Unless the above process has been completed in accordance with laws, any company cannot be given its legal status as a corporation in Japan (A general incorporation, the Company Act, Article 49, 579). This seems to be well known. So, the founders of a company usually entrust the legal procedure to legal professional (such as an attorney, a judicial scrivener).
Following the incorporation procedure, several registrations/applications to the tax office is required. However, some companies do not take any action until the first fiscal year end or tax return filing. So, today’s topic is tax procedures entailed by the incorporation.
There are some points you should consider before incorporating your company.
You might think “too late”. But if you think “doing business through a company structure may save tax than a sole proprietor”, you would better to re-examine if it is really applicable to your own case (please see the blog “Setting up a “Personal Company in Japan” for more detail).
Any company must prepare financial statements (such as Balance Sheet, Profit & Loss Statement) for every fiscal year (please see the blog “For whom financial statements be prepared?” for more detail).
In addition, tax filings for the Corporation Tax and the Consumption Tax etc. based on the financial statements are also needed.
These filings require time and effort in any event whether yourself do it or entrust it to a tax accountant.
You can choose any date as fiscal year ending date of your company at your discretion. So, if you choose appropriate timing for the year end not disturbing the business, you would be able to devote enough time and effort for the closing process.
The fiscal year has to be defined by the articles of incorporation and the change is subject to resolution at general shareholders’ meeting, but registration is not necessary. In a sense, you can easily change the fiscal year as long as the shareholders consent to it.
Accordingly, you may change it after experiencing a few year-end closing processes.
Not necessarily means the bigger the better.
If a company is established with capital of JPY 10 million or more, the company has to file the Consumption Tax return from the initial fiscal year.
Besides, there are many tax relief measures for the Corporation Tax, Corporate Inhabitant Tax and Enterprise Tax, which are determined by the capital amount.
Unnecessary large amount of capital may end up with losing tax saving opportunities.
You should consider costs to keep the company running.
A company has to bear the statutory welfare costs (such as of health insurance, public pension, unemployment & accident compensation insurance) for its employees.
If you are not going to hire any employee for a while, you may be better off to conduct the business as a sole proprietor so that you remain in the national medical care & pension system.
Since such judgment can be complex, depending on amount of salary paid by the company, number of dependent family member and so on, you would better to consult with a Social & Labor Insurance Specialist (Shakai-hoken Roumushi).
Whenever there is any change in the registered item of a company, registration for the change is required. If you entrust the registration to the legal professionals, it incurs cost.
If you have any plan entails change of the registration in foreseeable future after the incorporation, such as office relocation, change of directors, capital increase, change of the company name, you should take them into budget for the initial fiscal year.
When your company is a joint-stock company (Kabusiki Kaisha or KK), the company has to hold a general shareholders’ meeting after every fiscal year end regardless of size of the company. In principle, you have to prepare agenda, convocation notice, minutes of the meeting even if the company has only one shareholder.
Even though some procedures can be omitted with unanimous consent by all of the shareholders, you would still have to devote time and effort to arrange formality of such processes.
As for Membership Company (LLC, Limited Partnership Company, General Partnership Company), general members’ meeting is not necessarily required, so you can design organization of the company more flexible than KK.
When the company’s shareholders likely to consist of just yourself or a few of your family or friends, the Membership Company may be suitable to save the costs and efforts.
Preparation of corporate tax returns requires more time and efforts as they have more volume and detailed pages compared with the personal income tax return.
In addition to complexity of the corporate tax returns per se, supplemental materials (such as breakdown of accounts stated in the company’s financial statements, explanation of business conducted by the company) are also required even though they may not be directly concerned with calculation of taxable income or tax liability.
Besides, as the taxes should be computed based on the financial statements, some items (such as depreciation, bad debt reserve) have to be determined during the course of fiscal year end closing process considering tax implication.
Such process requires lots of expertise. Entrust of such process to a tax accountant incurs costs.
To save your energy and the costs, you should discuss with the tax accountant to what process should be done by yourself and what you want him/her to do.
Leaving everything on the tax accountant should be expensive.
Then, the main topic of today.
The followings are major procedures. Some of them should be done timely manner to apply from the initial fiscal year.
To be filed in two months from date of the incorporation.
You have to file the notification with the tax office, prefecture and municipality office where the company’s offices are located.
Formats of the notification document to the tax office and the local authorities (prefecture and municipality) are different. Each local authority provides own format, but electric filing is done with uniformed format.
Discretionary application to be filed with the tax office.
If a company want to file the Blue Tax Return (BTR) from the initial fiscal year, the application should be filed by either earlier of the date 3 months elapsed after the incorporation or ending date of the initial fiscal year.
Generally speaking, the initial fiscal year likely ends up with loss because start-up cost surpasses its turnover.
To carryforward the loss (tax loss) incurred for the initial fiscal year to the following years so that it can be offset against taxable income of those years, the company need to file the BTR for such initial year. Therefore, the company would better to file this application immediately after the incorporation (please see “The “Blue” Tax Loss” for more information).
When the company want to start filing of the BTR from the second year onward, the application should be filed before beginning date of the applicable year (i.e., advance application).
Discretionary application. It should be filed before beginning date of the first applicable fiscal year. The company firstly should file the application with the tax office then, after approval by the director of the tax office, file notification of the approval with the respective local offices.
The application to the tax office and the notification to the local (prefecture, municipality) offices are made in different document format.
Each local authority provides own format, but electric filing is done with uniformed format.
The filing due date of the corporate tax returns is principally within 2 months from ending date of every fiscal year. However, some companies may not be able to meet such dead line when their articles of incorporation provide that annual general shareholders’ meeting be held within 3 months from every fiscal year end.
Therefore, one month extension of the filing due date is granted to such companies, however, provided this application has been filed in advance.
As for a joint-stock company (KK), the general shareholders’ meeting is always necessary. Therefore, if its articles of incorporation provide that the meeting be held in the 3 months, the application is legitimate and should be approved.
However, if the meeting shall be held in the 2 months, the company needs to file the application based on “extraordinary reason” why the company cannot file the tax returns in the 2 months. But it is highly likely that the tax office rejects the application since such reason is regarded as breach of the articles of incorporation.
Besides, the application from the Membership Company of which the articles of incorporation has no provision of the general members’ meeting is also likely rejected unless it is based on legitimate “extraordinary reason”.
Notification of the selected valuation method. This notification should be filed with the tax office when a company makes selection of the valuation method for inventories at its discretion.
You may be able to save the corporate taxes by making selection of valuation method of inventories (see the blog “Inventory Valuation” for the detail).
The notification must be made on or before the tax return filing due date of the fiscal year for which the selected method initially applies. So, I suppose it will give you enough time for making selection even for the initial fiscal year.
Notification of the selected depreciation method. This notification should be filed with the tax office when a company makes selection of the depreciation method at its discretion.
The notification must be made on or before the tax return filing due date of the fiscal year for which the selected method initially applies.
When a company become to pay salary to its employee, the company need to file “Notification of establishment of payroll office” with the tax office.
If the company has multiple offices paying salary, the notification should be filed with each tax office of the jurisdiction where the respective offices are located.
The notification has to be filed in one month from the establishment of the payroll office.
Discretionary application. A company needs to withhold income taxes when it pays salary.
The company has to pay the income taxes withheld at source to the tax office by 10th day of the following month to the month the salary was paid. However, for relatively small businesses (with salary payee of less than 10), there is an exception that the payer may pay aggregated amount of the withheld taxes to the tax office twice a year (July 10th as for the taxes withheld during January through June, January 20th of the following year as for July through December).
This exception applies to salaries paid in or after the following month to the month this application was filed with the tax office in the jurisdiction where concerned payroll office is located.
Discretionary selection to be a Taxable Business Operator (TBO). It requires deliberate judgment.
A company with capital of less than JPY 10 million is automatically exempt from tax filing obligation of the Consumption Tax for the first two fiscal years from the incorporation.
However, some companies may be better off to be a TBO so that they can file the tax return to claim refund of the Consumption Taxes paid on purchased goods or services. For instance, if a company is going to make large capital investment or spend sizable start-up expense in the initial fiscal year.
If such a company wants to be a TBO from the first fiscal year, it should file the notification of selection to a TBO with the tax office by end of the first fiscal year.
When the company wants to be a TBO from or after the second fiscal year, the notification should be filed before beginning date of the applicable fiscal year.
Whether or not the selection brings tax benefit is speculated based on projection of revenues and expenditures after the selection. Accordingly, there may be the case where you face to an adverse outcome despite positive forecast. Such risk is inevitable especially if the selection is made under the situation where sensible projection is not available such as right after the incorporation.
This is also discretionary selection requires deliberate judgment.
The “Simplified Filing Method” (SFM) is tax filing method to compute the Consumption Tax liability simply based on gross sales amount.
It is the exceptional method applicable only when the taxable sales amount for the base period is JPY 50 million or less however the computation always result in tax payable.
So, applying SFM to the fiscal year when principle method would result in tax refund attracts obvious disadvantage.
Contrary, there may be the fiscal years when you can save the tax payable making the good use of SFM.
A newly established company needs to consider application of SFM together with selection of TBO aforementioned. As same to the selection of TBO, application of SFM involves inevitable risk that it may attract adverse tax implication despite positive projection.
If a newly established company wants to apply SFM to the fist fiscal year, it should file the notification for SFM with the tax office before the end of the first fiscal year.
However, SFM may not be applicable if the company had purchased a merchandise or a fixed asset of which unit cost exceeding JPY 1 million.
The judgment for application of SFM involves more uncertain factors than selection of TBO, therefore it would need more deliberate discussion.
There are lots of things to be discussed before and right after the incorporation.
I recommend that you consult to a tax accountant at earlier stage.