA)<br />US check-the-box treatment unavailable <br />Page 12<br />Setting Up Business In Japan<br />
  13. 13. Entity taxationGK – godokaisha<br />Commercial/Legal considerations<br />Can undertake any business activity<br />All members have limited liability<br />Less onerous corporate governance requirements (than KK)<br />Gaining wide acceptance in Japan<br />Tax considerations<br />Same Japan tax treatment as KK<br />Pass through treatment in the US may be available via Check-the-Box regulations <br />Page 13<br />Setting Up Business In Japan<br />
  14. 14. Entity taxationBranch office<br />Commercial/Legal considerations<br />Can conduct basically any business<br />Head office retains legal liability<br />Tax considerations<br />Subject to Japan tax on its Japan source income <br />No WHT on income repatriated to head office<br />Bonuses to Branch representative generally deductible<br />National Tax Agency (NTA) may want to inspect head office’s books<br />Page 14<br />Setting Up Business In Japan<br />
  15. 15. Tax and Operational Essentials... My debt to society<br />Page 15<br />Setting Up Business In Japan<br />
  16. 16. Taxation in JapanOverview<br />Corporate tax<br />41% (effective) corporate tax rate<br />Corporation tax (national): 30% Inhabitants tax (Tokyo): 6.21% Enterprise tax (Tokyo): 3.26% Local special tax: 4.292%<br /> Aggregated rates: 43.726 Effective tax rate 40.69%<br />Consumption tax – 5%<br />Individual tax<br />Tax rates (0 – 50%)<br />Withholding and capital gains taxes<br />Page 16<br />Setting Up Business In Japan<br />
  17. 17. Incorporation/Getting started Initial tax filings<br />KK’s Fiscal year – January 1 to December 31<br />Application for filing Blue return due<br />Incorporation of a company<br />31Jan<br />31Mar<br />28 Feb<br />Notice of incorporation filed with Local Tax Office (Typically a month but depends on office – eg. Tokyo is 15 days)<br />1 Jan 2010<br />Notice of incorporation filed with National Tax Office (Two months from incorporation)<br />Page 17<br />Setting Up Business In Japan<br />
  18. 18. Corporate TaxationBlue tax return status (1)<br />Blue return filers may qualify for special privileges, including:<br />Ability to carry forward losses<br />Limited ability to carry back losses arising within five years of establishment of company<br />Tax office must examine books and records & provide written explanation before making any tax adjustments<br />Page 18<br />Setting Up Business In Japan<br />
  19. 19. Corporate TaxationBlue tax return status (2)<br />Blue return filers must<br />Maintain accounting books<br />Blue Return status revoked if<br />Failure to maintain accounts<br />Delaying the filing of tax returns for a period of two years<br />Page 19<br />Setting Up Business In Japan<br />
  20. 20. Corporate TaxationMore initial filings…<br />Due within two months of incorporation<br />Notification of establishment of office paying salaries, for WHT purposes<br />Due by due date of tax return filing (if applicable):<br />Application for Valuation Method of Inventory<br />Application for Depreciation Method of Depreciable Fixed Assets<br />Application for calculation method of book value per unit of securities<br />Application for translation method of monetary assets and liabilities denominated in foreign currency<br />Page 20<br />Setting Up Business In Japan<br />
  21. 21. Tax and Operational Essentials... Tax return filings<br />Corporate tax<br />Annual return due within two months of fiscal year end<br />One month extension on filing (not payment) is common<br />Interim return due within two months of half year end<br />Consumption tax<br />Annual return (if applicable) due within two months of fiscal year end<br />No extensions<br />Page 21<br />Setting Up Business In Japan<br />
  22. 22. Tax and Operational Essentials... Tax return filings – timeline <br />XYZ KK’s Fiscal year – 1 January to 31December<br />Corporate tax return due unless granted extension<br />31 Aug 2009<br />31Mar 2010<br />28 Feb 2010<br />1 Jan 2009<br />31 Dec 2009<br />Corp tax return due if extension granted<br />Consumption tax return due<br />Interim tax return due<br />Page 22<br />Setting Up Business In Japan<br />
  23. 23. Tax and Operational Essentials... Accounting for change<br />Page 23<br />Setting Up Business In Japan<br />
  24. 24. Tax and Operational Essentials... Accounting<br />Attached to the final corporate tax return<br />Balance Sheet<br />P&L Statement<br />Detailed schedules supporting balance sheet & P&L statement<br />Detailed schedule of changes in shareholders equity<br />Page 24<br />Setting Up Business In Japan<br />
  25. 25. Tax and Operational Essentials... Accounting – important issues<br />Accounting system used needs to accurately record<br />Consumption tax<br />Entertainment expenses<br />Depreciation<br />Page 25<br />Setting Up Business In Japan<br />
  26. 26. ExpensesCommon Examples<br />Start-up costs<br />Can be expensed in first fiscal year, or<br />Amortized (expensed) over five years<br />Salaries<br />Generally deductible<br />Limitation on deductibility for salaries paid to relatives <br />Director’s compensation<br />“Excessive” salaries not deductible<br />Irregular payments (e.g., bonuses) not deductible<br />Bonus paid in equal monthly instalments in following year may be deductible<br />Entertainment expenses<br />In principle not deductible<br />For small companies 90% of first JPY4m generally deductible <br />Page 26<br />Setting Up Business In Japan<br />
  27. 27. Tax audits Current focus of the NTA<br />Economic slow down – impacted on revenue collection<br />Pressure on auditors to collect more tax<br />Focus areas for smaller business<br />Directors compensation<br />Entertainment expenses<br />Page 27<br />Setting Up Business In Japan<br />
  28. 28. Tax and Operational Essentials... Japan’s Consumption tax<br />Page 28<br />Setting Up Business In Japan<br />
  29. 29. Japan’s consumption taxOverview <br />Imposed at 5% on:<br />Provision of services or legal transfer of goods in Japan<br />Importation of goods into Japan (removed from bonded warehouse)<br />Page 29<br />Setting Up Business In Japan<br />
  30. 30. Consumption taxObligation to file a return<br />Taxable enterprise<br />Taxable sales in excess of JPY 10 million in “base period”<br />base period is entity’s fiscal year two years prior to current fiscal year<br />Newly established corporations<br />No base period for Companies in first or second fiscal year<br />Rule: Consumption Tax return only requiredif paid-in capital is JPY10 million or more at beginning of fiscal year<br />Page 30<br />Setting Up Business In Japan<br />
  31. 31. Consumption tax returnsOverview<br />Timing of returns<br />Due within two months of end of fiscal period<br />No extensions<br />Annual, quarterly and monthly filing elections available – based on previous fiscal year’s tax liability<br />Page 31<br />Setting Up Business In Japan<br />
  32. 32. Tax and Operational Essentials... Sharing the wealth<br />Page 32<br />Setting Up Business In Japan<br />
  33. 33. Tax and Operational Essentials... Employee issues<br />Hiring<br />Finding employees <br />Relevance of the entity<br />Relatives..?<br />Firing<br />Always get a (second...) legal opinion<br />Page 33<br />Setting Up Business In Japan<br />
  34. 34. Tax and Operational Essentials... Employee issues<br />Compliance<br />Employee filings (tax, social/labor insurance)<br />Monthly payroll<br />Withholding tax requirement (monthly, or semi-annually)<br />End of year adjustment<br />Sole proprietor needs to file for social/labor insurance on behalf of employees...<br />Page 34<br />Setting Up Business In Japan<br />
  35. 35. Tax and Operational Essentials... Compensation packages<br />Standard compensation package includes<br />Salary<br />Transportation<br />Social/labor insurance<br />More sophisticated packages include...<br />Housing<br />Tuition fees<br />Stock options<br />Home leave<br />Page 35<br />Setting Up Business In Japan<br />
  36. 36. Tax and Operational EssentialsEmployee v. Director<br />Common for companies to outsource director role <br />Page 36<br />Setting Up Business In Japan<br />
  37. 37. Tax and Operational Essentials... Employee v. Independent contractor<br />Page 37<br />Setting Up Business In Japan<br />
  38. 38. Tax and Operational Essentials... Why am I here<br />Page 38<br />Setting Up Business In Japan<br />
  39. 39. Getting profits out of the companyDividend vs salary vs consulting fees<br />Dividend income<br />Dividend is paid to shareholder from after-tax profits (retained earnings)<br />Taxed with shareholder’s other income<br />Double taxation issue<br />Salary income<br />Employee is entitled to receive a salary<br />Taxed as employment income<br />No double taxation as salary is an expense for the company<br />Consulting fee<br />Generally treated as business income for individual<br />Page 39<br />Setting Up Business In Japan<br />
  40. 40. Tax and Operational Essentials... When the music stops<br />Page 40<br />Setting Up Business In Japan<br />
  41. 41. Exit strategiesSale vs. liquidation<br />Sale<br />Shareholder elects to sell his/her interest in the company<br />Japan tax issue arises BUT may be exempt under Japan/US Tax Treaty<br />Liquidation<br />Shareholder liquidates the company<br />Cash payout generally treated as a dividend <br />Japan tax will arise if seller resident of Japan<br />Japan tax of as low as 5% may be levied if resident of certain jurisdictions (eg. US, UK)<br />Page 41<br />Setting Up Business In Japan<br />
  42. 42. Tax and Operational Essentials... Take aways…?<br />Key points <br />Clearly understand what your business is about<br />Think realistically about your needs (office space, employees etc.)<br />Consider your exit options (will your business be something worth buying?)<br />Always get a second opinion...<br />Understand your US tax implications<br />Page 42<br />Setting Up Business In Japan<br />

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