Case 7
<Question>
When starting a business, could you tell me whether a corporate or an individually owned business has more tax merit?
<Answer>
It is difficult to say which style has more merit for tax purposes as it depends on the amount of taxable incomes. If a business has a strong profitability and recognizes a large profit from the beginning, starting a business by a corporation is one a viable option.
If the taxable income is over JPY 10,000,000, doing business as a corporation might be better. The Effective Tax Rate of Corporate Tax is nearly fixed however, that of Individual Income Tax adopts a progressive tax rate system. Consequently, if the taxable income is beyond a certain amount, Individual Income Tax would be higher than Corporate Tax. The following is the tax rates for each type.
Corporation
|
Brackets of taxable income |
Up to 4 million yen |
4 million yen to 8 million yen |
Over 8 million yen |
|
Corporate tax Inhabitant taxes 1. Prefectural 2. Municipal Enterprise tax Special local corporate tax |
18.00% 0.90% 2.21% 2.70% 2.30% |
18.00% 0.90% 2.21% 4.00% 3.30% |
25.50% 1.50% 3.69% 5.30% 4.30% |
|
Total tax rate |
26.11% |
28.41% |
40.29% |
|
Effective tax rate |
24.87% |
26.48% |
35.64% |
Note;
Additionally, a corporate inhabitant tax of between JPY 70,000 to JPY 3,800,000 is a per capita levy that is imposed each tax year based upon the amount of capital and the number of employees.
Individual
|
Brackets of taxable income |
Tax rates |
|
|
– |
Or under 1,950,000 yen |
5% |
|
Over 1,950,000 yen |
Or under 3,300,000 yen |
10% |
|
Over 3,300,000 yen |
Or under 6,950,000 yen |
20% |
|
Over 6,950,000 yen |
Or under 9,000,000 yen |
23% |
|
Over 9,000,000 yen |
Or under 18,000,000 yen |
33% |
|
Over 18,000,000 yen |
– |
40% |
Local tax consists of “Individual inhabitant tax” and “Enterprise tax”. Individual inhabitant tax is the collective term for prefectural tax and municipal tax on individual income. Individual inhabitant tax consists of an income-graded component and a flat-rate (fixed amount) component etc.
Taxable income for enterprise tax purposes is generally calculated in accordance with the provisions for calculating income for income tax purposes. Standard rates of individual inhabitant tax (income-graded component) are as follows.
Prefectural tax rate 4%
Municipal tax rate 6%
(1) Standard rate of tax for the flat-rate component
It is 1,000 yen for prefectural inhabitant tax and 3,000 yen for municipal inhabitant tax. Tax rates may differ from the standard tax rate depending on the local government concerned.
(2) Enterprise tax
The tax rates range is from 3% to 5%, depending on the type of business.
Comparison of total taxes in case of JPY 10,000,000 income
JPY 4,000,000 JPY 4,000,000×24.87％ = JPY 994,800
JPY 8,000,000 JPY 4,000,000×26.48％ = JPY 1,059,200
JPY 10,000,000 JPY 2,000,000×35.64% = JPY 712,800
Per capita levy on corporate inhabitant tax JPY 70,000
Total taxes JPY 2,836,800
Note:
- Effective tax rate is used.
- Additional tax rate is imposed on corporate tax for 3 years commencing April 1, 2012 of business years, so the actual effective tax rate is 38.01%.
- The minimum per capita levy of the corporate inhabitant tax is imposed in this case.
Several deductions from income are possible in the calculation of individual taxes. The total taxes are calculated with the assumption of the following deductions.
Basic deduction: JPY 380,000, Deduction for blue tax: JPY 650,000, Deduction for social insurance: JPY 800,000, Deduction for spouse: JPY 380,000,
The total deductions: JPY 2,210,000
JPY 7,790,000 ×33% = JPY 2,570,700 (National tax)
JPY 7,790,000 ×10% = JPY 779,000 (Inhabitant tax)
Flat-rate component JPY 3,000
JPY 7,790,000 × 3% = JPY 233,700 (Business tax)
Total taxes JPY 3,586,400
Establishing corporations are superior to individually owned business based upon a JPY 10,000,000 income.
Reference
Starting a business in Japan – Business operation 25/10/2012
Starting a business in Japan – Blue tax return for Income tax 11/10/201
Starting a business in Japan – Opening bank accounts and borrowing money 28/09/2012
Starting a business in Japan – Consumption tax 03/09/2012
Starting a business in Japan 18/08/2012
By Certified Public Accountant (CAP) & Tax Accountant, Koji Takahashi
Tokyo & Yokohama
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