When you form a company in Japan, the amount of share capital is not only a signal of creditworthiness; it also affects your tax position. The main interaction is with consumption tax, which is the focus of this article.
The two-year exemption and the ¥10 million line
A newly formed company has no base period (the business year before last), so as a rule it is exempt from consumption tax for its first and second business years. If, however, the company is formed with capital of ¥10 million or more, it is — as an exception to that rule — a taxable business from its first and second years. Even below ¥10 million, if taxable sales and similar figures for the specified period (the first six months of the preceding business year) exceed ¥10 million, the company becomes taxable from its second year. Where the exemption matters, capital is commonly set below ¥10 million.
How the invoice system changes the calculus
The invoice system cuts across this, however. If your customers are mainly businesses (B2B), you will often be asked to register as a qualified invoice issuer — and once registered, you can no longer remain exempt. If you intend to register from formation, the practical benefit of the exemption largely disappears. Conversely, for export-centred businesses or businesses with heavy capital expenditure, deliberately electing to be a taxable business in order to obtain refunds (see the separate article) can be the better design.
The per-capita levy and registration tax
Capital also matters beyond consumption tax. The per-capita levy of corporate inhabitant tax falls due every year even in loss years. For a company based in Sapporo, Hokkaido, the levy is ¥20,000 of prefectural (Hokkaido) tax plus ¥50,000 of municipal (Sapporo) tax — ¥70,000 a year in total — where capital (as defined) is ¥10 million or less and employees number 50 or fewer. Once capital exceeds ¥10 million (up to ¥100 million), it rises to ¥50,000 plus ¥130,000 — ¥180,000 a year (figures for Hokkaido and Sapporo; the amounts vary by prefecture and municipality). The registration and license tax on incorporation is also linked to capital: 0.7% of capital for a kabushiki kaisha (KK; minimum ¥150,000) and the same rate for a gōdō kaisha (GK; minimum ¥60,000).
KK or GK?
Note that the choice of company form — KK or GK — makes no difference to corporate income tax treatment. What differs is the cost of formation and the flexibility of governance design. (Once the company is running, see our note: It Is Your Company, Yet You Cannot Freely Change Your Own Salary.)
"How much capital?" is not just an item on the registration form; it is a tax question to be weighed together with your business plan and customer mix. Capital can be changed later, but it is best settled at formation.
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