permanent establishment There are three types of PE. Of those,The place itself becomes the PEwhich is what is called a "branch PE" in practice (the term "branch PE" does not appear in the statutory provisions; Article 2, Item 19 of the Corporation Tax Act)(a)refers to the things listed in).

Location of the provision

Article 2, Item 12-19 of the Corporation Tax Act. I will read from the main clause and the proviso.

Permanent establishment means any of the following:However, in cases where a convention concluded by our country for the avoidance of double taxation or the prevention of fiscal evasion with respect to taxes on income provides otherwise than as set forth in the following, the provisions of that convention shall apply. foreign corporation shall be the permanent establishment provided for in that treaty (limited to those located in Japan).

(a) located in Japan of a foreign corporationbranch, factory, or other fixed place of businessthose specified by a Cabinet Order

The treaty takes precedence.For foreign corporations that are subject to a tax treaty, the definition of a PE in the treaty applies as the definition of a PE under domestic law. You cannot reach a conclusion by reading domestic law alone.

A provision with the same structure can also be found in Article 2, Paragraph 1, Item 8-4, Sub-item (a) of the Income Tax Act.The division is not between "individuals and corporations," but rather between the tax categories of "income tax and corporate tax."The subject on the Income Tax Act side isNon-resident or foreign corporationAnd foreign corporations are also included (which comes into play in situations such as withholding tax).

places listed in the Cabinet Order

Article 4-4, Paragraph 1 of the Order for Enforcement of the Corporation Tax Act. The article title is "(Scope of Permanent Establishments)".

(i)Place of business management, branch office, office, factory, or workshop

(ii)mines, oil or gas wells, quarriesplaces to extract other natural resources

(iii)A fixed place where other businesses are conducted

Number 3 is acting as the catch basin.Even in places not named in items 1 and 2, they are included if they fall under a "fixed place for conducting business."

Article 1-2, Paragraph 1 of the Income Tax Act Enforcement Order also lists the items in the same wording.The only difference is the definition provisions cited in the paragraph header.(The Act is "Article 2, Item 12, Sub-item (a) of the Act", and the Cabinet Order is "Article 2, Paragraph 1, Item 8-4, Sub-item (a) of the Act".)

There are cases where PE does not occur even if space is available

Paragraph 4 of the same Article excludes places where only certain activities are conducted. The main clause limits the effect of the exclusion to "the places specified by Cabinet Order provided for in paragraph 1."and those specified by Cabinet Order provided for in the second paragraph) (i.e., long-term construction sites, etc.).

Each itembelonging to the said foreign corporationa facility used solely for the storage, display, and delivery of goods and products, a location where inventory is held exclusively for such storage and other similar purposes,Purchase of goods or merchandiseOr places held solely for the purpose of collecting information.

The decisive factor is not each item, but the proviso.

However, the activities listed in the respective items (in the case of the activities listed in item (vi), the entire activities at the location set forth in the same item) are of the said foreign corporationlimited to cases where they are of a preparatory or auxiliary nature to the execution of the business.

Even if it falls under the wording of each item,Unless it is preparatory and auxiliary to that business, it will not be excluded.It's the same even if the name is a warehouse.

Furthermore, Paragraph 5 blocks the tactic of dividing an activity across multiple locations or related parties and making each appear preparatory or auxiliary.It is not an unconditional ban.Those activities "only when fulfilling a complementary function as part of an integrated operation, and (ii) whether either (1) another location (the same location in Item 2) constitutes a PE of the company or a related party, or (2) the combination of fragmented activities as a whole is not of a preparatory or auxiliary character,when any of the following applyto disable the exception in paragraph 4.

What happens when PE occurs?

Article 141, Item 1 of the Corporation Tax Act.The tax base consists of two parts.

(1) Foreign corporations having a permanent establishment: the following for each business year: domestic source income

(a) domestic source income set forth in Article 138, paragraph 1, item 1 (Domestic Source Income)

(b) domestic source income set forth in Article 138, paragraph 1, items (ii) to (vi) (excluding those that fall under domestic source income set forth in item (i) of that paragraph)

Iincome attributable to permanent establishment, RO gaOther domestic source income not attributable to a PEIt is.PE-attributable income That's not all.

Tax returns are under Article 144-6 of the Corporation Tax Act.There is a proviso.

However, as for the amount of income pertaining to the domestic source income prescribed in items (i) and (ii),All inclusive tax treatypursuant to the provisions of …… or other provisions specified by Cabinet Ordercases where corporate tax is not imposedis not required to submit the tax return in question.

Points that require care in practice

• Is a desk in a serviced office or coworking space a "fixed location"?The constancy of place and the degree of control are called into question.
• Where do the employees live?There is an issue of whether it falls under a "fixed place of business"
• If you are placing only the server,The necessity of human involvement is in question.
• Places that will only be used for a short time?Interpretation of "certain"
• How to read a corporation of a country with which a treaty exists.Under the proviso of Item 12, Column 19, the definition in the treaty shall prevail.
• Which article applies to sole proprietors and non-residents?Article 2, Paragraph 1, Item 8-4 of the Income Tax Act and Article 1-2 of the Order for Enforcement of the Income Tax Act

Just because you don't have a branch office in Japan doesn't mean you don't have a PE (Permanent Establishment).The decision is determined by the application of statutory provisions, not by the name of the location. Please consult us at the stage of considering a foreign corporation's expansion into Japan.

Legal basis

• Article 2(xii-19) of the Corporation Tax Act (Permanent Establishments): opening proviso and subitem (a)
• Article 4-4(1), (4), and (5) of the Order for Enforcement of the Corporation Tax Act (Scope of Permanent Establishments)
• Article 138(1)(i) of the Corporation Tax Act (PE-Attributable Income), Article 141(i) (Taxable Base), and Article 144-6 (Final Returns)
• Article 2(1)(viii-4)(a) of the Income Tax Act
• Article 1-2(1), (4), and (5) of the Order for Enforcement of the Income Tax Act (Scope of Permanent Establishments)

This article does not cover treaty definitions. Individual determinations require confirmation of the actual activities at the location.