MARKET FAQ

There is no fundamental difference in how taxes are calculated. The difference arises when you choose a branch: setting up a branch brings your Taiwan head office itself into Japan's tax system, with both an advantage and a cost. You can establish your presence in Japan in one of two ways: as a Japanese branch of your Taiwanese company, or as a separate Japanese company. The commonly used Japanese company forms are the kabushiki kaisha (KK) and the godo kaisha (GK), and both are independent Japanese corporations. Taiwanese startups entering Japan generally establish either a KK or a GK. Whether you set up a branch, a KK or a GK, there is no fundamental difference in how corporate tax and consumption tax are calculated. You do not need to run repeated comparisons to determine which form produces the lowest tax bill.

The real difference between the two routes is not the tax rate but who the taxpayer is. If you set up a KK or a GK, that Japanese company is itself the taxpayer. If you set up a branch, the branch is not an independent company under Japanese tax law, and the taxpayer is your Taiwan head office itself. Both the advantage and the cost described below stem from this distinction. If you choose the branch form, note that a Japanese branch adds one advantage and one cost. The advantage is that you can allocate your Taiwan head office's expenses, such as general and administrative expenses, to the Japanese branch. The cost comes in two parts. First, in a tax audit the Japanese tax authorities will ask you to produce your Taiwan head office's books to show that the allocated expenses are reasonable. If you cannot demonstrate that the allocation is reasonable, some or all of the allocated shared expenses may be denied as deductible expenses. This increases the Japanese branch's taxable income and may result in an additional tax assessment, including an understatement penalty and interest for late payment. Second, for a branch, eligibility for consumption tax exemption is determined by the amount of your Taiwan head office's stated capital, not by the size of the Japanese branch.

1. When you decide the form, register your Japanese operation as a separate Japanese company. Either a KK or a GK works. The question to settle is a different one: is there a specific reason why it must take the form of a branch? If there is not, do not choose a branch, and the Japanese tax authorities will not ask for your Taiwan head office's books. 2. If there is such a reason, build two things into your plan before you start. First, for every head office expense you allocate from Taiwan to the Japanese branch, document, at the time of each allocation, a clear and reproducible basis for calculating it, rather than trying to reconstruct it during a later tax audit. Second, when you prepare your first-year budget, do not assume that the branch will qualify for consumption tax exemption.

Case: A Taiwanese company established a branch in Japan to keep its initial costs down. During a tax audit of the branch, the Japanese tax authorities asked the company to provide detailed financial records from its Taiwan head office and demonstrate that the shared head-office expenses allocated to the Japanese branch were reasonable. The company provided the records, but explaining the basis for the allocation took longer than it had expected.

If no other requirements apply, set the initial stated capital of your Japanese subsidiary at 9.99 million yen or below. Choose the actual amount based on the working capital the business requires and the level of credibility it needs with customers, financial institutions, and other stakeholders. Two taxes drive this decision. One is consumption tax. The other is the per capita levy on corporate inhabitant tax (均等割), a fixed annual amount payable whether or not the company is profitable. Both taxes use 10 million yen as a threshold, although they apply the boundary differently. For consumption tax, what matters is whether the stated capital recorded in the corporate registry is below 10 million yen. If you set the stated capital at 9.99 million yen, your Japanese subsidiary will neither file nor pay consumption tax for up to its first two fiscal years. If you set it at exactly 10 million yen, its consumption tax obligations begin in the first fiscal year. The per capita levy is based on the combined amount of stated capital and capital reserve. The threshold is 10 million yen or less, so a combined amount of exactly 10 million yen remains in the lowest bracket. In Tokyo's 23 special wards, a company whose stated capital and capital reserve total 10 million yen or less and that has 50 or fewer employees pays 70,000 yen a year. Above 10 million yen, the annual levy rises to at least 180,000 yen. This guidance assumes that no other threshold must be met first. The most common example is the "Business Manager" status of residence (経営・管理), which a foreign national needs when establishing and personally managing a company in Japan. Since October 2025, this status has required stated capital or total contributions of at least 30 million yen. Because that amount is far above the suggested ceiling above, this guidance does not apply if you need this status of residence. Other constraints include sector-specific licensing requirements, such as those for a fee-charging employment placement business, which has separate asset requirements.

The per capita levy is a fixed local tax that does not vary with profits. In a loss-making year, corporate tax can be zero, but the per capita levy remains payable. Therefore, if the combined amount exceeds 10 million yen, the resulting increase in the levy is not a one-off cost. It is a recurring annual expense.

1. When determining the initial capital, check two figures together. Keep the stated capital at 9.99 million yen or below, and choose the actual amount based on the working capital and business credibility you need. Also keep the combined amount of stated capital and capital reserve at 10 million yen or below. Both amounts are set when the company is registered. Changing them later requires a formal capital increase or reduction. 2. Before reducing the amount, answer two questions. Do you need the "Business Manager" status of residence? Does your business require a sector-specific licence? If either answer is yes, base the amount on that requirement first.

Case: A Taiwanese parent company wanted to strengthen its new company's credibility with Japanese customers and set the stated capital of its Japanese subsidiary at exactly 10 million yen. Because that amount was not below 10 million yen, the subsidiary was liable for consumption tax from its first fiscal year. The company discovered this only after incorporation, by which time the exemption was no longer available.

They may be granted, but qualifying for Japan's preferential tax treatment is extremely difficult in practice. A stock option gives an employee the right to purchase shares in the future at a predetermined price. Japan provides preferential tax treatment for certain stock options, based on the premise that the underlying shares are issued by a Japanese company. Shares in a Taiwanese parent company do not meet that premise. Japan's tax-qualified stock option regime determines how much an employee ultimately receives. Without preferential treatment, the employee is taxed on the exercise gain as employment income under aggregate taxation when the options are exercised. With preferential treatment, taxation is deferred until the employee sells the shares and realizes the proceeds, and the gain is taxed under separate self-assessment taxation at a lower rate.

Japan's preferential tax treatment is tied to the company that issues the underlying shares. The regime was designed around stock options over shares issued by Japanese companies. The FY2024 tax reform did ease the requirements for tax-qualified stock options, but none of those changes addressed options over shares in a foreign parent company. For stock options over shares issued by a foreign company, the regime does not set out clear eligibility criteria. Meeting the requirements involves complex valuation work and procedures.

1. If you want to use stock options to retain employees in Japan, structure the plan around shares in the Japanese subsidiary itself. Do not grant options over shares in the Taiwanese parent company. 2. Because the plan affects your company's equity structure, involve Japanese tax and legal advisers while the compensation plan is still being designed. Once employees are ready to exercise their options, it will be too late to redesign the plan.

Case: A Taiwanese parent company granted the country manager of its Japanese subsidiary stock options over the parent company's own shares. The plan did not meet Japan's tax-qualification requirements. As a result, when the manager exercised the options, the exercise gain was taxed as employment income under aggregate taxation, at a top rate of 55%. Had the plan been structured to meet Japanese requirements before the options were granted, the gain would instead have been taxed when the shares were sold, under separate self-assessment taxation at approximately 20%.

Japanese withholding tax is deducted when the dividend is paid. Without the required filing, the rate is 20.42%. If the notification form is filed by the deadline, the rate is reduced to 10%. The Japanese subsidiary files the form with the competent tax office. The deadline is the day before the dividend payment date. The form's official Japanese name is 外国居住者等所得相互免除法に関する届出書. Use this exact name when requesting the form. Dividends paid by the Japanese subsidiary to the Taiwanese parent are subject to a reduced 10% withholding rate under the Private-sector Tax Arrangement with Taiwan. There is no ownership-percentage or holding-period requirement. If the form is not filed by the deadline, tax is initially withheld at 20.42%. A separate refund claim must then be filed to recover the excess withholding, and processing the refund takes time.

The reduced rate applies only if you complete the required filing. The tax office will not apply it automatically simply because you meet the underlying conditions. If the form has not reached the tax office by the day before the dividend payment date, tax will be withheld at 20.42% when the dividend is paid. Japan and Taiwan do not have a government-to-government tax treaty. This relief arises from the Private-sector Tax Arrangement with Taiwan and the Japanese domestic legislation that gives effect to that arrangement. The Japanese name of the form refers to the domestic statute, not to a tax treaty. Check the exact name when obtaining the form to avoid using the wrong one.

1. When the board considers the dividend resolution, include the filing timetable on the same agenda. The deadline is the day before the dividend payment date, not the date of the resolution or the annual tax return filing period. 2. Before filing, check whether the notification form will be filed by the deadline. The 10% reduced rate has no ownership-percentage or holding-period requirement; timely filing is required.

Case: A Japanese subsidiary paid a dividend to its Taiwanese parent company for the first time but failed to file the notification form. The subsidiary therefore withheld tax at the default rate of 20.42%, and the amount received by the parent company was substantially lower than expected. They later filed a refund claim for the excess withholding, but the refund was not credited for several months. This temporarily affected the Taiwanese parent company's cash management.

A contribution in kind of technology or IP is treated as a transfer of the asset from the Taiwanese parent to the Japanese subsidiary. Any unrealized gain (gain on transfer) arises at the Taiwanese parent. Putting in technology, software or patents instead of cash is a contribution in kind. Because it is treated as a transfer, the asset must be valued, and Japanese transfer pricing rules require an appropriate fair-market-value assessment. Even within the same corporate group, the value must match the price you would charge an unrelated third party. If the assessed market value is higher than the technology's book value, the difference is an unrealized gain (gain on transfer) arising at the Taiwanese parent. In the ordinary case where the Taiwanese parent has no permanent establishment (PE) in Japan, that gain is not Japan-source income and is not taxed in Japan. Whether it is taxed is instead a matter of Taiwan tax law. In practice, this route is not commonly taken. The Taiwanese parent company makes a cash contribution as usual, and the Japanese subsidiary then uses that cash to buy the technology from the Taiwanese parent company. Alternatively, the Japanese subsidiary enters into a license agreement with the Taiwanese parent company and pays a royalty. This approach is far simpler from a procedural standpoint.

The critical point is how the price is set. The Japanese tax authorities look at the transaction from a transfer pricing standpoint. Even inside the same group, the value must match the price you would charge an unrelated third party. So if you contribute technology, you must first obtain a valuation from an outside specialist, and obtaining that valuation is costly. Even after you obtain it, you carry the risk that the tax authorities reject it. Both burdens arise before the company begins operations.

1. When you decide how to structure the contribution, you should drop the option of contributing technology or IP and use a cash contribution instead, unless there are special circumstances. 2. Have the Japanese subsidiary use that cash to buy the technology from your Taiwanese parent company, or enter into a license agreement with your Taiwanese parent company and pay a royalty.

Case: A Taiwanese technology company planned to contribute the source code of its own software in kind and to establish its Japanese company on that basis. It then found that a proper valuation of the intangible asset would cost several million yen in specialist fees, and that the Japanese tax authorities could reject that valuation on transfer pricing grounds. In light of those two issues, the company abandoned the contribution in kind. It set up the company with a minimal cash contribution instead, and the Taiwanese parent company and the Japanese company entered into a license agreement for the software, with a royalty based on sales.

Japanese tax law sets two thresholds for stated capital, 10 million yen and 100 million yen. Once a threshold is crossed, the benefits attached to it do not merely decrease. They cease to apply. The first threshold is 10 million yen. If stated capital exceeds this threshold, your Japanese subsidiary ceases to qualify as a tax-exempt business for consumption tax, and the per capita levy on corporate inhabitant tax (均等割) also increases. The per capita levy is a local tax payable every year regardless of profit or loss. The second threshold is 100 million yen. If stated capital exceeds this threshold, all tax incentives available to small and medium-sized companies cease to apply. These include (1) the reduced corporate tax rate, (2) the deduction limit for entertainment expenses, (3) the special treatment allowing low-value depreciable assets to be expensed in a single year, and (4) the ability to offset carried-forward tax losses against 100% of current-year income. The company also becomes subject to enterprise tax on a pro forma basis (外形標準課税). This tax is based on business scale, measured by added value and capital, rather than on profitability. It is therefore payable even in a loss-making year.

During a capital increase, founders often focus on valuation and ownership percentages. However, as the stated capital recorded in the corporate registry increases, so do the taxes payable regardless of profitability. In Japan, once stated capital crosses a threshold, the relevant incentives for small and medium-sized companies do not merely decrease. They cease to apply altogether. Pay particular attention to enterprise tax on a pro forma basis. Because it is based on business scale rather than earnings, it applies even in a loss-making year. A startup that is not yet profitable but has a high level of stated capital may overlook this point.

1. Before you finalize the terms of your next capital increase, calculate the stated capital that will be registered after the increase, and check whether it crosses the 10 million yen threshold or the 100 million yen threshold. 2. If either threshold will be crossed, reassess whether that level of stated capital is genuinely necessary, for example to obtain bank financing or to establish credibility with business partners.

Case: A Taiwanese startup whose Japanese business was performing well received a capital injection of 150 million yen from its Taiwanese parent company to fund a large promotional campaign. Its stated capital therefore exceeded 100 million yen, and the company not only lost the benefits for small and medium-sized companies but also became subject to enterprise tax on a pro forma basis. It made a large loss that year because of the upfront spending, but local enterprise tax calculated on its capital and added value still amounted to several million yen. The company later carried out a capital reduction involving no distribution to shareholders, bringing its stated capital back to 100 million yen or less.

Of the residual assets distributed on liquidation, the portion that exceeds the amount of stated capital, etc. (資本金等の額) is treated as a dividend under Japanese tax law. The amount of stated capital, etc. is the capital that shareholders paid into the Japanese subsidiary. It is not necessarily limited to the stated capital shown in the corporate registry. When shares are issued, any part of the payment that is not recorded as stated capital is recorded as capital reserve, and that part is included as well. On liquidation, subtract this amount from the total you plan to distribute to your Taiwanese parent company. The remainder corresponds to profits earned and retained by the Japanese subsidiary, and is treated for Japanese tax purposes as a deemed dividend (みなし配当). Because that portion is treated as a dividend, the Private-sector Tax Arrangement with Taiwan applies to it in the same way as it applies to an ordinary dividend. That arrangement was concluded between private-sector bodies on each side. It is not a government-to-government treaty. If the requirements are met, the Japanese withholding tax rate on that portion is reduced to 10%. For the procedure, see the question on dividends paid by a Japanese subsidiary to a Taiwanese parent company.

When you close a company, it is easy to assume that remitting the remaining funds is the end of the matter. Japanese tax law does not look at the act of remitting. It looks at what the funds consist of. The distribution is divided at a particular threshold, and the portion above that threshold is taxed as a dividend. Where that line falls determines how much tax must be paid in Japan before the funds reach Taiwan.

1. Before you decide to liquidate, calculate two figures. The first is the amount of stated capital, etc., which is the stated capital shown in the corporate registry plus the portion recorded as capital reserve. The second is the total you plan to distribute to your Taiwanese parent company. The difference between them is the amount subject to tax. 2. Whether that amount is taxed at 10% or at the default rate depends on whether you complete the required filing by the deadline. See the question on dividends for the procedure, and build it into your timetable when you decide to liquidate.

There are several one-off statutory costs of incorporation, with amounts or calculation methods prescribed by law. Other variable costs, such as professional fees, may also arise. What is easy to underestimate is the pair of recurring monthly costs. First, the one-off costs. The incorporation registration of a kabushiki kaisha (KK) is subject to registration and license tax. The amount is 0.7% of the stated capital, subject to a minimum of 150,000 yen. For a godo kaisha (GK) the rate is the same, with a minimum of 60,000 yen. A KK must also have its articles of incorporation notarized. Where the stated capital is 3 million yen or more, the notarization fee is 50,000 yen. A GK's articles of incorporation do not require notarization. If the articles are prepared on paper, stamp tax of 40,000 yen applies. Electronic articles are exempt. Next, the fixed costs that begin in the first year. 1. Tax advisory fees, including bookkeeping services. In Japan, monthly bookkeeping, payroll processing, year-end tax adjustment and the corporate tax return are effectively impossible to handle in-house. From the first year onwards, annual fees for a certified public tax accountant start at several hundred thousand yen and are a fixed cost. 2. The employer's share of social insurance premiums. If you pay directors' remuneration or salaries, the company must pay roughly 15% of that amount each month on top of the remuneration itself. This is not a tax, but it is a heavy fixed cost in cash flow terms. There is also the per capita levy on corporate inhabitant tax (均等割), which is payable every year regardless of profit or loss. For the amounts and brackets, see the question on how much initial capital to set for your Japanese subsidiary.

When Taiwanese startups budget for Japan, they usually calculate the incorporation costs carefully but leave out the fixed costs of the first year. These two costs are easy to underestimate because they behave differently from incorporation costs. You pay incorporation costs once and they are done. Tax advisory fees and social insurance premiums have to be paid every month, starting before the company has any revenue. Social insurance premiums are not even a tax, yet in cash flow terms they are just as heavy a fixed cost.

1. When you build the budget, separate the one-off costs of incorporation from the fixed costs that arise every month. Do not put them in the same column. 2. In the fixed-cost column, include the tax accountant's fee and the employer's share of social insurance premiums from the outset. Both start in the first year and do not wait until the company has revenue.