Taxation-wise, if the foreign company’s capital is 300 million yen, between a Japan subsidiary company and a Japan branch office, which would be better?
★ Explanation ★
1. “Capital” for Japan subsidiary companies and Japan branch offices
In the case of a Japan subsidiary company, since it is its own judicial person and is considered independent from the parent company, it would also have its own separate capital. As such, the taxes levied on the subsidiary company would be based on its own capital.
On the other hand, a Japan branch office is considered a part of the foreign company, with legal responsibility with the foreign company, the accounting process for the branch office also takes place in the head office (foreign company). Since it cannot set its own capital, the tax basis for the branch office depends on the capital of the foreign company. Even in their registration form, the capital amount reflected is that of the foreign company.
2. Taxes that are affected by the capital
The capital of a company has a variety of effects on the processing and calculation of taxes such as corporate tax and consumption tax. This is particularly true when considering the difference in taxes due for capital anywhere between 10 million yen and 100 million yen.
a. For corporations with a capital of less than 10 million yen
If the corporation has a capital of less than 10 million yen, it can become a tax-exempt business for up to two fiscal years, given a few exceptions.
b. For corporations with a capital of up to 10 million yen
If the corporation with up to 10 million yen in capital but has 50 employees or less, it is possible to reduce the corporate inhabitant taxes (per capita basis) to approximately 70,000 yen annually. (You may refer to Chapter 1 3-7 as well.)
c. For corporations with a capital of up to 100 million yen
For corporations with 100 million yen or less in capital, there are a variety of tax benefits they can avail of, such as the reduction of the corporate tax rate, deduction of small depreciable assets, fixed deductible limit for entertainment expenses, and tax refund during deficit.
3. For foreign companies with more than 300 million yen in capital that are expanding into Japan
For foreign companies with capital more than 300 million yen that will set up a Japan subsidiary company, if their business expansion type is a subsidiary company with no more than 10 million yen (and with less than 50 employees), they will be able to avail of the tax benefits we mentioned above. On the other hand, if the foreign company would establish a Japan branch office, in principle, taxation levied on its capital will be based on its foreign company (head company)’s capital. Therefore, if the foreign company has a capital of more than 300 million yen, they will not fall under any of the categories we listed in item (2), resulting in a relatively larger tax payment.
For these reasons, when a foreign company with a large amount of capital expands business into Japan, establishing a subsidiary company would generally have more advantages tax-wise. However, there are cases where a branch office would be more advantageous if the Japan entity would constantly be in a deficit.
Also, if a foreign company with a capital of 500 million yen or more establishes a wholly-owned Japan subsidiary company, be aware that it will be subjected to certain restrictions on SMEs which are stipulated in Japan’s Group Taxation Regime.