Whether a corporation is taxable in Japan first depends onwhether it is a domestic or foreign corporation. The criterion is surprisingly simple.

Statutory definition

Article 2 of the Corporation Tax Act.

(iii) Domestic corporation: a corporation having its head office or principal office in Japan.

(iv) Foreign corporation: a corporation other than a domestic corporation.

Article 2, paragraph (1), items (vi) and (vii), of the Income Tax Act Use the Same Wording.

The Single Criterion Is Whether the Head Office or Principal Office Is in Japan.

Even a 100% Foreign-Owned Corporation Is Domestic If Its Head Office Is in Japan. This Is Calledthe head-office-location principle.

However, the Reverse Does Not Necessarily Follow Automatically.The statute says “head officeor principal office”; it does not look only at the head office.It Cannot Be Read Simply as “Register the Head Office Abroad and Become a Foreign Corporation.”

Tax Scope for Foreign Corporations

Article 141 of the Corporation Tax Act Specifies the Tax Base.

(i)permanent establishment A foreign corporation with such an establishment: the following income for each fiscal year domestic source income

(a) Domestic-source income listed in Article 138, paragraph (1), item (i)

(b) Domestic-source income listed in Article 138, paragraph (1), items (ii)–(vi), excluding income also falling under item (i)

(ii) A foreign corporation without a permanent establishment: domestic-source income listed in Article 138, paragraph (1), items (ii)–(vi), for each fiscal year

For foreign corporations,the tax base for corporation tax on each fiscal year's income is the income arising from domestic sources. This contrasts with domestic corporations, which are generally taxed on worldwide income.

Against that background,Whether a Permanent Establishment (PE) Existschanges the scope. If a PE exists, income attributable to it under Article 138(1)(i) is added.

No PE Does Not Mean No Tax.As item (ii) states, foreign corporations without a PE also have a tax base for domestic-source income under Article 138(1)(ii)–(vi).

Furthermore,Income Tax Withholding Is a Separate Matter.Interest, dividends, and royalties are, under the parenthetical exclusion in Article 138(1)(ii),excluded from item (ii), income from use or holding of assets in Japan,and handled through income tax withholding.

However, This Is an Exclusion from Item (ii).If a foreign corporation has a PE and the income is attributable to it, the income enters the corporation tax base under Article 138(1)(i).The parenthetical wording in Article 141(i)(b) quoted above—excluding income falling under Article 138(1)(i)—shows that item (i) can overlap with item (ii) and subsequent items.Do Not Conclude “No Tax” After Checking Corporation Tax Alone.

What to Check First

The Country of Incorporation and the Location of the Head Office Are Separate Questions.

The statute asks whether the head office or principal office is in Japan, not under which country's law the corporation was formed. Do not rely solely on registration or articles of incorporation;the head office's actual location must be established as a matter of fact.

Points that require care in practice

• What If a Company Formed Overseas Makes Its Substantive Decisions in Japan?The location of the principal office becomes an issue.
• What If the Registered Head Office Differs from the Actual Place of Management?The question is how the statutory wording applies.
• Does a Foreign LLC or LPS Count as a Corporation?The initial question is whether it qualifies as a corporation at all.
• Does Moving the Head Office Abroad End Domestic Corporation Status?The facts and timing of the move matter.
• What If a Foreign Corporation Owns Real Estate in Japan?Some domestic-source income is taxable regardless of PE status.
• A tax haven: How Is a Subsidiary Located in Such a Jurisdiction Treated?Even for a foreign corporation, its Japanese shareholders—domestic corporations and resident—may be subject to income attribution rules.

Each of theseis determined by the facts, not the registration entry.

If Classified as a Domestic Corporation, Its Worldwide Income Is Subject to Japanese Corporation Tax.When planning an overseas corporation, understand the implications of where its head office is located before proceeding.

Legal basis

• Article 2, Items (iii) (Domestic Corporations) and (iv) (Foreign Corporations), of the Corporation Tax Act
• Article 2, Paragraph (1), Items (vi) and (vii), of the Income Tax Act
• Article 138, Paragraph (1), of the Corporation Tax Act (Domestic-Source Income)
• Article 141 of the Corporation Tax Act (Tax Base for Foreign Corporations' Income for Each Fiscal Year; the Article has no heading)
• Article 2, Item (xii)-19, of the Corporation Tax Act (Permanent Establishment)

An individual determination requires verification of the facts.