A foreign-owned small or medium enterprise (SME) in Japan pays a combined effective corporate tax rate of roughly 30 to 35 percent on taxable income once national corporate tax, local enterprise tax (法人事業税), and corporate inhabitant tax (法人住民税) are added together. A reduced SME rate on the first JPY 8 million of annual income pulls the blended rate below 30 percent in lower-profit years.
What Is the Effective Corporate Tax Rate in Japan for 2026?#
The effective rate, the combined burden of all three Japan corporate taxes stacked on top of each other, runs approximately 30 to 35 percent of taxable income, varying by capital size and by the prefecture and municipality where the company is registered. This is not a single tax: it is national corporate tax under the Corporate Tax Act (法人税法) plus two locally administered taxes under the Local Tax Act (地方税法). Each component has its own base and its own rate structure, and they are calculated sequentially rather than as one flat percentage.
Foreign owners deciding how much capital to inject at incorporation should read this alongside the Japan company incorporation guide, since the capital figure chosen at setup is the threshold that determines which rate band applies for years afterward.
Which Taxes Combine to Produce the Effective Rate?#
Three taxes combine: national corporate tax, corporate inhabitant tax (法人住民税), and enterprise tax (法人事業税). National corporate tax is levied under the Corporate Tax Act (法人税法) on taxable income computed after allowable deductions. Corporate inhabitant tax is a prefectural and municipal tax under the Local Tax Act (地方税法) with two parts: a flat per-capita component owed regardless of profit, and an income-based component calculated as a percentage of the national corporate tax liability. Enterprise tax is a separate prefectural tax on business activity, with SMEs taxed on an income basis only.
The per-capita component of corporate inhabitant tax is owed even in a loss year, which is a distinct question from the one this article answers. For how that minimum tax works when a company has zero profit, see the companion post on why Japan's per-capita inhabitant tax is owed even at zero profit.
Does Company Size Change the Rate?#
Yes. Japan's tax system draws the line at JPY 100 million in paid-in capital, and which side of that line a company sits on materially changes the effective rate. According to figures published by PwC and JETRO, a large corporation (capital exceeding JPY 100 million) carries an effective rate of approximately 30.62 percent. An SME (capital of JPY 100 million or below) carries a higher effective rate of approximately 34 to 35 percent on income above JPY 8 million, because the enterprise tax calculation and local surcharge structure differ between the two capital bands.
This capital threshold is a structuring decision made once, at incorporation, and it is difficult to reverse afterward without a formal capital reduction. Most foreign-owned Japan subsidiaries are capitalized below JPY 100 million specifically to stay inside the SME band and qualify for the reduced-rate treatment described below.
What Is the Reduced SME Rate on the First JPY 8 Million of Income?#
An SME applies a reduced national corporate tax rate of 15 percent on the first JPY 8 million of annual taxable income, with the standard SME rate and local taxes applying above that threshold. Because the 15 percent band only covers the first JPY 8 million, the blended effective rate for a small, lower-profit company sits below 30 percent even though the headline SME effective rate on income above JPY 8 million runs 34 to 35 percent. A newly profitable subsidiary earning modest taxable income in its early years benefits disproportionately from this reduced band; the benefit compresses as income rises past the JPY 8 million line.
Taxable income itself is not simply revenue minus cash costs. Deduction rules, including the capped treatment of entertainment expenses (交際費) for a Japan 合同会社 (GK) or 株式会社 (KK), determine how much of a given year's spending actually reduces the taxable base before any of these rates apply; see the entertainment-expense deduction guide for how that cap interacts with the SME capital threshold.
Key points:
(a) A profitable foreign-owned SME (capital JPY 100 million or below) faces an effective combined rate of approximately 34 to 35 percent on taxable income above JPY 8 million, built from national corporate tax, corporate inhabitant tax, and enterprise tax together.
(b) The first JPY 8 million of annual taxable income is taxed at a reduced 15 percent national rate plus local tax, which keeps the blended effective rate below 30 percent for smaller-profit years.
(c) The JPY 100 million capital threshold decides which rate band applies and is set at incorporation, making capital-size structuring and taxable-income deduction planning, not just the headline percentage, the decisions that actually move the effective tax bill.
Frequently Asked Questions#
Is Japan's corporate tax rate the same for every company?
No. The effective rate depends on paid-in capital (above or below JPY 100 million) and on the level of taxable income, because the reduced 15 percent SME rate only applies to the first JPY 8 million of annual income. A large corporation above the JPY 100 million threshold runs an effective rate of approximately 30.62 percent, while an SME runs approximately 34 to 35 percent on income above JPY 8 million under figures published by PwC and JETRO.
Does a loss-making company owe any of this corporate tax?
National corporate tax and the income-based portions of enterprise tax and corporate inhabitant tax are owed only when there is taxable income, so a loss year generally produces no liability on those components. The per-capita portion of corporate inhabitant tax is a separate flat minimum owed regardless of profit; that mechanism is covered in the companion post on Japan's per-capita inhabitant tax at zero profit.
Should I capitalize my Japan company above or below JPY 100 million?
Staying at or below JPY 100 million in paid-in capital keeps a company inside the SME rate band and preserves eligibility for the reduced 15 percent rate on the first JPY 8 million of income, which is why most foreign-owned subsidiaries are capitalized under that line. The right figure still depends on the entity's operating plan and planned local presence, which is a structuring question best reviewed against the current tax and legal consulting framework before incorporation rather than after.
Conclusion#
Japan's effective corporate tax rate for a foreign-owned SME runs approximately 30 to 35 percent once national corporate tax, corporate inhabitant tax, and enterprise tax are combined, with the precise figure set by paid-in capital and by how much of the year's income falls inside or outside the reduced JPY 8 million band. The rate itself is published guidance, not a fixed Aplash determination, and it moves with annual tax reform, so the capital and income figures for a specific entity should be checked against current published rates before filing.
This article is informational only and does not constitute legal, tax, or regulatory advice. Consult a qualified advisor before acting on the content. Last updated: October 2026.