News Details

2024.07.31

Tax Reform for 2024 Expansion of JCT Obligations for Foreign Enterprises

List of news

1. Introduction

In this News, we will mention major revisions related to the Japanese consumption tax (JCT) exemption for foreign enterprises (including non-resident business operators).
Regarding the determination of consumption tax exempt enterprises, the 2024 Tax Reform introduced more strict measures to foreign enterprises. This reform will apply to the tax periods beginning on or after 1 October 2024. Foreign enterprises which were previously tax-exempt enterprises should assess whether the new rules affect their operations in Japan.

2. Current rules

In principle, for JCT purposes, both domestic enterprises and foreign enterprises should be equally taxed on taxable transactions conducted in Japan. However, under the current rules, there are cases where foreign enterprises or newly established subsidiaries of foreign companies are treated as tax exempt enterprises regardless of their business size. 
This reform will have a great impact on the business operations of overseas subsidiaries of domestic companies, foreign companies, and Japanese subsidiaries of foreign companies.

3. Revisions for newly established companies with no base period

① Due to the 2024 Tax Reform, even if a foreign company has a base period, it should be deemed that it has no base period at the timing of commencing business in Japan. That is, the determination of whether a foreign company is a taxable enterprise or exempt enterprise will be judged in accordance with the special provisions for both newly established companies with no base period and specified newly established companies. 

② Due to the revised special provision for specified newly established companies, in addition to the current controlling standard (a foreign company controlled by a parent company whose taxable sales exceed JPY 500 million is subject to JCT), a foreign company controlled by a parent company (including a foreign parent company) whose global income exceeds JPY 5 billion (including overseas income) is also subject to JCT.
 
4. Revision to the specified period rule

Due to this tax reform, when judging the JCT obligations, foreign enterprises are no longer allowed to apply the amount of wages paid to residential employees during the specified period as an alternative of the total taxable sales (exceeding JPY 10 million). 

5. Conclusion

In this News, we mentioned the 2024 Tax Reform that has expanded the scope of JCT obligations for foreign enterprises.
Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us below.

(Reference / in Japanese)
Ministry of Internal Affairs   Outlines of 2024 Tax Reform from page 70

National Tax Agency   Notice Regarding Consumption Tax Revisions

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