Japan Tax Reform

Japanese Cabinet Approval of 2024 Tax Reform Package

The Japanese cabinet has officially approved the outline of the anticipated 2024 tax reform package.

This package includes significant adjustments, particularly in relation to the application of the small business VAT exemption.

Changes for Foreign Businesses

For taxable periods starting on or before October 1, 2024, notable changes affect foreign businesses’ eligibility for the small business VAT exemption. Specifically:

  1. Payroll Threshold Exemption Criteria: For taxable periods that begin on or before 1 October 2024, foreign businesses no longer have the option to apply for the small business VAT exemption if their payroll threshold is below JPY 10 million.
  2. Capital Requirement: If a foreign entity has capital of JPY 10 million or more when commencing business in Japan, they will no longer be eligible for the small business VAT exemption.

Expanded Scope of Rules

The reform introduces an expansion of rules to address situations where the small business VAT exemption is employed during the establishment of a new subsidiary. This change aims to curb potential misuse of the exemption.

Impact on New Subsidiary Establishment

The modified rules extend to businesses that establish a new subsidiary in an attempt to leverage the small business VAT exemption. The change is applicable even if the affiliated entity of the new subsidiary has a domestic turnover below JPY 500 million, provided its worldwide turnover exceeds JPY 5 billion.

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