Presentation on Setting up a Business in Japan

1. Setting up Business in Japan The Executive Centre, Shibuya

2. Tax and Operational Essentials... Agenda Who am I – (Individual tax overview) What can I become – (Forms of doing business in Japan) My debt to society – (Corporate Tax essentials) Accounting for change – (Accounting/Expenses) Sharing the wealth – (Employee-related issues) Why am I here – (Getting profits out of a company) When the music stops – (Exiting from the business) Take aways… Page 2 Setting Up Business In Japan

3. Tax and Operational Essentials... Who am I Page 3 Setting Up Business In Japan

4. Individual Tax OverviewClassifications For Japan tax purposes, individuals are classified as either: Non-resident No intention to reside in Japan, and In Japan less than twelve months Non-permanent resident Intention to reside in Japan, or In Japan more than twelve months but less than five years in previous ten years Permanent resident Intention to reside permanently in Japan, or In Japan for more than five years in previous ten years Page 4 Setting Up Business In Japan

5. Individual Tax OverviewScope of taxation Tax classification determines what income is taxed in Japan and at what rate… Non-resident Only Japan source income subject to tax at flat 20% (on gross) Exempt from Japan tax if conditions under a Tax Treaty are met Non-permanent resident Japan source income plus any income remitted into Japan Taxed at progressive rates (0% to 50%) Permanent resident Income earned anywhere in the world Taxed at progressive rates (0% to 50%) Page 5 Setting Up Business In Japan

6. Individual Tax OverviewVlSAs Important to consider… Does the individual meet VISA requirements where He/she leaves company employment Hires someone from abroad Example Bob works for US investment bank – investor/manager VISA , intra-company transferee visa, specialist visa He sets up his own consulting firm When his current VISA expires... Page 6 Setting Up Business In Japan

7. Tax and Operational Essentials... What can I become Page 7 Setting Up Business In Japan

8. Tax and Operational Essentials... Choice of entity Forms of doing business in Japan Individual (sole proprietorship) Corporate entity (KK, GK) Branch Page 8 Setting Up Business In Japan

9. Entity taxationSole Proprietorship Simplest form Individual is the business Business expenses claimed as a deduction Taxed at applicable progressive rate Issues include... Legal liability Leasing property Attracting employees Page 9 Setting Up Business In Japan

10. Entity taxation Corporate entities – overview Japanese corporations taxed on worldwide income Two common types: 1. Joint Stock Co. (aka kabushikikaisha, “KK”) 2. Limited Liability Co. (aka godokaisha, “GK”) Page 10 Setting Up Business In Japan

11. Using a corporationIssues to consider Page 11 Paid in capital Representative Director Choosing fiscal year Setting Up Business In Japan

12. Entity taxationKK – kabushikikaisha Commercial/Legal considerations Can undertake any business activity Only type of company which can be listed in Japan Most used form of business entity in Japan – prestige factor Shareholders have limited liability Tax considerations Taxed on worldwide income Directors bonuses generally non-deductible Dividends paid to non-resident shareholders incur 20% WHT (unless reduced under applicable DTA) US check-the-box treatment unavailable Page 12 Setting Up Business In Japan

13. Entity taxationGK – godokaisha Commercial/Legal considerations Can undertake any business activity All members have limited liability Less onerous corporate governance requirements (than KK) Gaining wide acceptance in Japan Tax considerations Same Japan tax treatment as KK Pass through treatment in the US may be available via Check-the-Box regulations Page 13 Setting Up Business In Japan

14. Entity taxationBranch office Commercial/Legal considerations Can conduct basically any business Head office retains legal liability Tax considerations Subject to Japan tax on its Japan source income No WHT on income repatriated to head office Bonuses to Branch representative generally deductible National Tax Agency (NTA) may want to inspect head office’s books Page 14 Setting Up Business In Japan

15. Tax and Operational Essentials... My debt to society Page 15 Setting Up Business In Japan

16. Taxation in JapanOverview Corporate tax 41% (effective) corporate tax rate Corporation tax (national): 30% Inhabitants tax (Tokyo): 6.21% Enterprise tax (Tokyo): 3.26% Local special tax: 4.292% Aggregated rates: 43.726 Effective tax rate 40.69% Consumption tax – 5% Individual tax Tax rates (0 – 50%) Withholding and capital gains taxes Page 16 Setting Up Business In Japan

17. Incorporation/Getting started Initial tax filings KK’s Fiscal year – January 1 to December 31 Application for filing Blue return due Incorporation of a company 31Jan 31Mar 28 Feb Notice of incorporation filed with Local Tax Office (Typically a month but depends on office – eg. Tokyo is 15 days) 1 Jan 2010 Notice of incorporation filed with National Tax Office (Two months from incorporation) Page 17 Setting Up Business In Japan

18. Corporate TaxationBlue tax return status (1) Blue return filers may qualify for special privileges, including: Ability to carry forward losses Limited ability to carry back losses arising within five years of establishment of company Tax office must examine books and records & provide written explanation before making any tax adjustments Page 18 Setting Up Business In Japan

19. Corporate TaxationBlue tax return status (2) Blue return filers must Maintain accounting books Blue Return status revoked if Failure to maintain accounts Delaying the filing of tax returns for a period of two years Page 19 Setting Up Business In Japan

20. Corporate TaxationMore initial filings… Due within two months of incorporation Notification of establishment of office paying salaries, for WHT purposes Due by due date of tax return filing (if applicable): Application for Valuation Method of Inventory Application for Depreciation Method of Depreciable Fixed Assets Application for calculation method of book value per unit of securities Application for translation method of monetary assets and liabilities denominated in foreign currency Page 20 Setting Up Business In Japan

21. Tax and Operational Essentials... Tax return filings Corporate tax Annual return due within two months of fiscal year end One month extension on filing (not payment) is common Interim return due within two months of half year end Consumption tax Annual return (if applicable) due within two months of fiscal year end No extensions Page 21 Setting Up Business In Japan

22. Tax and Operational Essentials... Tax return filings – timeline XYZ KK’s Fiscal year – 1 January to 31December Corporate tax return due unless granted extension 31 Aug 2009 31Mar 2010 28 Feb 2010 1 Jan 2009 31 Dec 2009 Corp tax return due if extension granted Consumption tax return due Interim tax return due Page 22 Setting Up Business In Japan

23. Tax and Operational Essentials... Accounting for change Page 23 Setting Up Business In Japan

24. Tax and Operational Essentials... Accounting Attached to the final corporate tax return Balance Sheet P&L Statement Detailed schedules supporting balance sheet & P&L statement Detailed schedule of changes in shareholders equity Page 24 Setting Up Business In Japan

25. Tax and Operational Essentials... Accounting – important issues Accounting system used needs to accurately record Consumption tax Entertainment expenses Depreciation Page 25 Setting Up Business In Japan

26. ExpensesCommon Examples Start-up costs Can be expensed in first fiscal year, or Amortized (expensed) over five years Salaries Generally deductible Limitation on deductibility for salaries paid to relatives Director’s compensation “Excessive” salaries not deductible Irregular payments (e.g., bonuses) not deductible Bonus paid in equal monthly instalments in following year may be deductible Entertainment expenses In principle not deductible For small companies 90% of first JPY4m generally deductible Page 26 Setting Up Business In Japan

27. Tax audits Current focus of the NTA Economic slow down – impacted on revenue collection Pressure on auditors to collect more tax Focus areas for smaller business Directors compensation Entertainment expenses Page 27 Setting Up Business In Japan

28. Tax and Operational Essentials... Japan’s Consumption tax Page 28 Setting Up Business In Japan

29. Japan’s consumption taxOverview Imposed at 5% on: Provision of services or legal transfer of goods in Japan Importation of goods into Japan (removed from bonded warehouse) Page 29 Setting Up Business In Japan

30. Consumption taxObligation to file a return Taxable enterprise Taxable sales in excess of JPY 10 million in “base period” base period is entity’s fiscal year two years prior to current fiscal year Newly established corporations No base period for Companies in first or second fiscal year Rule: Consumption Tax return only requiredif paid-in capital is JPY10 million or more at beginning of fiscal year Page 30 Setting Up Business In Japan

31. Consumption tax returnsOverview Timing of returns Due within two months of end of fiscal period No extensions Annual, quarterly and monthly filing elections available – based on previous fiscal year’s tax liability Page 31 Setting Up Business In Japan

32. Tax and Operational Essentials... Sharing the wealth Page 32 Setting Up Business In Japan

33. Tax and Operational Essentials... Employee issues Hiring Finding employees Relevance of the entity Relatives..? Firing Always get a (second...) legal opinion Page 33 Setting Up Business In Japan

34. Tax and Operational Essentials... Employee issues Compliance Employee filings (tax, social/labor insurance) Monthly payroll Withholding tax requirement (monthly, or semi-annually) End of year adjustment Sole proprietor needs to file for social/labor insurance on behalf of employees... Page 34 Setting Up Business In Japan

35. Tax and Operational Essentials... Compensation packages Standard compensation package includes Salary Transportation Social/labor insurance More sophisticated packages include... Housing Tuition fees Stock options Home leave Page 35 Setting Up Business In Japan

36. Tax and Operational EssentialsEmployee v. Director Common for companies to outsource director role Page 36 Setting Up Business In Japan

37. Tax and Operational Essentials... Employee v. Independent contractor Page 37 Setting Up Business In Japan

38. Tax and Operational Essentials... Why am I here Page 38 Setting Up Business In Japan

39. Getting profits out of the companyDividend vs salary vs consulting fees Dividend income Dividend is paid to shareholder from after-tax profits (retained earnings) Taxed with shareholder’s other income Double taxation issue Salary income Employee is entitled to receive a salary Taxed as employment income No double taxation as salary is an expense for the company Consulting fee Generally treated as business income for individual Page 39 Setting Up Business In Japan

40. Tax and Operational Essentials... When the music stops Page 40 Setting Up Business In Japan

41. Exit strategiesSale vs. liquidation Sale Shareholder elects to sell his/her interest in the company Japan tax issue arises BUT may be exempt under Japan/US Tax Treaty Liquidation Shareholder liquidates the company Cash payout generally treated as a dividend Japan tax will arise if seller resident of Japan Japan tax of as low as 5% may be levied if resident of certain jurisdictions (eg. US, UK) Page 41 Setting Up Business In Japan

42. Tax and Operational Essentials... Take aways…? Key points Clearly understand what your business is about Think realistically about your needs (office space, employees etc.) Consider your exit options (will your business be something worth buying?) Always get a second opinion... Understand your US tax implications Page 42 Setting Up Business In Japan