Tax Guide for Corporations
Key tax-saving and filing points that small businesses and one-person corporation owners should know.
From how corporate tax works, setting director compensation, and using expenses, to director retirement pay, consumption tax, and year-end closing strategies — a complete look at tax-saving strategies unique to corporations.
How corporate tax works and the rates
The structure of corporate tax, residence tax, and enterprise tax, and how to calculate the effective rate.
BasicsOptimizing director compensation
Set the most advantageous compensation by combining the corporate and personal tax burdens.
Tax savingWhat a corporation can expense
Company housing, per diems, entertainment expenses, and other expense techniques unique to corporations.
ExpensesUsing director retirement pay
Achieve large corporate-to-personal tax savings through the favorable treatment of retirement income.
Retirement payConsumption tax and the invoice system
The 2-year tax-exempt period after incorporation and how to decide on becoming a taxable business.
Consumption taxYear-end closing measures and a tax-saving checklist
Tax-saving actions you can take before closing, organized by timing.
ClosingHow corporate tax works and the rates
Corporate tax is not the only tax a corporation pays. In addition to corporate tax and local corporate tax (national taxes), corporate residence tax and corporate enterprise tax (plus special corporate enterprise tax) are combined. Small and medium-sized corporations can apply a reduced rate of 15% to income of ¥8 million or less per year, keeping the burden down, but the effective tax rate on the portion above ¥8 million is about 33–34%. Grasping this structure is the starting point for corporate tax saving.
Corporate tax rate for SMEs (capital of ¥100 million or less)
| Taxable income bracket | Corporate tax rate | Notes |
|---|---|---|
| Portion up to ¥8 million per year | 15% | Special reduced rate. Applies to fiscal years beginning on or before March 31, 2027 (17% for years with income over ¥1 billion) |
| Portion above ¥8 million per year | 23.2% | Standard rate |
| Local corporate tax (national) | Corporate tax amount × 10.3% | Filed and paid to the national government together with corporate tax |
| Corporate residence tax (standard) | Corporate tax amount × 7.0% ＋ per-capita levy | The per-capita levy is at least ¥70,000/year. The higher rate in Tokyo's 23 wards is 10.4% |
| Corporate enterprise tax (standard) | 3.5–7.0% (income levy) | The rate changes at ¥4 million and ¥8 million. Separately, special corporate enterprise tax (income levy × 37%) |
| Special defense corporate tax (from April 2026) | (Corporate tax amount − ¥5 million) × 4% | No burden if the corporate tax amount is ¥5 million or less per year |
| Rough effective tax rate | About 33–34% (SME, portion above ¥8 million per year, Tokyo standard case) | |
For fiscal years beginning on or after April 1, 2026, a special defense corporate tax is levied as an add-on based on the corporate tax amount. The amount is "(base corporate tax amount − ¥5 million basic deduction) × 4%," so there is effectively no burden for corporations whose corporate tax amount is ¥5 million or less per year. The mechanism and its impact are explained in detail in How the defense tax increase works and its impact on take-home pay.
A sole proprietor pays income tax (up to 45%) ＋ residence tax (10%) ＋ National Health Insurance, so the burden rises sharply as income grows. Once sales and income exceed a certain level, incorporating (going corporate) tends to produce tax-saving benefits. A rough guide is income above ¥6–8 million. For details on the decision, see When to incorporate; for a design that includes social insurance premiums, see Micro-corporations and social insurance premiums.
※ Taxable income ＝ gains (revenue) − losses (expenses/losses). Director compensation and expenses count as losses and lower taxable income.
Optimizing director compensation
By having the owner-president take director compensation, you can lower the corporation's taxable income while also using the personal-side employment income deduction. The key is to set a compensation amount that minimizes the combined total of corporate tax and the individual's income tax and residence tax. The thinking behind the optimal amount and estimates including social insurance premiums are explained in detail in What is the optimal amount to set director compensation at.
¥15 million
approx. ¥4.54 million (burden rate about 30%)
approx. ¥10.46 million
¥15 million
¥7 million → corporate tax, etc. approx. ¥1.71 million
substantially reduced
To treat director compensation as a loss (expense), you must decide the amount within 3 months of the start of the fiscal year and pay the same amount every month (regular fixed-amount compensation). If you change it midyear without reason, the changed portion is not deductible.
Compensation and rough tax rates (single, social insurance included)
| Director compensation (annual) | Employment income deduction | Rough income ＋ residence tax | Social insurance premiums (employee's share) |
|---|---|---|---|
| ¥4 million | ¥1.24 million | approx. ¥380,000 | approx. ¥600,000 |
| ¥6 million | ¥1.64 million | approx. ¥760,000 | approx. ¥800,000 |
| ¥8 million | ¥1.9 million | approx. ¥1.24 million | approx. ¥930,000 |
| ¥10 million | ¥1.95 million | approx. ¥1.82 million | approx. ¥1.05 million |
| ¥12 million | ¥1.95 million | approx. ¥2.51 million | approx. ¥1.05 million |
※ Rough figures. They vary with the spousal deduction, dependent deduction, and other circumstances. For a design that holds down social insurance premiums, also see Micro-corporations and social insurance premiums.
※ Generally, an annual income around ¥8–10 million tends to minimize the combined corporate and personal tax (varies by situation).
What a corporation can expense
A distinctive feature is that corporations have a wider range of allowable losses (expenses) than sole proprietors. With company housing, per diems, life insurance, and other expense techniques unique to corporations, you can effectively lower taxable income.
- Director compensation, salaries, bonuses
- Social insurance premiums (company's share)
- Office/store rent
- Company housing rent (leased in the corporation's name)
- Business-trip per diems (based on internal rules)
- Entertainment expenses (fully deductible up to ¥8 million/year for SMEs)
- Life insurance premiums (deductible types)
- Vehicle costs (company car)
- Depreciation and repair costs
- Tax accountant and lawyer fees
- Corporate tax, corporate residence tax (non-deductible)
- Bonuses to directors (without prior notification)
- Excessive director compensation (the unreasonably high portion)
- The owner's personal living expenses
- Donations (the portion above a set amount)
- Entertainment expenses above the deductible limit (for large corporations, only 50% of food-and-drink entertainment is deductible)
- Fines and traffic penalties
The three big expense techniques unique to corporations
Lease a property in the corporation's name and sublet it to a director or employee at a set percentage of the equivalent rent. The corporation can expense the full rent while minimizing the individual's salary taxation.
Create travel rules and pay business-trip per diems to directors and employees. The per diems received are tax-free (no income tax), and the corporation can fully deduct them.
SMEs (capital of ¥100 million or less) can fully deduct up to ¥8 million of entertainment expenses per year (the special measure runs through fiscal years beginning on or before March 31, 2027). Food-and-drink expenses of ¥10,000 or less per person are excluded from entertainment expenses in the first place and are fully deductible.
※ The more losses, the lower the taxable income and the less corporate tax. However, the outlay must be "related to the business."
Using director retirement pay
Director retirement pay is fully deductible (an expense) for the corporation, and on the receiving director's side a favorable rate applies as retirement income. It is one of the largest tax-saving opportunities in a lifetime.
→ the corporation deducts it in full
based on years of service
to compute taxable income
greatly reduced taxable income
Calculating the retirement income deduction
| Years of service | Retirement income deduction |
|---|---|
| 20 years or less | ¥400,000 × years of service (minimum ¥800,000) |
| Over 20 years | ¥8 million ＋ ¥700,000 × (years of service − 20) |
※ Apply the ordinary income and residence tax rates to this retirement income. It is calculated separately from other income (separate taxation).
※ If service as a director is 5 years or less, the half-taxation does not apply (specified-director retirement allowances, etc.).
※ Merit multiplier method: monthly director compensation at retirement × years of service × merit multiplier (2–3×) is the rough guide for deductibility. For the detailed calculation, see How to calculate tax on retirement pay.
Consumption tax and the invoice system
After incorporation, the first two fiscal years are in principle exempt from consumption tax (if capital is under ¥10 million). However, depending on the capital at establishment or sales in the specified period, you may become a taxable business from the first year.
at incorporation?
in principle tax-exempt
from year 1
Taxable/exempt determination from year 3 onward
| Criterion | Content | Period used for the determination |
|---|---|---|
| Sales in the base period | Over ¥10 million → taxable business | The fiscal year two years earlier |
| Sales/salaries in the specified period | Both over ¥10 million → taxable business | The first 6 months of the prior fiscal year |
| Invoice registration | Registering makes you a taxable business even if exempt | On and after the registration date |
- If you have many B2B transactions: clients often require invoices (qualified invoices), so consider registering early.
- If mainly B2C transactions: general consumers do not care about the purchase tax credit, so you can make the most of the exempt period.
- The 20% special measure (through the taxable period that includes September 30, 2026): if a tax-exempt business becomes a taxable business upon invoice registration, there is a special measure that reduces the tax due to 20% of the sales consumption tax. The options after it ends are explained in Until when is the 20% special measure? What to do after it ends.
※ Simplified taxation (taxable sales of ¥50 million or less two fiscal years earlier; notification required): tax due ＝ sales consumption tax × (1 − deemed purchase rate). For how to choose, see The difference between simplified and general taxation.
Year-end closing measures and a tax-saving checklist
As the closing month approaches, check whether you can take steps to compress profit. It is important to act 1–3 months before closing. Once the closing date passes, most measures are too late.
- Estimate the landing point of profit and gauge room for tax saving
- Consider changing director compensation (revisions must be within 3 months of the start of the new fiscal year)
- Apply to increase premiums for the Small Enterprise Mutual Aid (an income deduction for the director individually)
- Consider joining or increasing the Business Safety Mutual Aid (premiums are a loss) or life insurance
- Repairs and consumables purchases (items you expect to use)
- Prepaying advertising and outsourcing costs
- Valuation losses and bad-debt write-offs for dead stock and bad receivables
- Purchasing equipment under ¥400,000 (special measure for small-value depreciable assets; up to ¥3 million per year in total. For acquisitions on or before March 31, 2026, the threshold is under ¥300,000)
- Check for missed accruals (salaries, retainer fees, etc.)
- Paying director bonuses (compensation with prior notification)
- Physical inventory count and valuation
- Calculating depreciation of fixed assets
- Sorting out loans receivable and payable
- Estimating and confirming the final tax with your tax accountant
Using loss carryforwards
A corporation's losses (net operating losses) can be deducted from future profits for up to 10 years (carryforward deduction). Always file to record early-stage losses. There is also a "loss carryback" system (SMEs only) that carries the current year's loss back to the prior year's profit to receive a refund.
※ SMEs can deduct up to 100% of income (large corporations up to 50%).
Learn more in related columns and pages
Optimal director compensation
How to think about optimal pay by combining corporate tax, income tax, and social insurance premiums.
When to incorporate
The rough income guide and break-even for a sole proprietor considering going corporate.
Tax on retirement pay
The retirement income deduction and half taxation. Understand the favorable treatment of director retirement pay.
Invoices and tax-exempt businesses
The exempt period at establishment, the registration decision, the 20% special measure, and transitional rules.
Corporate tax filing (details)
Check the structure of the return, the schedules, and the timeline all in one place.
Cost of setting up a company
The breakdown for a stock company (from about ¥200,000) and an LLC (from about ¥60,000), and how to save.
Business Safety Mutual Aid
Premiums are fully deductible. Tax deferral and points to note in the 2024 revision.
Micro-corporations and social insurance
Do premiums fall? The mechanism, rough savings, and points to note.
Stock company vs. LLC
The merits of reorganizing and the procedures. Also why it is not about tax saving.
How the defense tax increase works
Explaining the special defense corporate tax and more — when and what changes, and how.
FAQ
What is the rough guide for incorporating (going corporate)?
Generally, once income exceeds ¥6–8 million, the effective corporate tax rate (about 23–34% for SMEs) tends to become more favorable than the combined personal income and residence tax, and you can also use the employment income deduction via director compensation. Judge overall, including the social insurance burden and setup/maintenance costs.
By when must director compensation be decided?
To make it deductible, the rule is "regular fixed-amount compensation": decide the amount within 3 months of the start of the fiscal year and pay the same amount every month. If you change it midyear without reason, the changed portion is non-deductible.
Is consumption tax exempt right after incorporation?
If capital is under ¥10 million, years 1 and 2 are in principle exempt, but if sales/salaries in the specified period (the first 6 months of the prior fiscal year) exceed ¥10 million it becomes taxable, and registering for invoices makes you a taxable business even if exempt.
Do I need to file in a loss year too?
Yes. Losses can be carried forward for up to 10 years to offset future profits, but you cannot use the carryforward deduction unless you have filed. SMEs also have a system to carry a loss back to the prior year's profit and receive a refund.
Will the special defense corporate tax increase the burden?
For fiscal years beginning on or after April 1, 2026, 4% of the base corporate tax amount minus the ¥5 million basic deduction is added on. Because of the basic deduction, there is effectively no burden for SMEs whose corporate tax amount is ¥5 million or less per year.
Sources / official information
This article is based on the official information below. Rules may be revised; please check each official site for the latest details.
- National Tax Agency — Tax Answer, Corporate tax (in Japanese)
- National Tax Agency — Tax Answer No.5759 Special corporate tax rate for SMEs (in Japanese)
- Ministry of Finance — Overview of corporate tax (in Japanese)
- National Tax Agency — Overview of the special defense corporate tax (pamphlet) (in Japanese)
- Tokyo Metropolitan Taxation Bureau — Corporate enterprise tax and corporate metropolitan tax (in Japanese)
※ This article is for general information only and is not tax or legal advice. For individual tax matters, consult your local tax office or a licensed tax accountant (zeirishi).