(Consumption Tax Act, Article 9, paragraph 1)
The wording is a little stiff, so here it is in plain terms: if taxable sales in the base period are 10 million yen or less, the obligation to pay consumption tax is exempted. Which period the base period refers to is set out in Article 2, paragraph 1, item 14 of the Consumption Tax Act. > 個人事業者についてはその年の前々年をいい、法人についてはその事業年度の前々事業年度（当該前々事業年度が一年未満である法人については、その事業年度開始の日の二年前の日の前日から同日以後一年を経過する日までの間に開始した各事業年度を合わせた期間）をいう。[［3］](#ref-3) > > Reference translation (unofficial): For an individual business operator, it means the year two years before that year; for a corporation, it means the business year two business years before that business year (for a corporation for which that earlier business year is less than one year, the period combining each business year that began during the period from the day before the date two years prior to the start of that business year to the day on which one year has elapsed from that same date).(Consumption Tax Act, Article 2, paragraph 1, item 14)
In plain terms: for a corporation, the base period is the "business year two business years earlier". A newly established company does not yet have such a business year. So how is a company without a base period treated? The National Tax Agency (NTA) explains as follows. > 新たに開業した個人事業者または新たに設立された法人のように、その課税期間について基準期間における課税売上高がないときまたは基準期間がないときは、原則として納税義務が免除されますが、例えば、次の「納税義務が免除されない場合」のようなときには免除されませんのでご注意ください。[［6］](#ref-6) > > Reference translation (unofficial): Where, as with a newly started individual business operator or a newly established corporation, there are no taxable sales in the base period for the taxable period or there is no base period, the payment obligation is in principle exempted. Please note, however, that the exemption does not apply in cases such as the following "cases where the payment obligation is not exempted".(NTA Tax Answer No. 6531, "When starting a new business or establishing a new corporation"; excerpt from the original NTA page in Japanese)
## How the "2 years" are counted The "2 years" means the 1st and 2nd business years after establishment, that is, the first two business years. The NTA explains it as follows. > 新たに設立された法人の設立1期目および2期目については、基準期間がありませんので、設立1期目および2期目は原則として納税義務が免除されますが、以下に記載する「新設法人に対する納税義務の免除の特例」または「特定新規設立法人の納税義務の免除の特例」に該当する場合には、納税義務は免除されず、課税事業者として消費税の申告が必要となります。[［4］](#ref-4) > > Reference translation (unofficial): For the 1st and 2nd business years of a newly established corporation there is no base period, so the payment obligation is in principle exempted for those two years. However, if the corporation falls under the "special rule on exemption from the payment obligation for newly established corporations" or the "special rule on exemption from the payment obligation for specified newly established corporations" described below, the payment obligation is not exempted, and the corporation must file a consumption tax return as a taxable business operator.(NTA Tax Answer No. 6503, "Special rule on exemption from the payment obligation for corporations without a base period"; excerpt from the original NTA page in Japanese)
The "specified newly established corporation" in the quotation is covered by a separate special rule that applies to companies established by large corporate groups, such as a parent company. This article does not cover it. A business year does not always match a calendar year. The 1st business year runs from the date of establishment to the first closing date, so it is shorter. Depending on the combination of the closing month and the date of establishment, the "2 years" can be shorter than two years. Also, you do not necessarily start paying the moment the 3rd business year begins. Even after a base period (the business year two business years earlier) exists, the exemption continues if the taxable sales in it are 10 million yen or less. > 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。[［5］](#ref-5) > > Reference translation (unofficial): Where taxable sales in the base period for that taxable period (for an individual business operator, the year two years before that year; for a corporation whose business year is one year, the business year two business years before that business year) are 10 million yen or less, the payment obligation is in principle exempted.(NTA Tax Answer No. 6501, "Exemption from the payment obligation"; excerpt from the original NTA page in Japanese)
On this point, the part of the rumor that says "you do not have to pay while the business is still small" is right. ## The answer depends on stated capital of 10 million yen Now to the main point. Even without a base period, there are cases where the exemption does not apply. Article 12-2 of the Consumption Tax Act provides as follows as a special rule for newly established corporations. > 当該事業年度開始の日における資本金の額又は出資の金額が千万円以上である法人（以下この項及び次項において「新設法人」という。）については、当該新設法人の基準期間がない事業年度に含まれる各課税期間（第九条第四項の規定による届出書の提出により、又は第九条の二第一項、第十一条第三項若しくは第四項若しくは前条第一項若しくは第二項の規定により消費税を納める義務が免除されないこととなる課税期間を除く。）における課税資産の譲渡等及び特定課税仕入れについては、第九条第一項本文の規定は、適用しない。[［2］](#ref-2) > > Reference translation (unofficial): For a corporation whose amount of stated capital or investment on the first day of the business year is 10 million yen or more (hereinafter in this paragraph and the next paragraph, a "newly established corporation"), the main clause of Article 9, paragraph 1 does not apply to taxable transfers of assets, etc. and specified taxable purchases in each taxable period included in a business year for which that newly established corporation has no base period (excluding a taxable period for which the obligation to pay consumption tax is not exempted by the submission of a notification under Article 9, paragraph 4, or under Article 9-2, paragraph 1, Article 11, paragraph 3 or 4, or paragraph 1 or 2 of the preceding Article).(Consumption Tax Act, Article 12-2, paragraph 1; excerpt)
The wording is a little stiff, so here it is in plain terms: a company whose stated capital at the start of the business year is 10 million yen or more cannot use the exemption in Article 9, paragraph 1, even though it has no base period. In other words, it is a taxable business operator from its 1st year. The NTA explains the same point. > その事業年度開始の日における資本金の額または出資の金額が1,000万円以上である法人（以下「新設法人」といいます。）は、その課税期間の納税義務は免除されません。したがって、設立1期目または設立2期目のそれぞれの期首における資本金の額または出資の金額が1,000万円以上である場合には、その設立1期目または設立2期目は課税事業者となります。[［4］](#ref-4) > > Reference translation (unofficial): A corporation whose amount of stated capital or investment on the first day of the business year is 10 million yen or more (hereinafter a "newly established corporation") is not exempt from the payment obligation for that taxable period. Therefore, if the amount of stated capital or investment at the start of the 1st business year or at the start of the 2nd business year after establishment is 10 million yen or more, the corporation is a taxable business operator for that 1st or 2nd business year.(NTA Tax Answer No. 6503, "Special rule on exemption from the payment obligation for corporations without a base period"; excerpt from the original NTA page in Japanese)
What triggers the test is the amount of stated capital at the start of each business year. Let us compare the answer for the 1st business year in two fictional companies.| Company | Stated capital at the start of the 1st business year | Payment obligation in the 1st year | Payment obligation in the 2nd year |
|---|---|---|---|
| Company A | 5 million yen | In principle, exempt | In principle, exempt |
| Company B | 12 million yen | Not exempt | Not exempt |
(NTA Tax Answer No. 6503, "Special rule on exemption from the payment obligation for corporations without a base period", note; excerpt from the original NTA page in Japanese)
If you register because a business partner asks you for invoices, you must file returns and pay tax from the 1st business year after establishment. The second is a capital increase during the 1st business year. The NTA gives the following example. > 例えば、資本金の額を1,000万円未満で設立した後、設立1期目の途中で増資したことにより資本金の額が1,000万円以上となった場合には、設立2期目は課税事業者となります。[［4］](#ref-4) > > Reference translation (unofficial): For example, if a corporation is established with stated capital of less than 10 million yen and then, through a capital increase during its 1st business year, its stated capital becomes 10 million yen or more, it is a taxable business operator in its 2nd business year.(NTA Tax Answer No. 6503, "Special rule on exemption from the payment obligation for corporations without a base period"; excerpt from the original NTA page in Japanese)
What is used for the test is the amount of stated capital at the start of each business year. If it reaches 10 million yen or more during the 1st business year, the exemption no longer applies from the 2nd business year. The third is sales in the specified period (the first 6 months of the preceding business year). > 設立2期目を判定する場合において、設立1期目に特定期間が生じている場合には、特定期間の課税売上高等による納税義務の判定も必要となります。[［4］](#ref-4) > > Reference translation (unofficial): When making the determination for the 2nd business year after establishment, if a specified period arose in the 1st business year, the payment obligation must also be determined based on the taxable sales, etc. in the specified period.(NTA Tax Answer No. 6503, "Special rule on exemption from the payment obligation for corporations without a base period", note; excerpt from the original NTA page in Japanese)
In plain terms: when the 2nd business year is tested, sales in the specified period within the 1st business year are also looked at. A company that makes sales soon after it is established may lose the exemption in the 2nd business year. However, no specified period arises for a company whose 1st business year is 7 months or less, for example[［7］](#ref-7). Even if sales in the specified period exceed 10 million yen, the exemption does not end immediately. The law provides that, instead of sales, the total of salaries, etc. paid in the same period may be used for the test. > 当該事業者が第一項の特定期間中に支払つた所得税法第二百三十一条第一項（給与等、退職手当等又は公的年金等の支払明細書）に規定する支払明細書に記載すべき同項の給与等の金額に相当するものとして財務省令で定めるものの合計額をもつて、第一項の特定期間における課税売上高とすることができる。[［7］](#ref-7) > > Reference translation (unofficial): The total amount of what is prescribed by Ministry of Finance order as corresponding to the amount of salaries, etc. that should be stated in the statement of payment prescribed in Article 231, paragraph 1 of the Income Tax Act (Statement of Payment of Salaries, etc., Retirement Allowances, etc., or Public Pensions, etc.), paid by that business operator during the specified period referred to in paragraph 1, may be treated as the taxable sales for the specified period referred to in paragraph 1.(Consumption Tax Act, Article 9-2, paragraph 3; excerpt)
In plain terms: even if sales in the specified period exceed 10 million yen, if the salaries, etc. paid in that period are 10 million yen or less, you can test using the amount of salaries, etc., and keep the exemption. Right after incorporating a sole proprietorship, many companies pay only officers' remuneration, so this way of testing can matter. ## What to do| Situation | What to consider |
|---|---|
| Established with stated capital under 10 million yen, and not registering as a qualified invoice issuer | In principle, the payment obligation is exempted in the 1st and 2nd business years［4］ |
| Establishing with stated capital of 10 million yen or more | You are a taxable business operator from the 1st year. Prepare for filing［2］［4］ |
| A business partner is asking you for invoices | If you register, you are not exempt. The premise of the "2-year exemption" changes［4］ |
| You plan to increase capital during the 1st business year | If stated capital at the start of a business year becomes 10 million yen or more, the exemption no longer applies from the 2nd business year［4］ |
| Unsure about the amount of stated capital or about registering as a qualified invoice issuer | Consult a licensed Japanese tax accountant (zeirishi) before establishing the company. You can also check how the system works at the tax office's consultation counter. |