Thursday, September 12, 2013

Q: Registration tax imposed on a foreign firm opening an office in Japan.

A: Formalities for a foreign investor opening an office in Japan is not much different from Japanese national doing so. However, imposed tax system varies due to the office’s legal entity status, cash flow, work-flow between a branch and parent company. For example, the branch is taxed solely on Japan source income only if the entity is able to pass size-test, authority-test, cash-flow-test and some other factors. Selecting the type of legal entity, you should consider at least the followings:

1. Types of Corporation
Under Japanese Corporate Tax Law, “foreign corporation” is an entity whose headquarter resides outside Japan, and “foreign-affiliated corporation” is an entity whose controlling interest is dominated by a foreign company. Where former entity is treated a foreign company in Japan but latter is treated domestic company for the sake of tax treatment.

2. Bilateral Tax Treaty
Japan binds bilateral tax treaties with 56 countries as of May 2008. The treaty aims to avoid double taxation and unfair tax treatment in bound countries by superseding domestic law. The application of the Tax Treaty is very effective but needs careful planning and thorough research on the subject.

3. Bilateral Social Insurance Treaty
As to bilateral tax treaty, Japan also binds bilateral social insurance treaty with few countries in the subject of pension plan and health plan. Social insurance system is mandatory for all types of corporation status except in few cases.

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