(Corporation Tax Act, Article 21; original in Japanese)
The wording is a little stiff, so here it is in plain terms: corporation tax on a company's income for each business year is imposed on the basis of the amount of income for that year. What serves as the basis here is the amount of income, not sales. In a business year with a loss, income is negative, so there is no base on which to impose the tax. For that reason, no corporation tax on income for that business year becomes payable. Note that a loss in the financial statements does not always match the tax loss amount. Under corporation tax, some expenses cannot be treated as deductible expenses (sonkin), depending on the type of expense and the payment procedure. Article 34, paragraph 1 of the Corporation Tax Act sets the treatment of officers' remuneration as follows. > 内国法人がその役員に対して支給する給与（退職給与で業績連動給与に該当しないもの、使用人としての職務を有する役員に対して支給する当該職務に対するもの及び第三項の規定の適用があるものを除く。以下この項において同じ。）のうち次に掲げる給与のいずれにも該当しないものの額は、その内国法人の各事業年度の所得の金額の計算上、損金の額に算入しない。 > > Reference translation (unofficial): Of the remuneration that a domestic corporation pays to its officers (excluding retirement remuneration that does not fall under performance-linked remuneration, remuneration paid to an officer who also has duties as an employee for those duties, and remuneration to which paragraph 3 applies; the same applies hereinafter in this paragraph), the amount of remuneration that falls under none of the following is not included in deductible expenses in calculating the amount of income of that domestic corporation for each business year.(Corporation Tax Act, Article 34, paragraph 1; original in Japanese)
In plain terms: of the remuneration paid to officers, amounts that do not fit the prescribed forms are not deductible expenses［11］. If non-deductible expenses are large, taxable income can be positive even when the financial statements show a loss. So corporation tax can arise for a year even when the financial statements show a loss. If there is money spent without recording the recipient's name or address in the books (undisclosed-use expenditure, shito hitoku-kin), 40% of that amount is added to the corporation tax for that business year. This addition arises even when income is negative［14］. A tax whose amount is fixed by size, the per-capita levy, does not exist in the Corporation Tax Act. The per-capita levy belongs to the corporate inhabitant tax, which is provided for in the Local Tax Act. We look at this in a later section. ## A loss remains for 10 years as a "tax loss" A loss year does not simply end with zero corporation tax. There is a system that lets the amount of the loss (tax loss) be offset against later profits. Article 57, paragraph 1 of the Corporation Tax Act provides as follows. > 内国法人の各事業年度開始の日前十年以内に開始した事業年度において生じた欠損金額（この項の規定により当該各事業年度前の事業年度の所得の金額の計算上損金の額に算入されたもの及び第八十条（欠損金の繰戻しによる還付）の規定により還付を受けるべき金額の計算の基礎となつたものを除く。）がある場合には、当該欠損金額に相当する金額は、当該各事業年度の所得の金額の計算上、損金の額に算入する。 > > Reference translation (unofficial): Where a domestic corporation has a tax loss amount that arose in a business year beginning within ten years before the first day of each business year (excluding amounts included in deductible expenses in calculating the amount of income for a business year before that business year under this paragraph, and amounts that formed the basis for calculating a refund to be received under Article 80 (refund by carryback of tax losses)), an amount equivalent to that tax loss amount is included in deductible expenses in calculating the amount of income for that business year.(Corporation Tax Act, Article 57, paragraph 1; original in Japanese)
In plain terms: a tax loss that arose in a business year beginning within the past 10 years can be treated like an expense (deductible expense) in calculating income for later business years. The NTA explains the same system. > 確定申告書を提出する法人の各事業年度開始の日前10年（注）以内に開始した事業年度で青色申告書を提出した事業年度に生じた欠損金額は、各事業年度の所得金額の計算上損金の額に算入されます。 > > Reference translation (unofficial): A tax loss amount that arose in a business year for which a blue tax return was filed, among business years beginning within 10 years (note) before the first day of each business year of a corporation that files a final tax return, is included in deductible expenses in calculating the amount of income for each business year.(NTA Tax Answer, "No.5762 Carryforward deduction of tax losses for business years in which a blue tax return was filed"; excerpt from the original NTA page in Japanese)
In plain terms: if you file the loss year with a blue tax return, you can use that loss in profitable years within the following 10 years. Note that the carryforward period for tax losses that arose in business years beginning before April 1, 2018 (Heisei 30) is 9 years［3］. A loss year does not simply end with "zero tax." ## A tax that applies even at a loss: the per-capita levy One of the taxes that applies even at a loss is the corporate inhabitant tax. The corporate inhabitant tax consists of two parts: the per-capita levy and the corporation-tax-based levy (hōjinzei-wari). The Ministry of Internal Affairs and Communications explains it as follows. > 均等割とは読んで字のごとく、法人であれば等しく払う義務のある税金です。「等しい額」といっても世界にも進出している大きな法人と地域密着型の法人とでは、法人の規模が違います。そのため、都道府県民税では法人の資本金等の額で、市町村民税では法人の資本金等の額と従業者数で払う税金の額が分けられています。このように法人の規模に応じて区分けしたうえで、同一区分内においては同一の額を法人に課しています。 > > Reference translation (unofficial): As the word itself says, the per-capita levy is a tax that every corporation is equally obliged to pay. Even so, when we say "an equal amount," a large corporation operating around the world and a locally rooted corporation differ in size. For that reason, the amount of tax to pay is divided by the corporation's amount of stated capital, etc. for the prefectural inhabitant tax, and by the corporation's amount of stated capital, etc. and number of employees for the municipal inhabitant tax. After dividing corporations into categories by size in this way, the same amount is imposed on corporations within the same category.(Ministry of Internal Affairs and Communications, "Local Tax System: Corporate Inhabitant Tax"; original in Japanese)
In plain terms: the amount of the per-capita levy is decided by the size of the company (amount of stated capital, etc. and number of employees). It does not look at income. Even at a loss, the amount does not change. The amounts are set in tables in the Local Tax Act. Article 52, paragraph 1 (prefectural inhabitant tax) and Article 312, paragraph 1 (municipal inhabitant tax) of the Local Tax Act provide as follows. > 法人の均等割の標準税率は、次の表の上欄に掲げる法人の区分に応じ、それぞれ同表の下欄に定める額とする。 > > Reference translation (unofficial): The standard tax rate of the per-capita levy on corporations is the amount set out in the lower column of the following table, according to the category of corporation listed in the upper column of the table.(Local Tax Act, Article 52, paragraph 1; original in Japanese)
> 法人に対して課する均等割の標準税率は、次の表の上欄に掲げる法人の区分に応じ、それぞれ同表の下欄に定める額とする。 > > Reference translation (unofficial): The standard tax rate of the per-capita levy imposed on corporations is the amount set out in the lower column of the following table, according to the category of corporation listed in the upper column of the table.(Local Tax Act, Article 312, paragraph 1; original in Japanese)
In plain terms: the annual amount is fixed in a table for each category of corporation. The table below compares the main categories for ordinary corporations.| Category of corporation | Prefectural inhabitant tax | Municipal inhabitant tax | Total |
|---|---|---|---|
| Stated capital, etc. of ¥10 million or less; 50 employees or fewer | ¥20,000 a year | ¥50,000 a year | ¥70,000 a year |
| Stated capital, etc. of over ¥10 million up to ¥100 million; 50 employees or fewer | ¥50,000 a year | ¥130,000 a year | ¥180,000 a year |
| Stated capital, etc. of over ¥5 billion; more than 50 employees | ¥800,000 a year | ¥3,000,000 a year | ¥3,800,000 a year |
(Consumption Tax Act, Article 4, paragraph 1; original in Japanese)
In plain terms: consumption tax is imposed on transfers of assets, etc. (sales) made in Japan by business operators. Whether the business made a profit is not the basis. Consumption tax applies even in a business year in which income is negative (a tax loss). However, not every company pays consumption tax. The test uses taxable sales, not income. Article 9, paragraph 1 of the Consumption Tax Act provides as follows. > 事業者のうち、その課税期間に係る基準期間における課税売上高が千万円以下である者（適格請求書発行事業者を除く。）については、第五条第一項の規定にかかわらず、その課税期間中に国内において行つた課税資産の譲渡等及び特定課税仕入れにつき、消費税を納める義務を免除する。ただし、この法律に別段の定めがある場合は、この限りでない。 > > Reference translation (unofficial): Of business operators, for those whose taxable sales in the base period for the taxable period are 10 million yen or less (excluding qualified invoice issuers), notwithstanding Article 5, paragraph 1, the obligation to pay consumption tax is exempted with respect to taxable transfers of assets, etc. and specified taxable purchases made in Japan during that taxable period. However, this does not apply where this Act provides otherwise.(Consumption Tax Act, Article 9, paragraph 1; original in Japanese)
In plain terms: a business operator whose taxable sales in the base period for the taxable period are ¥10 million or less is exempted from the obligation to pay consumption tax［16］. However, a company registered for the invoice system (as a qualified invoice issuer) is obliged to pay even if its taxable sales are ¥10 million or less. There are also other cases in which the exemption does not apply［17］. The NTA explains the same system. > 事業者は、国内において行った課税資産の譲渡等について消費税を納める義務がありますが、その課税期間の基準期間（個人事業者の場合はその年の前々年、事業年度が1年である法人の場合はその事業年度の前々事業年度）における課税売上高が1,000万円以下である場合には、原則として、納税義務が免除されます。 > > Reference translation (unofficial): Business operators are obliged to pay consumption tax on taxable transfers of assets, etc. made in Japan, but if taxable sales in the base period for the taxable period (for an individual business operator, the year before the previous year; for a corporation whose business year is one year, the business year before the previous business year) are ¥10 million or less, the tax payment obligation is in principle exempted.(NTA Tax Answer, "No.6501 Exemption from the tax payment obligation"; excerpt from the original NTA page in Japanese)
In plain terms: if taxable sales in the base period (for a company, in principle the business year two years earlier) are ¥10 million or less, the payment obligation is in principle exempted［17］. Conversely, a company whose taxable sales in the base period exceed ¥10 million is obliged to pay consumption tax even when its income is negative. Note that consumption tax is not a tax paid out of the business's profit. The NTA explains how the burden works as follows. > 消費税は、事業者に負担を求めるものではありません。税金分は事業者が販売する商品やサービスの価格に含まれて、次々と転嫁され、最終的に商品を消費しまたはサービスの提供を受ける消費者が負担することとなります。 > > Reference translation (unofficial): Consumption tax does not ask business operators to bear the burden. The tax portion is included in the price of the goods and services that business operators sell, is passed on one after another, and is ultimately borne by the consumers who consume the goods or receive the services.(NTA Tax Answer, "No.6101 The basic mechanism of consumption tax"; excerpt from the original NTA page in Japanese)
In plain terms: consumption tax is ultimately borne by consumers. A business operator subtracts the consumption tax it paid on purchases and expenses from the consumption tax it received together with its sales, and pays the remainder to the state［18］. Regardless of whether there is a loss, if the tax received exceeds the tax paid, there is an amount to pay. Conversely, if the tax paid is larger, there is no amount to pay. ## Pitfalls If you assume "a loss means zero corporation tax," there are three points where you can stumble later. The first is that a final tax return is required even at a loss. Article 74, paragraph 1 of the Corporation Tax Act sets the items to be stated in the return as follows. > 内国法人は、各事業年度終了の日の翌日から二月以内に、税務署長に対し、確定した決算に基づき次に掲げる事項を記載した申告書を提出しなければならない。一 当該事業年度の課税標準である所得の金額又は欠損金額 > > Reference translation (unofficial): A domestic corporation must, within two months from the day after the last day of each business year, file with the district director of the tax office a return stating the following items based on its settled financial statements: 1. The amount of income or tax loss amount that is the tax base for that business year.(Corporation Tax Act, Article 74, paragraph 1; original in Japanese)
In plain terms: the tax loss amount, along with the amount of income, is an item to be stated in the return. Even in a loss year, you file the return within two months from the day after the end of the business year. The NTA explains the conditions for a company to use the carryforward deduction as follows. > 欠損金の繰越控除をする法人は、欠損金額が生じた事業年度において青色申告書である確定申告書を提出し、かつ、その後の各事業年度について連続して確定申告書を提出するとともに、その事業年度に係る一定の帳簿書類（注1）を保存している法人です。 > > Reference translation (unofficial): A corporation that takes the carryforward deduction of tax losses is a corporation that filed a final tax return that is a blue tax return for the business year in which the tax loss amount arose, has filed final tax returns continuously for each subsequent business year, and keeps certain books and documents (note 1) for that business year.(NTA Tax Answer, "No.5762 Carryforward deduction of tax losses for business years in which a blue tax return was filed"; excerpt from the original NTA page in Japanese)
In plain terms: to use a tax loss against later profits, you must file a return for the loss year and then keep filing every year after that. If you do not file, you cannot meet this condition. Also, for companies other than small and medium-sized corporations, etc., there is a limit on the carryforward deduction: the tax loss can be treated as a deductible expense only up to an amount equal to 50% of income for that year［3］. The second is that if the loss year is filed with a white tax return, the tax loss cannot be carried forward. Article 58, paragraph 1 of the Corporation Tax Act provides as follows. > 内国法人の各事業年度開始の日前十年以内に開始した事業年度のうち青色申告書を提出する事業年度でない事業年度において生じた欠損金額に係る第五十七条第一項（欠損金の繰越し）の規定の適用については、当該欠損金額のうち、棚卸資産、固定資産又は政令で定める繰延資産について震災、風水害、火災その他政令で定める災害により生じた損失の額で政令で定めるもの（次項及び第三項において「災害損失金額」という。）を超える部分の金額は、ないものとする。 > > Reference translation (unofficial): In applying Article 57, paragraph 1 (carryforward of tax losses) to a tax loss amount that arose in a business year, among business years beginning within ten years before the first day of each business year of a domestic corporation, that is not a business year for which a blue tax return is filed, the portion of that tax loss amount exceeding the amount, specified by Cabinet Order, of losses arising with respect to inventory, fixed assets, or deferred assets specified by Cabinet Order due to earthquakes, storms and floods, fires, or other disasters specified by Cabinet Order (referred to as the "disaster loss amount" in the following paragraph and paragraph 3) is deemed not to exist.(Corporation Tax Act, Article 58, paragraph 1; original in Japanese)
In plain terms: a tax loss that arose in a business year for which no blue tax return was filed cannot be carried forward, except for the portion due to disaster losses. If you close a loss year with a white tax return, that loss cannot be used against later profits. The third is the "carryback refund" when the company had corporation tax in the previous year. There is a system that lets a company carry a tax loss back to the previous business year and receive a refund (a return of overpayment) of that year's corporation tax. The NTA explains it as follows. > 青色申告書である確定申告書を提出する事業年度に欠損金額が生じた場合（以下、この事業年度を「欠損事業年度」といいます。）において、その欠損金額をその欠損事業年度開始の日前1年以内に開始したいずれかの事業年度（以下「還付所得事業年度」といいます。）に繰り戻して法人税額の還付を請求することができます。 > > Reference translation (unofficial): Where a tax loss amount arises in a business year for which a final tax return that is a blue tax return is filed (hereinafter, this business year is referred to as the "loss business year"), the corporation may carry that tax loss amount back to any business year beginning within one year before the first day of the loss business year (hereinafter referred to as the "refund income business year") and claim a refund of corporation tax.(NTA Tax Answer, "No.5763 Refund by carryback of tax losses"; excerpt from the original NTA page in Japanese)
In plain terms: you can carry the loss back against the previous one year's income, recalculate, and claim a refund of the previous year's corporation tax. However, the claim has requirements and a deadline. > （1）還付所得事業年度から欠損事業年度の前事業年度までの各事業年度について連続して青色申告書である確定申告書を提出していること。（2）欠損事業年度の青色申告書である確定申告書をその提出期限までに提出していること。（3）上記（2）の確定申告書と同時に欠損金の繰戻しによる還付請求書を提出していること。 > > Reference translation (unofficial): (1) Final tax returns that are blue tax returns have been filed continuously for each business year from the refund income business year to the business year before the loss business year. (2) The final tax return that is a blue tax return for the loss business year has been filed by its filing deadline. (3) A claim for refund by carryback of tax losses has been filed together with the final tax return in (2) above.(NTA Tax Answer, "No.5763 Refund by carryback of tax losses"; excerpt from the original NTA page in Japanese)
In plain terms: in addition to having continued filing blue tax returns up to the previous year, the conditions are that the return for the loss year is filed by the deadline and that the refund claim is filed together with the return. A return filed after the deadline does not meet this condition. Note that, for companies other than small and medium-sized enterprises, etc., this system cannot be used, with certain exceptions, for tax losses that arise in business years ending on or before March 31, 2028 (Reiwa 10)［9］. ## What to do| Situation | What to consider |
|---|---|
| The financial results show a loss | File the final tax return within two months from the day after the end of the business year. State the tax loss amount in the return［7］ |
| You file blue tax returns | Keep doing so. It is the precondition for using a tax loss against later profits［3］ |
| You plan to switch to a white tax return | Even if you have a loss that year, the tax loss cannot be carried forward. Consult a licensed Japanese tax accountant (zeirishi) before switching［8］ |
| The company had corporation tax in the previous business year | Consider using the carryback refund. By the filing deadline, file the refund claim together with the return［9］［10］ |
| Paying the per-capita levy | A fixed amount is due even at a loss. Include it in your cash flow plan［4］［5］［6］ |
| Taxable sales in the base period (in principle, the business year two years earlier) exceed ¥10 million | You are obliged to pay consumption tax even at a loss. Include it in your cash flow plan［16］［17］ |
| You are registered for the invoice system (as a qualified invoice issuer) | Even if taxable sales in the base period are ¥10 million or less, and even at a loss, you are obliged to pay consumption tax. Include it in your cash flow plan［16］［17］ |
| Unsure about the treatment | Consult a zeirishi. You can also check how the system works at the tax office's consultation counter |