Tax Guide for Small Business Owners in Japan

Business Tax (個人事業税)

Individual business tax (個人事業税) is a prefectural tax levied on income from certain types of business activities. It is separate from national income tax and resident tax.

Tax Rates by Industry

Rates vary depending on your industry classification. Most businesses fall into one of three tiers:

The ¥2.9 Million Deduction

Every sole proprietor receives an automatic deduction of ¥2,900,000 from their business income before business tax is calculated. This means if your business income is ¥5,000,000, the taxable base for business tax is only ¥2,100,000.

Importantly, some types of income are exempt from business tax entirely. Writers, artists, and certain creative professionals may not be subject to this tax. If you are unsure whether your industry is taxed, check with your prefectural tax office.

Payment Schedule

Business tax is billed by your prefecture, typically in August. If the amount exceeds ¥10,000, it is split into two installments due in August and November. You will receive a payment slip by mail — you do not need to file a separate return for business tax.

Consumption Tax Threshold (¥10 Million Revenue)

Japan’s consumption tax (消費税) is a value-added tax currently set at 10% (8% for food and certain necessities). As a business owner, you may need to collect and remit this tax.

Who Needs to Collect?

You become a taxable business operator (課税事業者) if your taxable sales in the base period (基準期間) exceed ¥10,000,000. The base period is two fiscal years prior. For example:

• If your 2024 revenue exceeded ¥10M, you become taxable in 2026.
• There is also a special provision: if taxable sales exceed ¥10M in the first six months of the prior year, you become taxable the following year.

What You Owe

The consumption tax you owe is calculated as: tax collected on sales minus tax paid on purchases (input tax credit). For example, if you collected ¥500,000 in consumption tax from clients and paid ¥200,000 in consumption tax on business expenses, you remit ¥300,000.

Invoice System (インボイス制度)

Since October 2023, Japan has implemented the Qualified Invoice System (適格請求書等保存方式), commonly called the Invoice System (インボイス制度). This system fundamentally changed how consumption tax credits work.

How It Works

Under the invoice system, businesses can only claim input tax credits on purchases that come with a qualified invoice (適格請求書) issued by a registered invoice issuer. This means:

• If your clients are taxable businesses, they will want qualified invoices from you to claim their input tax credits.
• To issue qualified invoices, you must register as an invoice issuer (適格請求書発行事業者) with the tax office.
• Registering as an invoice issuer automatically makes you a taxable business operator, even if your revenue is below ¥10M.

Who Needs to Register?

Registration is generally recommended if:

• Your clients are businesses (B2B) that need qualified invoices.
• You are already a taxable business operator.
• Your competitive position depends on providing invoices to corporate clients.

If you primarily serve individual consumers (B2C), registration may not be necessary, since consumers cannot claim input tax credits.

Simplified Taxation (簡易課税)

If your taxable sales are ¥50 million or less, you can elect the simplified taxation system (簡易課税制度). Instead of tracking actual input tax on every purchase, you apply a deemed purchase ratio (みなし仕入率) based on your industry.

Deemed Purchase Ratios by Industry

For example, a freelance consultant (Type 5) with ¥8,000,000 in revenue would calculate consumption tax as: ¥800,000 (tax collected) minus ¥400,000 (deemed input: 50% ratio) = ¥400,000 to remit.

Record Keeping Requirements

Proper record keeping is not optional — it is legally required and enforced through audits. Here is what the law expects:

• Blue Return filers: Must maintain double-entry bookkeeping records including a general journal (仕訳帳), general ledger (総勘定元帳), and produce a balance sheet and income statement. Records must be kept for seven years.
• Consumption tax records: If you are a taxable business, you must retain qualified invoices and records of both sales and purchases for seven years.
• Electronic records: Under the revised Electronic Books Preservation Act (電子帳簿保存法), electronic transactions (emails, PDFs, online receipts) must be preserved in electronic format. You can no longer simply print and store them.
• Receipt retention: All receipts, invoices, bank statements, and contracts must be retained for at least five years (seven for Blue Return filers and consumption tax purposes).

Common Deductible Business Expenses

Claiming legitimate business expenses reduces your taxable income. Here are the most common deductions for small business owners in Japan:

Official References

• NTA: Consumption Tax Taxable Business Operators (No. 6501)
• NTA: Simplified Taxation System (No. 6505)