If you plan to establish a subsidiary (Kabushi Kaisha “KK” or Godo Kaisha “GK” in Japan, you’d better pay attention to capital amount from a tax point of view.
Japanese Government offers various tax benefits to a small and medium sized “SME” corporation.
They are governed by various tax related laws and capital plays an important role if the corporation enjoys the benefits.
We advise you how much capital is appropriate to establish an ordinary company (Stock Company and Japanese Limited Liability Company) in Japan based on Companies Act, Tax Laws and Business Manager Visa regulation.
Capital and capital reserves are regulated by Companies Act.
Also, tax benefits are regulated by Tax Laws mainly based on capital amount.
In order to obtain Business Manager Visa certain capital amount is still required. First of all, we will explain about requirements from Companies Act.
How much capital Companies Act requires
Since a minimum capital article was eliminated when the present Companies Act was introduced in 2006, you can establish a stock company at any amount. In an extreme case, one Yen capital can be acceptable.
However, since capital is source of credit and operating funds for the start-up, there must be lower side limit. On the other hand, if you want to enjoy tax benefits there is also upper side limit.
Companies Act defines in article 445 below that the amount contributed by shareholders becomes capital. Half of it can be recorded as capital reserves “Shihon Junbikin”.
Since the start-up often makes a loss at the beginning, it is recommendable to keep capital reserves to cover the loss if they do not want to leave retained earnings account in red. Off course it means to reduce contributions of shareholders. Hence, they must be careful about the reduction.
Article 445 Unless it is otherwise provided for in this Act, the amount of stated capital of a Stock Company shall be the amount of properties contributed by persons who become shareholders at the incorporation or share issue.
(2) The amount not exceeding half of the amount of the contribution under the preceding paragraph may not be recorded as stated capital.
(3) The amount not recorded as stated capital pursuant to the provisions of the preceding paragraph shall be recorded as capital reserves.
How much is the best capital amount for “Tax benefits”
There are many tax benefits in Japanese Tax Laws. In order to enjoy them, capital amount should be under certain amount.
Among various taxes, those which capital have a significant impact are Corporate Tax, Corporate Inhabitant Tax, Corporate Enterprise Tax and Consumption Tax.
(1) Corporate Tax – Tax benefits for Small and Medium Sized Corporation “SMC”
<Practical Definition>
SMC means :
Companies whose capital is one hundred million yen or less at the end of each accounting period and;
companies which are not under full controlling interest by Large Sized Corporation (LSC) whose capital is five hundred million yen or more.
If your company falls in “SMC”, the company can enjoy tax benefits bellow.
<Tax Benefits for SMC>
① Corporate tax rate reduction
A corporate tax rate is reduced to 19% from 23.2% with regard to an amount of eight million yen or less out of the amount of income.
* Not applicable to a company whose average income of previous three fiscal years is more than one and a half billion yen. This was effective on 1st Apr. 2019.
② Special provision for entertainment and social expense
Entertainment and social expenses incurred by corporations are not, as a rule, included in expenses.
However, “SMC” may include such expenses up to eight million yen or 50% of them.
③ Reserve for bad debts (individual evaluation)
“SMC” may include certain amount as reserve for bad debts when trade debtors are ordered confirmation of corporate reorganization, etc.
➃ Reserve for bad debts (allowed to apply a predetermined legal reserve rate)
“SMC” may apply the predetermined legal reserve rate to calculate the reserve instead of applying the average rate of actual previous three fiscal years bad debt rate which needs time consuming calculation.
For example, if a trade debtor is a wholesaler or a retailer, the predetermined rate is 10/1,000.
* Not applicable to a company whose average income of previous three fiscal years is more than one and a half billion yen. This was effective on 1st Apr. 2019.
⑤ Net Loss Carried Over
Where “SMC” has an amount of net loss which has arisen in an accounting period for which a tax return is filed in blue return, it may carry over net loss for 10 years and includes it as expense to calculate taxable income, whereas LSC can include it up to 50% of its income.
⑥ Net Loss Carried Back
Where “SMC” has an amount of net loss which has arisen in an accounting period for which a tax return is filed in blue return, it may carry back net loss to income of previous year to request corporation tax refund.
(2) Corporate Tax—Tax Benefits for Small and Medium Sized Enterprise (SME)
In case of ordinary company, practical definition of “SME” is as below. Act on Special Measures Concerning Taxation gives you precise definition.
<Practical definition>
SME means：
companies whose capital is one hundred million yen or less except more than half of their issued shares are obtained by Large Sized Corporation(**)
or more than two third of their issued shares are obtained by plural LSCs.
** LSC in this case means that corporations whose capital is more than one hundred million yen.
<Tax Benefits for SME>
① Special provision for petty sum depreciation assets
The special provision for petty sum depreciation assets allows “SME” inclusion in full (up to a total maximum of 3 million yen per year) of the depreciable worth less than 300,000 yen in charges against revenue.
Number of employees must be 1,000 or less to apply the provision.
* Not applicable to a company whose average income of previous three fiscal years is more than one and a half billion yen. This was effective on 1st Apr. 2019.
The Act on Special Measures Concerning Taxation gives SME many other special provisions.
(3) Corporate Inhabitant Tax – Per capita portion
Corporate Inhabitant Tax consists of a per capita portion and a corporate tax-based portion. The per capita portion is a flat amount levied on each company regardless of its income, and the corporate tax-based portion is calculated based on its corporate tax amount.
The per capita portion is levied based on capital plus capital reserves and number of employees.
For example, in case of 50 or less employees, per capita tax to a company whose capital plus capital reserves is less than 10 million yen is 70,000 yen, whereas a company of more than 10 million yen and less than 100 million yen is 180,000 yen.
It is recommendable for the start-up to raise capital less than 10 million yen.
(4) Corporate Enterprise Tax—Size Based Business Tax
Size Based Business Tax is a kind of business tax to pay to local governments which consists of per income portion, per value added portion and per capital portion, and which is applied to a company with capital of more than 100 million yen at the end of fiscal year.
The tax is calculated based on the amount of income, value added amount and the size of company. Therefore, even when the company runs a loss, Size Based Business Tax is levied.
In order to avoid the Size Based Business Tax, the capital should be less than 100 million yen.
(5) Consumption Tax – Small Sized Enterprise is exempted from Consumption Tax Liability
The consumption tax rate is now 8% and is supposed to increase to 10% from 1st October 2019.
The start-up whose capital is less than 10 million yen is exempted from consumption tax liability (tax exempt enterprise) for two fiscal years after the incorporation if it meets criteria below.
【1st fiscal year】
① The capital is less than 10 million yen at the beginning of the 1st fiscal year
② The start-up which is not established by a group of enterprises whose taxable sales are more than 500 million yen with the group having more than 50% stake
【2nd fiscal year】
① The capital is less than 10 million yen at the beginning of 2nd fiscal year
② Taxable sales or amount of salary payed during the first half of the previous fiscal year does not exceed 10 million yen.
③ The start-up which is not established by a group of enterprises whose taxable sales are more than 500 million yen with the group having more than 50% stake.
The capital less than 10 million yen is recommendable for the start-up.
However the tax exempt enterprises can opt to be taxable to get consumption tax refund if they purchase large amount of depreciable assets. We recommend you to consult a tax accountant on this point.
Typical capital amount for SMC and SME
According to statistics of Ministry of Internal Affairs and Communications, average amount of start-ups is around 5 million yen.
In order to enjoy various tax benefits described above, it is strongly recommendable for start-ups to incorporate their capital less than 10 million yen.
Capital amount for “Business Manager Visa”
Immigration Control and Refugee Recognition Act requires size of the start-up to hire more than two full-time resident employees. However, if its capital is more than 5 million yen, it may be accepted to meet the size without hiring two employees.
It is recommendable capital to be more than 5 million yen from this point.