This article takes an in-depth look at tax issues in the field of commercial real estate leasing in Japan, aiming to provide a comprehensive tax guide for companies planning to enter the Japanese market or already operating in Japan. This article introduces the main taxes involved in commercial real estate leasing in Japan, including consumption tax, real estate acquisition tax, fixed asset tax, etc., and elaborates on the characteristics and calculation methods of each tax type. It also analyzes the tax considerations of different types of enterprises during the leasing process, covering various business entities such as Japanese legal persons, Japanese branches of foreign companies, and individual operators.

Taking into account the differences in tax policies among various regions in Japan, the tax policies of major cities such as Tokyo and Osaka, as well as special economic regions, were compared. In order to help everyone better understand the tax calculation process, detailed rental tax calculation examples are provided. In addition, we also discussed a variety of tax optimization strategies, including rational use of depreciation policies, full use of tax incentives, etc., to help companies reduce tax costs, as well as tax treatments under some special circumstances, such as rent-free periods, renovation subsidies, transfer Leasing, etc., provides guidance for enterprises to deal with various complex situations.

Main taxes involved in commercial real estate leasing in Japan

When leasing commercial properties in Japan, companies need to face multiple and complex tax systems. A comprehensive understanding of these taxes will not only help enterprises rationally plan and control costs, but also ensure compliance operations. The following is a detailed introduction to several major related taxes:

1.1 Consumption tax

Consumption tax is a Japanese variation that applies to a wide range of areas, including commercial property leasing. Effective October 1, 2019, Japan’s standard consumption tax increase will be increased to 10%. In a leasing transaction, the lessee needs to pay an additional 10% consumption tax when paying rent.

For lessors, their tax liability depends on annual taxable sales. If annual taxable sales exceed 10 million yen, standard consumption tax must be levied. However, Japanese tax law provides a special system for small-scale taxpayers. Specifically, taxpayers whose annual taxable sales do not exceed 10 million yen can choose to apply the simplified collection method. Under this method, real estate taxpayers can calculate output tax based on 50% of taxable sales, without having to calculate input tax in detail, which greatly simplifies the tax processing process.

Japan has also implemented a light incremental system. While this mainly applies to goods such as food and newspapers (with an increment of 8%), in some cases consideration may need to be given if the lease contract includes the supply of these items. Additionally, from 1 October 2023, Japan has introduced The new system “invoice system” applicable to small-scale taxpayers may affect the tax treatment of some leasing businesses.

1.2 Real estate acquisition tax (real estate acquisition tax)

Real estate acquisition tax is a one-time tax consumed when acquiring real estate (land and buildings). While the property itself is not directly involved in this tax, it does need to be considered if a business purchases commercial property to rent out.

The standard tax rate is 4% of the assessed value of the property. However, each series has formulated a number of preferential policies to stimulate the real estate market. For example, for residential land acquired before March 31, 2024, the reduction is 3%. It is also possible to receive further discounts for new homes: seniors can receive 12 million yen for new homes worth no more than 45 million yen; for apartments, seniors can receive 12 million yen per household.

In addition, in order to reduce the burden on taxpayers, the Japanese government has also implemented a special measure: setting one-half of the assessed value of land as the tax standard. This policy was originally scheduled for March 31, 2024, but it may be extended. It is recommended to pay attention to the latest policy trends.

1.3 Fixed asset tax (fixed asset tax)

Fixed asset tax is an annual local tax levied on land, buildings and some large movable properties (such as machinery and equipment). Although usually borne by the landlord, it may be passed on to the tenant in some commercial lease agreements, so the tenant needs to pay special attention to this when negotiating the lease.

The standard interest rate is 1.4% of the property’s appraised value, but actual interest rates may vary by region. For example, most areas in Tokyo adopt a standard interest rate of 1.4%, while some places may adopt lower interest rates to attract investment. The valuation method is usually based on the market value of the asset, which is reassessed every three years. This cyclical assessment can lead to sudden changes in tax amounts, which businesses need to consider in their financial planning.

Taxpayers usually pay in four installments. The specific payment times are April, July, December and February of the following year. In order to reduce the burden on taxpayers, the Japanese government has implemented preferential policies for small-scale residential buildings, using one-sixth of their assessed value as the tax standard; for general residential land, one-third of the assessed value as the tax standard.

1.4 Urban planning tax (urban planning tax)

Major urban planning taxes are usually taken at the same time as fixed asset taxes and are used for the construction and maintenance of urban infrastructure. These cities occupy only designated urban planning areas, for land and buildings.

The standard growth rate is up to 0.3%, but actual growth rates may vary by region. For example, most areas in Tokyo use a maximum growth rate of 0.3%, while some smaller cities may use 0.2% or other growth rates. The tax basis of urban planning taxes is the same as that of fixed asset taxes, and the two are usually taxed and transferred together.

Similar to the fixed assets tax, the urban planning tax also implements preferential policies for residential land. The tax standard for small-scale residential land is six cents of the assessed value, and that for general residential land is one-third of the assessed value. This policy is intended to reduce the tax burden on residential property owners, but will have a smaller impact on commercial properties.

1.5 Corporate tax (corporate tax) or dividends (dividends)

For a legal person, rental income or expenses will directly affect its taxable income, thereby affecting the legal person’s tax. Rental expenses can generally be treated as expenses, while rental income needs to be fully included in taxable income.

The basic growth rate of corporate tax is 23.2% (for large companies with capital exceeding 100 million yen). Small and medium-sized enterprises (with capital not exceeding 100 million yen) may enjoy a more substantial tax rate: the portion of the annual tax payable not exceeding 8 million yen is subject to a preferential tax rate of 15% (this preferential policy was originally scheduled to end in 2023 , but may be postponed).

In addition to national tax, companies also need to collect local corporate tax (national tax, tax rate is 10.3%), corporate industrial tax (local tax, tax rate varies by region), and corporate enterprise tax (local tax, tax rate depends on capital and income). constitutes the actual tax burden of the enterprise.

For individuals renting commercial properties, income tax is required. Income tax adopts progressive tax rates ranging from 5% to 45%, and the specific tax rate is calculated based on the individual’s total income. In addition, individuals are subject to income tax (generally 10% of the income tax amount) and recovery special reporting (2.1% of the reporting amount, expected to continue until 2037).

1.6 Stamp duty (paper tax)

Stamp duty applies to various legal documents, including lease contracts. The tax amount is determined based on the contract amount and adopts a stepped tax rate. Here are a few specific examples:

Contract amount does not exceed 1 million yen: 200 yen

• 1 million yen to 5 million yen: 400 yen
• 5 million yen to 10 million yen: 1,000 yen
• 10 million yen to 50 million yen: 20,000 yen
• 50 million yen to 100 million yen: 60,000 yen
• 100 million yen to 500 million yen: 100,000 yen
• 500 million yen to 1 billion yen: 200,000 yen
• 1 billion yen to 5 billion yen: 400,000 yen
• Over 5 billion yen: 600,000 yen

The implication is that certain types of documents may be exempt from stamp duty. For example, from April 1, 2020, electronic contracts that meet certain conditions can be exempted from stamp duty, which is an initiative of the Japanese government to promote digitalization. In addition, stamp duty is usually levied on rental receipts.

In actual practice, companies need to comprehensively consider the impact of these taxes on commercial real estate leasing activities. For example, when choosing to lease or purchase commercial real estate, you need to weigh the differences between fixed asset tax, real estate acquisition tax and tax treatment of leasing expenses. At the same time, companies should also pay close attention to changes in tax policies, such as adjustments to tax tariffs, various Adjust business strategies in a timely manner due to tax policy adjustments or updates, etc.

In addition, considering the complexity of the Japanese tax system and the differences in local tax policies, companies are strongly recommended to consult local tax experts or accountants when conducting specific operations to ensure full compliance with the latest legal requirements and local tax policies to avoid Unnecessary taxes At the same time, legal enterprises can also consider using various tax planning strategies to optimize tax burdens and improve operating efficiency while complying with laws and regulations.

Tax considerations for different business types

In Japan, different types of businesses face different tax considerations when it comes to commercial property leasing. Understanding these differences is critical for businesses to develop appropriate tax strategies. Below is a detailed tax analysis for various business types:

2.1 Japanese legal person

Japanese legal entities face a complex tax environment regarding commercial real estate leasing. First of all, when it comes to the treatment of rental expenses, Japanese legal entities can fully deduct the rent paid as necessary expenses, directly reducing the taxable income. However, it should be noted that according to the regulations of the Japanese National Tax Agency, if the rent is significantly higher than the market price, the excess may be regarded as hidden profit distribution and shall not be deducted. Therefore, companies should retain market research data on rental pricing to prove its reasonableness. In particular, leases between related parties will be subject to more stringent scrutiny by tax authorities.

In terms of consumption tax, Japanese legal persons can usually deduct the consumption tax included in the rent paid by them. However, this deduction right is affected by a number of factors. According to the revision of the consumption tax law that took effect on October 1, 2019, the standard tax rate has been increased to 10%, while certain goods and services still maintain a reduced tax rate of 8%. For leased commercial properties, a standard tax rate of 10% generally applies. However, if an enterprise engages in both taxable and tax-exempt businesses, it needs to calculate the deductible input tax according to a dedicated ratio. Specifically, if the proportion of taxable sales to total sales is less than 95%, the proportional calculation method needs to be used to determine the deductible input tax.

Corporate tax returns are another important aspect. Japanese corporations need to accurately reflect leasing-related income and expenses in their corporate tax returns. It is worth noting that according to corporate accounting standards and tax laws, prepaid rent needs to be amortized and included in each tax year. If a long-term lease is signed, accounting for future rent increases may need to be considered, which may involve the calculation of deferred tax. In addition, Japan implements a “family club” system. If a company is controlled by a few individuals or families (usually three or less shareholders and their relatives control more than 50% of the shares), leasing transactions between it and related parties will be more stringent. review. In this case, the business may need to additionally demonstrate the commercial reasonableness of the transaction.

Starting from October 1, 2023, Japan has introduced an electronic invoice system (e.g. preservation method of eligibility request letter, commonly known as the electronic invoice system). This system puts forward new requirements for the recording and management of lease transactions. Only enterprises registered as “qualified application issuers” can issue valid value-added tax invoices. For businesses leasing commercial property, it is critical to ensure that they obtain compliant electronic invoices from the lessor, otherwise consumption tax deductions may not be available.

2.2 Japanese branch of foreign company

Japanese branches of foreign companies have unique tax treatment. Under Japanese law, a branch is considered part of a foreign company rather than a separate legal entity. This status results in a number of special tax considerations.

Branches are taxed only on their Japanese-source income, not their worldwide income. This principle stems from double taxation agreements that Japan has signed with most countries. However, determining which income is “Japan-sourced” can be complicated. For example, if a branch subleases part of a leased property to a foreign related party, complex income attribution issues may be involved. According to the guidance of the Japanese National Tax Agency, factors such as the place where the contract is signed, the place where the service is provided, and the risk bearer need to be considered to determine the attribution of income.

Transfer pricing is an issue that requires special attention for Japanese branches of foreign companies. Japan’s transfer pricing rules are based on the OECD transfer pricing guidelines, requiring transactions between related parties to comply with the arm’s length principle. This includes not only direct rent payments, but also possible security fees, management fees, etc. According to the transfer pricing documentation requirements revised in 2016, large multinational enterprise groups (with consolidated total revenue of 100 billion yen or more in the previous year) need to prepare master files, local files and country-by-country reports. Even if this threshold is not met, companies are still required to retain contemporaneous documentation to demonstrate the fairness of the transaction price.

Headquarters cost sharing is another complex issue. Generally, head office expenses directly related to Japanese operations can be allocated to the Japanese branch and deducted pre-tax in Japan. However, this allocation needs to have a reasonable basis, such as working time records, income ratio, etc. The Japanese tax authorities pay special attention to the allocation of administrative expenses and require enterprises to prove that these expenses indeed bring benefits to the Japanese branch. It is worth noting that certain expenses (such as headquarters acquisition costs) may be deemed unrelated to Japanese operations and are not deductible in Japan.

Starting in 2023, Japan will introduce a new foreign corporate tax system that requires foreign companies to disclose their global operations in more detail. This new system requires foreign companies with permanent establishments in Japan to submit more detailed reports, including global organizational structure, business overview, financial status and other information. This change may increase the compliance burden on branches, but also provides tax authorities with more comprehensive information to assess the reasonableness of cross-border transactions.

In addition, Japan introduced new interest deduction limitation rules in 2021 (so-called “excessive interest expense rules”), which may affect financing arrangements between branches and headquarters. Under this rule, net interest expense in excess of 30% of adjusted taxable income may not be allowed as a deduction. For affiliates that lease large amounts of commercial property, this rule could impact their financing strategies.

2.3 Individual operators

For individual operators engaged in commercial property leasing in Japan, tax considerations are particularly important because it directly affects the individual’s tax burden and business strategy.

In terms of income tax, the rental income of individual operators will be combined with other income, and progressive tax rates from 5% to 45% will apply. Specifically, the income tax rates for 2023 are as follows: 5% for less than 1.95 million yen, 10% for 1.95 million to 3.3 million yen, 20% for 3.3 million to 6.95 million yen, and 20% for 6.95 million to 9 million yen. 23%, 33% for 9 million to 18 million yen, 40% for 18 million to 40 million yen, and 45% for more than 40 million yen. In addition, a 10% local resident tax is required. In comparison, the basic corporate tax rate is 23.2% (for small and medium-sized enterprises, 15% for annual income below 8 million yen). However, it should be noted that legal persons also need to pay resident tax and business tax, and the actual tax burden may be higher than the superficial tax rate.

The identification of necessary funds is particularly important for individual operators. Under Japanese income tax law, individuals can deduct necessary expenses directly related to the receipt of income. For commercial property leases, this typically includes maintenance, insurance, property taxes, depreciation, and more. It is worth noting that Japanese tax law allows the calculation of depreciation using the fixed rate method or the fixed amount method, and different types of buildings have different statutory useful lives and depreciation rates. For example, commercial buildings with reinforced concrete structures are typically depreciated over 50 years. Sole proprietors need to carefully record all expenditures and retain relevant vouchers for at least 7 years.

The blue declaration system provides significant advantages to sole proprietors. This system originated from the tax reform of 1950 and was designed to encourage taxpayers to keep accurate accounting records. Individuals who choose blue filing can receive a number of tax benefits, including a special deduction of 650,000 yen (which can be increased to a maximum of 1.1 million yen when certain conditions are met), loss carryforward (can be carried forward up to 3 years), etc. . However, to obtain these discounts, you need to maintain double-entry bookkeeping and submit the next year’s blue declaration recognition application before March 15 of each year. In addition, blue filers can also set up various reserves, such as bad debt reserves, to achieve tax deferral to a certain extent.

Starting in 2020, Japan has introduced a basic control and elimination reform for personal income tax. The basic deduction amount has been increased from 380,000 yen to 480,000 yen, but taxpayers with annual income exceeding 24 million yen will gradually lose this deduction. This change has an impact on high-income sole proprietors who may need to reconsider whether to convert their business into a legal entity.

In addition, individual traders also need to pay attention to consumption tax regulations. Individuals with annual sales exceeding 10 million yen must register as consumption tax taxpayers. Individuals below this threshold can elect to become voluntary taxpayers, which may be more advantageous when making large equipment investments. The electronic invoice system that will be implemented from October 2023 also applies to individual operators, and they need to register and update the invoicing system in time.

2.4 Representative Office

A representative office has a unique tax status in Japan, primarily because it is not considered a separate legal entity or permanent establishment. However, this status also brings with it a complex set of tax considerations.

In terms of tax registration requirements, a pure representative office is not required to register for corporate tax or consumption tax in Japan. This is because the representative office theoretically does not engage in any revenue-generating activities. However, if a representative office employs employees, registration for source income tax and social insurance will be required. According to the regulations of the Japanese National Tax Agency, even if a foreign company pays wages, as long as the employees work in Japan, they need to pay source income tax in Japan. In addition, representative offices are required to pay social insurance for their employees, including health insurance and employees’ pensions.

The activities that a representative office can carry out are strictly restricted. According to Japanese law, representative offices can only engage in auxiliary activities, such as market research, information collection, advertising, etc. These activities should not directly generate revenue. However, in practice, it is not always clear what constitutes “auxiliary nature”. For example, if the representative office frequently arranges business meetings for the head office and participates in contract negotiations, even if the final contract is signed by the head office, the tax authorities may consider this to have exceeded a purely auxiliary nature. According to the OECD Model Tax Treaty revised in 2017 (most tax treaties in Japan refer to this model), even preparatory or auxiliary activities may be regarded as a permanent establishment if they form an integral part of the overall activities of the enterprise. .

If the representative office actually carries out business activities, such as signing contracts, providing services, etc., it may be deemed a permanent establishment and will be required to pay Japanese corporate tax. In this case, the company may face the risk of back taxes, interest or even penalties. It is therefore important to regularly review the scope of the representative office’s activities to ensure that they do not exceed legal boundaries.

If a representative office decides to convert into a branch or subsidiary, there are a number of tax implications. First, registration for corporate tax and consumption tax is required. Second, assets used by the original representative office may need to be transferred to the new entity at market value, which may incur tax costs. Under Japanese transfer pricing rules, such transfers should be made at an arm’s length price. Additionally, expenses incurred during the previous period of representation of the office may not be deductible in the new entity because they are deemed to have occurred in a different tax entity. However, if it can be demonstrated that these expenses directly benefit the new entity’s business, there may be an opportunity to claim a partial deduction.

Starting in April 2023, Japan will implement stricter reporting requirements for foreign companies’ activities in Japan. This is based on the OECD’s BEPS (Base Erosion and Profit Shifting) action plan. Even representative offices may be required to provide more detailed information on the nature and scope of their activities in Japan. This includes submitting an annual activity report detailing the office’s staff composition, specific activities carried out, relationships with the parent company, etc. This new requirement increases the compliance burden on representative offices, but also provides an opportunity for businesses to regularly review whether their activities in Japan remain consistent with the representative office positioning.

In summary, different types of businesses face unique tax challenges when it comes to commercial property leasing in Japan. Japanese legal persons need to pay attention to the treatment of rental expenses, consumption tax deductions and regulations on clan clubs; Japanese branches of foreign companies need to pay special attention to income attribution, transfer pricing and headquarters expense allocation; individual operators should make full use of the advantages of the blue declaration system and Carefully plan the identification of necessary funds; representative offices need to strictly limit the scope of their activities to avoid being identified as a taxable entity. No matter which business form you choose, keeping abreast of the latest tax policy changes, maintaining complete accounting records, and consulting tax experts regularly are the keys to ensuring tax compliance and optimizing tax burdens. In Japan’s complex and ever-changing tax environment, forward-looking tax planning can create significant economic value for enterprises.

Differences in tax policies in different regions of Japan

3.1 Tokyo Metropolitan Tax Policy

As the capital and economic center of Japan, Tokyo’s tax policy system is complex and unique. Tokyo’s tax policy not only reflects its characteristics as a metropolis, but also reflects the Japanese central government’s strategic considerations for the capital’s economic development.

Fixed asset value-added tax is an important part of Tokyo Metropolitan Taxation. As Tokyo’s real estate market continues to prosper, the value of fixed assets continues to rise, providing the Tokyo Metropolitan Government with a considerable and stable source of tax revenue. The Tokyo Metropolitan Government adopts a sophisticated assessment system to regularly reassess the value of fixed assets to ensure that taxes are kept in sync with the actual value of the assets. It is worth noting that Tokyo adopts differentiated tax rates for different types of fixed assets. For example, tax rates for residential land are usually lower than for commercial land, a policy aimed at balancing economic development and people’s livelihood needs.

The City Planning Tax is one of Tokyo’s unique taxes designed to support the construction and improvement of urban infrastructure. This tax is mainly used for large-scale urban planning projects such as road widening, public transportation network expansion, and urban greening. The urban planning tax rate is usually about 30% of the fixed asset tax, but the specific ratio may vary from region to region. This tax has largely supported Tokyo’s complex urban renewal plan, enabling Tokyo to continuously optimize its urban functions and maintain the competitiveness of an international metropolis.

The surtax in special districts reflects the complexity of Tokyo’s internal governance. Each of Tokyo’s 23 special districts has certain tax autonomy and can levy additional taxes based on the special needs of the district. These taxes are usually used to support improvements in educational facilities, social welfare projects, environmental protection programs, etc. within the region. For example, in order to improve the level of internationalization, Minato City levies an additional internationalization promotion tax on certain businesses; while Shinjuku City levies a special environment beautification tax on entertainment venues. This system design enables each district in Tokyo to formulate more targeted development strategies based on its own characteristics.

3.2 Osaka Prefecture tax policy

As Japan’s second largest economic center, Osaka’s tax policy not only draws on Tokyo’s experience, but also makes innovations based on its own characteristics. Osaka’s tax policy is relatively loose overall, mainly to enhance its competitiveness in the global and regional economy.

Compared to Tokyo, Osaka offers more benefits in terms of corporate taxation. For example, Osaka Prefecture has implemented the “Osaka Prefectural Business Site Promotion Ordinance” to provide corporate enterprise tax reductions and exemptions for newly established or expanded companies. Specifically, qualified enterprises can enjoy up to 40% corporate enterprise tax reduction for up to 10 years. This policy has greatly enhanced Osaka’s attractiveness to domestic and foreign companies.

Osaka has also introduced a series of tax incentives targeting specific regions. For example, in order to revitalize the Bay Area economy, Osaka provides additional tax incentives to companies investing in the area. These benefits include reductions and exemptions on fixed assets tax and urban planning tax, which can last up to 5 years. In addition, Osaka has also established the “Kansai Innovation International Strategic Comprehensive Special Zone”, where key industries such as life sciences and new energy can enjoy more generous tax policies, including investment tax credits and other measures.

3.3 Local city tax incentives

Local cities in Japan, especially some economically backward areas, have generally adopted more radical tax incentives in order to attract investment and promote economic development.

Many local cities offer a full range of tax incentives to newly established businesses. For example, Fukushima Prefecture launched the “Fukushima Innovation and Entrepreneurship Promotion Ordinance” in order to promote post-disaster reconstruction and industrial transformation. According to this regulation, new companies established in Fukushima Prefecture can enjoy 100% exemption from corporate prefectural tax for up to 5 years, and up to 90% exemption from real estate acquisition tax. Similarly, in order to attract IT companies, Tottori Prefecture provides a package of preferential tax policies including corporate enterprise tax and real estate acquisition tax, with a preferential period of up to 5 years.

In addition to new businesses, many local cities offer tax incentives for specific industries. For example, in order to develop the renewable energy industry, Hokkaido provides fixed asset tax exemptions for up to 10 years to related companies. Okayama Prefecture focuses on supporting the automobile manufacturing industry and provides related enterprises with comprehensive tax benefits including corporate enterprise tax and real estate acquisition tax.

3.4 Special economic zones

Japan has established a number of special economic zones, which enjoy unique tax incentives and are designed to promote innovation and development in specific fields.

The National Strategic Special Zone is an important platform established by the Japanese government to promote economic reform and innovation. These special zones enjoy greater policy autonomy, including tax incentives. For example, the Tokyo Area National Strategic Special Zone provides corporate tax exemptions of up to 20% for companies that conduct research and development in specific fields (such as artificial intelligence and the Internet of Things). Fukuoka City, as a national strategic special zone for entrepreneurship, provides newly established entrepreneurial companies with a 50% reduction in corporate tax for up to five years.

Comprehensive system special economic zones are another important special economic zone. These special zones have formulated targeted preferential tax policies based on their respective development positioning. For example, the Fujisan Foot Medical Town Comprehensive Special Zone in Shizuoka Prefecture provides fixed asset tax and real estate acquisition tax reductions and exemptions to medical equipment manufacturing companies. Kyoto Prefecture’s “Kyoto Academic Research City Comprehensive Special Zone” provides preferential measures such as super deductions for R&D expenses to high-tech enterprises.

3.5 Tax policies in post-disaster reconstruction areas

As a country prone to natural disasters, Japan has formulated a series of special tax policies for post-disaster reconstruction areas to accelerate economic recovery and reconstruction.

After the Great East Japan Earthquake in 2011, the Japanese government formulated comprehensive tax incentives for the affected areas. These measures include temporary tax relief for disaster-stricken businesses, special tax incentives for reconstruction projects, etc. Specifically, companies in disaster-stricken areas can enjoy corporate tax exemptions for up to three years, and fixed asset tax and urban planning tax exemptions for up to four years. In addition, the government also introduced the “Special Area Law for Recovery from the Great East Japan Earthquake”, which allows companies in specific recovery areas to enjoy corporate tax reductions of up to 40%. This policy has greatly promoted the industrial reconstruction of disaster areas.

In addition to the Great East Japan Earthquake, the Japanese government has also formulated similar tax policies for areas affected by other natural disasters. For example, after the 2016 Kumamoto earthquake, Kumamoto Prefecture provided a number of tax exemptions, including business tax and real estate acquisition tax, to disaster-stricken companies. After the heavy rain disaster in Western Japan in 2018, disaster-stricken areas such as Hiroshima Prefecture and Okayama Prefecture also launched targeted preferential tax policies, including fixed asset tax reductions and tax credits for reconstruction investments.

These post-disaster tax policies not only reflect the Japanese government’s emphasis on the recovery of disaster areas, but also demonstrate the flexibility and effectiveness of tax policy as an economic adjustment tool. Through these highly targeted and timely tax measures, Japan has successfully accelerated the economic recovery of many disaster areas and provided valuable experience for other countries in dealing with natural disasters.

Detailed explanation of rental tax calculation examples

4.1 Basic scenario settings

In order to fully understand the tax calculation of Japanese leasing business, we set up a specific case scenario. Suppose that a medium-sized IT company named “Sakura Technology” decides to rent an office in Chuo-ku, Tokyo. This company is a general legal person, mainly engaged in software development and IT consulting services, with an annual turnover of approximately 500 million yen. The company is in a stage of rapid development and its turnover is expected to continue to grow in the next few years.

The rental property is 300 square meters of office space in a modern office building located in a prime location near Ginza. This location not only has convenient transportation, but is also close to many financial institutions and large enterprises, making it very suitable for “Sakura Technology” to expand its business and attract talents. The monthly rent agreed by both parties is 3 million yen, payable in advance every quarter. The lease contract period is 3 years, effective from April 1, 2024. The contract also includes a clause that allows tenants to give priority to renewing the lease after the expiration of the contract, which provides guarantee for the long-term development of “Sakura Technology”.

4.2 Consumption tax calculation

In Japan, office leasing is usually subject to consumption tax. Effective October 1, 2019, Japan’s standard consumption tax rate has been increased to 10%. This tax rate change is an important fiscal policy implemented by the Japanese government to cope with the aging of the population and improve social welfare levels. For “Sakura Technology”, the monthly consumption tax that needs to be paid is: 3 million yen × 10% = 300,000 yen.

However, Japanese tax law provides a simplified taxation system (simplified taxation system) aimed at reducing the tax burden on small-scale taxpayers. If the annual sales of “Sakura Technology” do not exceed 50 million yen, you can choose to apply this system. Under the simplified taxation system, companies can use a fixed collection rate to calculate output tax without having to calculate input tax in detail. For the IT services industry, the tax rate is 50%. In other words, if “Sakura Technology” chooses simplified taxation, the actual consumption tax it pays will be reduced by half.

However, considering that “Sakura Technology”‘s annual turnover has reached 500 million yen, far exceeding the threshold for simple taxation, the company needs to pay consumption tax in the same way as a general taxpayer. This means that the company not only has to pay the full consumption tax on rent, but also needs to carefully calculate the input tax on other business activities to ensure accurate declaration and payment of consumption tax.

4.3 Calculation of stamp duty

In Japan, lease contracts are subject to stamp duty (paper tax). The amount of stamp duty depends on the length of the contract and the total rent. Japan’s stamp duty system originated during the Meiji period and was designed to ensure the legal validity of important documents and at the same time serve as a source of tax revenue for the government. In 2020, the Japanese government made minor adjustments to the stamp duty system to adapt to the needs of the digital age.

In this case, the lease term of “Sakura Technology” is 3 years, and the total annual rent is 360 million yen (3 million × 12 months). According to the latest stamp tax rate table, for real estate lease contracts with an amount between 100 million yen and 500 million yen, the stamp tax payable is 60,000 yen. Therefore, “Sakura Technology” needs to pay a one-time stamp tax of 60,000 yen when signing a lease contract.

It is worth noting that if the contract is signed electronically, according to the Electronic Stamp Duty Law revised in 2020, the stamp tax can be paid through the online declaration system without the need for actual decals. This policy change reflects the Japanese government’s efforts to promote the digitization of administrative procedures and provide companies with a more convenient way to comply with tax.

4.4 Analysis of the impact of corporate tax

Rental expenses have a direct impact on a company’s corporate tax. In Japan, rent is considered a necessary operating expense and can be fully deducted from a business’s taxable income. For “Sakura Technology”, the annual rental expense is 360 million yen, which will significantly reduce the company’s taxable income.

Assuming that “Sakura Technology”‘s annual operating profit (before rent is deducted) is 100 million yen, the taxable income after rent is deducted will be significantly reduced. The specific calculation is as follows: taxable income = 100 million yen – 360 million yen = -260 million yen .

In this case, the company does not need to pay corporate tax that year. More importantly, according to Japan’s loss carryforward system, companies can carry forward losses for the current year up to 10 years (the fiscal year starting after April 1, 2018). This means that “Sakura Technology” can use this 260 million yen loss to offset taxable income in future profit years, thereby achieving the effect of smoothing the tax burden.

In addition, the Japanese government has introduced various tax preferential policies to encourage companies to invest in equipment and innovate. For example, if “Sakura Technology” purchases new IT equipment or software while leasing an office, it may qualify for the “Production Improvement Equipment Investment Promotion Tax System” and enjoy special depreciation or tax credits. These policies can further optimize a company’s overall tax position.

4.5 Fixed assets tax and urban planning tax (if applicable)

In Japan, fixed asset tax (fixed asset tax) and urban planning tax (urban planning tax) are generally borne by property owners. However, in some rental agreements, particularly in the case of long-term leases or whole-building leases, these taxes may be partially or fully passed on to the tenant.

Assume that the assessed value of the building where the office leased by “Sakura Technology” is 5 billion yen, and the company rents 10% of the entire building. In Tokyo, the standard fixed asset tax rate is 1.4% and the urban planning tax rate is 0.3%. Then, if it needs to bear this part of the tax, the calculation method of “Sakura Technology” is as follows:

Annual fixed assets tax = 5 billion yen × 10% × 1.4% = 7 million yen

Annual city planning tax = 5 billion yen × 10% × 0.3% = 1.5 million yen

Therefore, if the lease agreement requires the payment of this part of the tax, “Sakura Technology” will need to pay an additional 8.5 million yen per year.

Japanese local governments have the right to adjust the rates of fixed assets tax and urban planning tax within a certain range. For example, in order to attract companies to settle in or support the development of specific industries, some regions will provide tax concessions. If the office of “Sakura Technology” is located in an industrial cluster or innovation zone designated by the Tokyo Metropolitan Government, it may enjoy exemptions from fixed asset tax and urban planning tax, which will further reduce the company’s rental costs.

4.6 Comprehensive tax cost analysis

Now we can conduct a comprehensive summary analysis of the overall tax cost of renting an office at “Sakura Technology”:

• Annual rent: 360 million yen
• Annual consumption tax: 36 million yen
• Stamp duty (one-time): 60,000 yen
• Fixed assets tax and urban planning tax (if applicable): 8.5 million yen

Total annual tax cost (excluding one-time stamp duty) = 36 million + 8.5 million = 44.5 million yen

Tax burden rate = tax cost / total rent = 44.5 million / 360 million ≈ 12.36%

This analysis shows that the main tax cost of “Sakura Technology” during the leasing process comes from consumption tax, followed by fixed asset tax and urban planning tax that may be borne. At the same time, we have also seen that rental expenses have a significant impact on corporate tax, which may lead to short-term tax losses, but this can obtain tax benefits in future years through the loss carry-forward system.

In order to optimize tax costs, “Sakura Technology” can consider the following strategies:

• Research whether you qualify for fixed asset tax and urban planning tax incentives offered by local governments.
• Evaluate whether it complies with various industrial support policies, such as IT industry development subsidies or super deductions for R&D expenses, etc.
• Consider dedicating part of your office space to R&D activities, which may qualify for more favorable tax policies.
• Negotiate with landlords to explore whether the consumption tax burden can be optimized by adjusting the rental structure (such as differentiating base rent and management fees).
• Take advantage of various small and medium-sized enterprise support policies launched by the Japanese government, such as the equipment investment promotion tax system, etc., to offset part of the rental costs.

It should be emphasized that actual conditions may vary depending on specific contract terms, business operating conditions and changes in local policies. Japan’s tax policy is also constantly adjusted to respond to changes in the economic environment and social needs. For example, in recent years, the Japanese government has been discussing the possibility of further increasing the consumption tax rate to cope with the increasingly severe pressure on social security. Therefore, “Sakura Technology” must not only consider the current tax environment when making long-term leasing decisions, but also remain sensitive to future policy changes.

In view of the complexity and regional differences of Japan’s tax system, it is strongly recommended that “Sakura Technology” hire a professional tax consultant to regularly evaluate the company’s tax status to ensure full use of various tax preferential policies, while strictly abiding by tax laws and regulations to avoid misunderstanding of policies. the tax risks arising. Through meticulous tax planning and management, “Sakura Technology” can maximize its operating cost structure in Japan while ensuring compliance.

Tax optimization strategies for commercial real estate leasing

5.1 Proper use of depreciation policies

Proper use of depreciation policies is a key tax optimization strategy in commercial real estate leasing. Japan’s depreciation system allows companies to deduct the cost of an asset year by year during its use, thereby reducing taxable income. For renovations and fixtures on a rental property, choosing the appropriate depreciation method can significantly impact a business’s tax costs.

The choice of accelerated depreciation method is an important means to optimize taxation. Japanese tax law allows companies to use the fixed-rate method for accelerated depreciation under certain conditions. This method provides higher depreciation in the early years of the asset’s life, allowing for a faster recovery of investment costs and a reduced tax liability in the short term. For example, for office space leased by a high-tech enterprise, accelerated depreciation may apply to its advanced IT equipment and dedicated laboratory facilities. Assuming that a company invests 100 million yen in purchasing advanced equipment, it may depreciate 40%, or 40 million yen, in the first year using the fixed-rate method, which is much higher than the depreciation amount using the straight-line method. Not only does this significantly reduce taxable income in the early years, it also improves the business’s cash flow.

The depreciation lives of different asset types also require careful consideration and planning. The Japanese National Tax Agency stipulates the standard service life of various types of assets, and enterprises can adjust it within a certain range based on actual conditions. Here are the standard depreciation lives for some common commercial real estate-related assets:

• Reinforced concrete structure buildings: 39-50 years
• Steel structure buildings: 34-38 years
• Ancillary equipment for buildings constructed of wood or reinforced concrete: 15-18 years
• Elevator and central air conditioning system: 17 years
• Office furniture: 15 years
• Computers and servers: 4-5 years
• General machinery and equipment: 7-10 years
• Passenger car: 6 years

For the rapidly changing technology industry, companies may want to consider shortening the depreciation life of certain equipment. For example, an IT company may apply to shorten the depreciation life of servers from 5 years to 3 years to reflect the reality of rapid technological updates. At the same time, for interior decoration of buildings, they can be divided into different categories, such as partitions (15 years), lighting systems (15 years), special-purpose decoration (10 years), etc., and different depreciation periods are applied to optimize overall depreciation. Strategy.

In addition, companies should also pay attention to the special depreciation policies introduced by the Japanese government from time to time. For example, to promote digital transformation, the government may allow companies to add 30% special depreciation to standard depreciation on eligible digital equipment. Accurately grasping these policies allows companies to maximize tax advantages while maintaining compliance.

5.2 Tax comparison of leasing vs. purchasing

When deciding whether to lease or purchase commercial property, a thorough comparative tax analysis is critical. This involves not only the immediate financial impact, but also long-term tax planning and overall business strategy.

Long-term cost analysis is at the heart of this decision-making process. Leasing generally allows the entire rent to be deducted as an operating expense, whereas acquisition involves complex asset depreciation, interest expense deductions and potential capital gains taxes. For example, assume that a company requires an office space worth 500 million yen, with an estimated useful life of 15 years. If you choose to lease, assuming the annual rent is 25 million yen, a total of 375 million yen in expenses can be deducted within 15 years. If you choose to buy, based on the 39-year depreciation period, you can only depreciate about 192 million yen in 15 years, but you can additionally deduct loan interest (assuming a loan of 300 million yen and an annual interest rate of 2%, a total of about 50 million can be deducted in 15 years) Yen interest). Additionally, the purchase will need to take into account capital gains taxes that may arise on a future sale.

From a cash flow perspective, leasing usually requires less initial capital investment, which allows the company to retain more cash for core business development. From a tax perspective, this means companies can put more money into R&D or equipment investments that may enjoy more favorable tax rates. For example, Japan provides a tax credit of up to 25% for R&D expenditures of small and medium-sized enterprises, which is much higher than the general corporate tax rate. Therefore, if a growing company chooses to lease rather than purchase office space, it may have more money to invest in R&D, resulting in greater tax benefits.

On the other hand, although the initial investment in acquisition is large, in the long run, better financial returns may be obtained through asset appreciation and lower usage costs. For example, in areas with active real estate markets such as Tokyo, the average annual appreciation rate of commercial real estate over the past 20 years has been approximately 2-3%. If a 500 million yen property purchased by a company increases in value to 600 million yen after 15 years, even taking into account the 20% capital gains tax, the company may still obtain considerable after-tax returns.

Additionally, acquisitions allow businesses to utilize assets more flexibly. For example, businesses can rent out some of their unused space to other companies to generate additional revenue. While this increases tax complexity, it also creates opportunities for further tax optimization, such as using depreciation to offset rental income.

Enterprises need to weigh these factors and make decisions based on their own cash flow situation, growth expectations, market prospects and long-term development strategies. In some cases, a hybrid strategy may be the best option, such as leasing for a few years and then considering purchasing after the business has stabilized.

5.3 Make full use of preferential tax policies

The Japanese government has provided a number of tax preferential policies to promote the development and use of certain types of commercial real estate. Making full use of these policies can significantly reduce the tax costs of enterprises. These preferential policies are usually consistent with the country’s strategic development direction, such as environmental protection, energy conservation, technological innovation, etc.

Energy-efficient building incentives are an important area of ​​tax incentives. In order to achieve its 2050 carbon neutrality goal, Japan provides tax incentives for buildings that meet certain energy-saving standards. For example, under the Energy Efficient Homes and Buildings Tax Regime, if a new or renovated commercial building reaches energy consumption efficiency class A (more than 40% improvement over the benchmark), it can receive a tax credit of up to 12% or a special depreciation of 50%. This applies to the building itself and related investments in energy-saving equipment.

Specifically, if a company invests 100 million yen to renovate a leased office building to meet Class A energy efficiency standards, it can choose to receive a tax credit of 12 million yen that year, or receive a tax credit of 50 million yen (the amount of investment 50%) for special depreciation. Not only does this significantly reduce direct tax costs, it also reduces long-term operating costs by reducing energy consumption. For example, a 40% improvement in energy efficiency may mean saving millions of yen in annual energy bills. These savings can also be deducted as expenses, further optimizing the tax situation.

R&D facility discounts are another area worthy of further exploration, particularly for high-tech companies. To encourage innovation, the Japanese government provides additional tax incentives for facilities and equipment used for research and development purposes. Under the “Tax System for Promotion of Research and Development”, companies can receive a tax credit of up to 14% (up to 25% for small and medium-sized enterprises), with the credit limit capped at 25% of the corporate tax (which can be increased to 40% in certain cases) .

Businesses may be eligible for these concessions if the commercial space they lease is used in part for research and development activities. For example, a biotechnology company leased an office building and converted 30% of the area into a laboratory. Assuming investments in renovations and equipment total 200 million yen, the company may qualify for tax credits of up to 28 million yen. In addition, rental expenditures for R&D may also be considered part of R&D expenses and thus qualify for additional tax benefits.

In order to maximize the use of these preferential policies, enterprises need to consider the following points when planning the use of rental space:

• Keep detailed records of space usage, especially clear demarcation of R&D areas.
• Keep all investment records and supporting documents related to energy-saving renovation and R&D equipment.
• Consider hiring a professional tax advisor to ensure that these complex preferential policies are properly understood and applied.
• Regularly review the company’s R&D activities and space usage to ensure continued compliance with the preferential conditions.
• Pay attention to policy updates, as the Japanese government often adjusts these preferential measures in response to economic and social needs.

By carefully planning and taking full advantage of these tax incentives, companies can significantly reduce their effective tax rate while promoting innovation and sustainable development. This is not only beneficial to the company itself, but also in line with the Japanese government’s strategic goals of promoting economic transformation and technological progress.

5.4 Reasonably arrange the term of the lease contract

The length of a lease contract not only affects the flexibility of business operations, but also has a direct impact on a number of tax factors. Properly arranging the lease term can optimize overall tax costs while providing enterprises with necessary operating flexibility.

The impact on stamp duty is the first factor to consider. In Japan, the stamp duty on a lease contract is determined based on the contract amount and term. Longer term contracts are usually subject to higher stamp duty. Specifically, the stamp duty calculation standards are as follows:

• Contract amount less than 1 million yen: 200 yen
• 1 million yen to 5 million yen: 400 yen
• 5 million yen to 100 million yen: 10,000 yen
• 100 million yen to 500 million yen: 60,000 yen
• 500 million yen to 1 billion yen: 160,000 yen
• 1 billion yen to 5 billion yen: 320,000 yen
• Above 5 billion yen: 480,000 yen

For example, a five-year lease contract worth 500 million yen requires a stamp tax of 160,000 yen. If the same lease is divided into two 3-year contracts, the amount of each contract is 300 million yen, and the stamp duty for each contract is 60,000 yen, totaling 120,000 yen. Although this arrangement may require additional administrative work, it can save 40,000 yen in stamp duty. More importantly, this arrangement provides greater flexibility, allowing companies to adjust leasing strategies based on operating conditions after 3 years.

The impact on property tax assessments is also an important consideration. While property taxes are primarily borne by landlords, in some long-term lease agreements this cost may be partially passed on to tenants. Japan’s fixed asset tax rate is generally 1.4%, but the actual tax burden may vary by region. Longer lease terms may result in landlords requiring tenants to bear more property taxes, as the long-term tax liability faced by landlords is more certain.

For example, assuming a commercial building worth 1 billion yen, the annual fixed asset tax is approximately 14 million yen. If a 10-year long-term lease is signed, the landlord may require the tenant to bear an annual fixed asset tax of 7 million yen (i.e. 50%). On the contrary, if it is a 5-year lease, the landlord may only require the tenant to contribute 30%, which is 4.2 million yen per year. This difference can add up to 14 million yen during the lease term, which is a considerable amount.

On the other hand, a shorter lease term may give tenants more negotiating room and reduce the risk of additional tax liabilities. For example, in times of economic uncertainty, tenants may be more inclined to sign a three- or five-year lease rather than a 10-year lease. Not only does this result in a lower long-term financial commitment, it may also result in more favorable terms at lease renewal time, including lower tax pass-throughs.

However, there are other factors to consider when choosing a lease term:

• Business stability: Long-term leases may provide businesses with a more stable operating environment, especially in prime locations.
• Amortization of renovations: If a business invests a lot of money in renovations, a longer lease term can better spread those costs.
• Market expectations: In markets where rents are expected to rise, long-term leases may be more advantageous; and vice versa.
• Business Growth: Fast-growing businesses may require more flexible lease arrangements to accommodate expansion or contraction needs.

Taking these factors into consideration, companies may adopt a hybrid strategy. For example, longer lease terms (such as 7-10 years) are signed for core office areas, while shorter lease terms (such as 3-5 years) are adopted for areas that may need to expand or contract. This strategy can ensure the stability of the core business while retaining the flexibility to respond to market changes.

From the perspective of tax optimization, companies should also consider arranging large rental payments in years with heavier tax burdens to maximize the effect of expense deductions. For example, if a business expects to be particularly profitable in a particular year, it may consider prepaying part of the next year’s rent in that year, thereby increasing the deductible expenses for that year.

Overall, lease term arrangements need to balance tax optimization, operational flexibility and long-term strategic planning. By carefully analyzing the tax implications of the various options and taking into account the specific circumstances of the business, a leasing arrangement can be developed that is both reasonable and strategic.

5.5 Optimize rent payment timing

The timing of rent payments can have a significant impact on a business’s tax position, particularly if it spans financial years. Reasonable planning of rent payment timing can help companies better manage cash flow and tax burden. This optimization strategy requires an in-depth understanding of Japanese accounting standards and tax laws, combined with the company’s financial status and business plan.

The tax treatment of multi-year rent payments requires special attention. In Japan, corporate income tax is calculated on a fiscal year basis, which usually coincides with the calendar year (April 1 to March 31 of the following year). If rent payments span financial years, it may affect the allocation of expenses between years. For example, if a company pays rent for April to June of the next year in March (the end of the fiscal year), this part of the prepaid rent needs to be treated as a prepaid expense on the balance sheet and cannot be immediately included in the current year’s expenses.

Specifically, assume that a company has an annual rent of 120 million yen, which is usually paid quarterly. If the rent of 30 million yen for the next quarter (April-June) is paid at the end of March, the 30 million yen will not be fully deductible in the current fiscal year, but will need to be recognized as an expense in the next fiscal year. This may result in a reduction in deductible expenses for the year and an increase in the tax burden for the year.

However, such multi-year payments may also present tax optimization opportunities. If a business expects higher profits for the current year and lower profits for the next year, it may be advantageous to pay the next quarter’s rent in March early. This increases deductible expenses in high-tax years, thereby lowering the overall tax burden.

The tax implications of prepaid rent also deserve further consideration. While prepaying rent may bring cash flow management benefits, such as receiving rent discounts, it may not always be advantageous from a tax perspective. According to Japanese accounting standards and tax laws, prepaid rent usually needs to be amortized and recognized as an expense over the actual period of use.

For example, if a company prepays 3 years of rent in one lump sum, totaling 360 million yen, and receives a 5% discount (actual payment is 342 million yen). From an accounting and tax perspective, the 342 million yen needs to be spread evenly over 36 months, with a monthly rental expense of 9.5 million yen recognized. This means that large amounts of prepaid rent cannot be fully deducted in the year of payment, but need to be recognized year by year during the lease term.

However, a prepaid rent strategy may still provide tax advantages in certain circumstances:

• Inflation: If inflation is expected to be high in the coming years, paying a fixed amount of rent upfront can materially reduce future rental costs.
• Expectations of changes in tax rates: If it is expected that corporate income tax rates may rise in the next few years, it may be more advantageous to prepay rent and receive a discount during a period of low tax rates.
• Cash Management: If the business is flush with cash, the discount received for prepayment of rent may be higher than the return on capital invested in other investments.

In practice, companies can consider the following strategies to optimize the timing of rent payments:

• Analyze the company’s profit expectations and cash flow situation, and choose the optimal rent payment frequency (monthly, quarterly or annual).
• Evaluate at the end of the financial year (usually March) whether it is necessary to prepay part of the next year’s rent to optimize the current year’s tax position.
• Negotiate a flexible rent payment plan with the landlord, such as increasing rent payments during the months when the business is more profitable and decreasing payments during the off-season.
• Consider converting part of the rent into other forms of expenses, such as service charges, which may have different recognition and deduction rules.
• Regularly review rental payment arrangements to ensure they continue to be consistent with the business’s financial position and tax optimization objectives.

Businesses need to weigh the potential discounts or other business benefits of prepayment against the tax implications to make the optimal decision. At the same time, any rental payment arrangements should have sound business reasons to avoid being viewed by tax authorities as pure tax planning.

By carefully designing rental payment strategies, companies can achieve reasonable optimization of tax burdens and effective cash flow management while complying with accounting and tax regulations. This not only improves short-term financial efficiency, but also provides greater flexibility for the long-term development of the business.

5.6 Leasing arrangements between group companies

For multinational conglomerates with multiple related entities in Japan, intra-group leasing arrangements can be an effective tax optimization strategy. However, this arrangement also needs to be handled carefully to ensure compliance with Japan’s strict transfer pricing regulations and other relevant regulations. Reasonable intra-group leasing arrangements can not only optimize the overall tax burden, but also improve the group’s asset utilization efficiency.

Transfer pricing considerations are one of the most important tax issues in inter-group leasing arrangements. The Japanese tax authorities strictly examine related-party transactions to ensure that they comply with the arm’s length principle (Arm’s Length Principle). When setting rental prices within the group, companies need to refer to rental levels for similar properties in the market and keep detailed documentation to justify the pricing.

For example, a multinational technology company might establish a subsidiary in Tokyo as a regional headquarters and lease office buildings it owns to other Japanese subsidiaries. In this case, rental pricing needs to be based on a detailed comparability analysis, taking into account the following factors:

• Property location: For example, if the office building is located in Chuo-ku, Tokyo, you need to refer to the market rent of similar grade office buildings in the area.
• Building scale and quality: including construction age, facility level, energy efficiency level, etc.
• Lease area: You can usually get a certain discount for leasing a large area.
• Lease length: Long-term leases may have different pricing strategies.
• Additional services: whether property management, parking spaces, etc. are included in the rent.

Assume that after analysis, the comparable market rental range is determined to be 3,500-4,000 yen per square meter per month. Intra-group rental prices should fall within this range, with good justification for the specific price chosen. For example, if a rent of 3,700 yen per square meter is selected, it may be necessary to explain how this price reflects the specific circumstances of leasing within the group (such as a long-term stable lease).

In addition, companies also need to consider rent adjustment mechanisms. Japan’s commercial leasing market usually undergoes rent adjustments every 3-5 years. There should be a similar mechanism for intra-group leasing to reflect market changes and avoid long-term deviations from market levels.

The importance of legitimate business purposes cannot be ignored. Tax authorities will scrutinize intra-group leasing arrangements to ensure they have a substantive business purpose and are not simply about obtaining tax advantages. For example, if a group company is formed specifically to hold and lease real estate to other group members, the company will need to justify its existence, such as:

• More efficient asset management: Centralizing real estate management can improve overall operational efficiency.
• Risk isolation: Separate high-value assets from businesses with higher operating risks.
• Financing convenience: Real estate companies may have easier access to favorable financing terms.
• Professional management: A dedicated team manages the real estate to provide better services.

Arrangements that lack a clear business rationale may be viewed as tax avoidance, thereby giving rise to tax risks. For example, if a loss-making subsidiary leases property to a profitable affiliate at a higher than market rate, this may be considered an improper profit diversion.

When implementing inter-group leasing arrangements, businesses should consider the following: Ensure the terms and conditions of the lease are similar to transactions between independent third parties. This includes rent levels, payment terms, maintenance responsibilities, etc. Maintain detailed transfer pricing documentation, including comparability analysis and basis for selection of pricing method. Japan requires large multinational companies to prepare contemporaneous documents, including local documents, master documents and country-by-country reports.

Consider the tax implications of the arrangement for all parties, including:

• Withholding tax: Japan imposes a 20% withholding tax on rent paid to non-residents, unless a tax treaty applies.
• Consumption tax: Rentals are usually subject to 10% consumption tax, and intra-group transactions are no exception.
• Property taxes: Although paid by the property owner, they may be passed on through rents.

Lease arrangements are regularly reviewed and updated to reflect changes in market conditions. A comprehensive assessment is recommended at least every 3 years. Consider applying for an Advance Pricing Arrangement (APA) from the tax authorities, particularly for large or long-term intra-group leases. APAs can last for 3-5 years and provide tax certainty. Pay attention to other relevant regulations, such as foreign exchange controls, special regulations related to real estate investment, etc. Consider setting up a shared service center to integrate real estate management with other logistics services (such as IT, human resources) to further strengthen business rationality.

Through careful planning and implementation of inter-group leasing arrangements, companies can ensure compliance with Japanese tax regulations and reduce potential compliance risks while optimizing the overall tax structure. This arrangement not only provides tax benefits but also improves the group’s overall operational efficiency and asset utilization. However, given the complexity and strictness of the Japanese tax environment, it is strongly recommended to consult professional tax and legal advisors when implementing such arrangements to ensure full compliance and maximize potential benefits.

Tax treatment under special circumstances

6.1 Accounting and tax treatment of rent-free period

Rent-free periods are common incentives in real estate leasing, often used to attract potential tenants or to compensate tenants for renovation time. From an accounting perspective, based on the accrual basis principle, even if there are no cash outflows during the actual rent-free period, the lessee still needs to recognize lease expenses equally over the entire lease period. Likewise, the lessor should recognize lease revenue equally over the entire lease term. This treatment more accurately reflects the economic substance of the transaction, whereby the rent-free period is actually part of the rent for the entire lease period.

In terms of tax treatment, most tax authorities accept this accounting treatment method as the basis for calculating corporate income tax. This means that even within the rent-free period, the lessee may still need to claim pre-tax deductions for the recognized lease expenses, while the lessor may need to pay corporate income tax on the recognized lease income. However, there may be differences in the tax laws of various countries, and some countries may require that rental income and expenses be recognized based on actual cash flow, which requires reconciliation between accounting treatment and tax treatment.

The treatment of consumption taxes (such as VAT or sales tax) can be more complex. Many tax authorities require excise tax to be paid when the rent is actually collected, rather than on an even accounting basis. This leads to inconsistencies between accounting confirmation and tax payment timing. For example, in a 12-month lease contract with a 2-month rent-free period, the lessor may be required to pay the consumption tax corresponding to the 12-month rent within 10 months of actually collecting the rent. This difference requires taxpayers to pay special attention in cash flow management and tax planning.

In addition, the tax laws of some countries may have special provisions regarding rent-free periods. For example, a rent-free period exceeding a certain period may be regarded as a disguised transfer of the right to use the house, thereby triggering additional tax treatment requirements. Therefore, when designing a leasing plan, various tax implications need to be fully considered to optimize the overall tax burden.

6.2 Tax treatment of decoration subsidies

Renovation allowances are another common rental incentive, and their tax treatment requires several considerations. For lessees who receive subsidies, the central question is how to recognize this revenue. Generally speaking, renovation subsidies should be considered an integral part of the rent rather than a separate item of income. Therefore, it should generally be recognized in installments over the entire lease term using the same method as rental income.

The specific installment recognition method usually adopts the straight-line method, that is, dividing the total decoration subsidy by the number of months of the lease period, and recognizing equal amounts of income every month. This method not only complies with the principle of matching income and expenses, but also better reflects the economic essence of the lease transaction. However, if the renovation subsidy is directly related to specific renovation expenditures and the lessee has ownership or control over the renovation, then it may be necessary to consider the subsidy as a deduction for the cost of fixed assets and affect the profit and loss in each period through depreciation.

From the lessor’s perspective, renovation allowances paid are generally considered part of the rent and should be deducted in installments over the lease term. However, if the amount of the subsidy is large, it may be necessary to consider whether it constitutes an improvement to the leased asset and thus requires capitalization.

In terms of consumption tax, the treatment of renovation subsidies may vary from country to country. Some countries may treat it as part of the rent and require full consumption tax on payment, while others may allow it to be treated as a capital expenditure and no consumption tax will be levied. Therefore, taxpayers need to carefully study local tax laws to determine the most appropriate treatment.

In addition, renovation subsidies may also involve withholding income tax issues. If the subsidy is paid to a non-resident lessee, withholding tax may be required to be withheld at specific rates. Not only does this increase the tax compliance burden on the lessor, it may also affect the overall economics of the lease negotiation.

6.3 Tax treatment of subletting situations

Sublease is a complex leasing arrangement in which the original lessee also acts as the sublease lessor. This dual status makes the tax treatment particularly complicated. For a master lease, the original lessee needs to conduct accounting and tax treatment in the same manner as a normal lessee, that is, recognize the lease expense and claim a pre-tax deduction. For sublease, the original lessee needs to recognize the lease income as the lessor and pay the corresponding taxes.

The main tax challenge in this case is how to deal with the possible tax overlay effects, especially with regard to consumption tax. Due to the chain relationship between rent collection and payment, simply taxing each level of rental relationship separately may lead to an overall tax burden that is too high. In order to avoid this situation, the tax laws of some countries allow subletting to be treated as collection and payment under certain conditions, thereby avoiding double taxation.

However, this preferential treatment is often subject to strict conditions, such as:

• The sublease rent shall not exceed the principal lease rent;
• Subletting is not for profit;
• The original lessee needs to apply to and obtain approval from the tax authorities;
• All relevant contracts and financial records must be clear and complete to demonstrate the sublease relationship.

If these conditions are not met, the original lessee may be required to conduct separate tax treatments for the master lease and the sublease, which may result in significantly increased tax costs.

In terms of income tax, the original lessee needs to pay corporate income tax on the difference between the sublease income and the main lease expenses. If the sublease income is higher than the main lease expenses, the difference will be treated as a taxable profit; conversely, if the sublease income is less than the main lease expenses, the difference may be treated as a deductible loss.

In addition, subletting may involve special tax reporting requirements. Many countries require taxpayers to disclose sublease arrangements in detail in their annual tax returns, including related party information, rental amount, lease period, etc. Failure to properly disclose this information may result in penalties or greater tax scrutiny.

Considering the complexity of subletting, taxpayers are advised to fully consult tax professionals before entering into subletting arrangements to fully assess the potential tax implications and formulate appropriate tax strategies.

6.4 Tax implications of changes to lease contracts

Changes to a lease contract, whether it is a rent adjustment or a change in the length of the contract, can have far-reaching tax consequences. These changes not only affect the current tax treatment, but may also have a retroactive impact on the tax treatment that has been carried out in previous periods, so extra caution is required.

For rent adjustments, if it is an increase in rent, it is generally necessary to recognize income or expenses based on the new rent amount starting from the current period when the adjustment becomes effective. This may result in an increase in the lessor’s taxable income and a corresponding increase in the lessee’s deductible expenses. If the rent is reduced, it may involve the issue of the write-back of over-recognition of revenue or expenses in the previous period. In some cases, a substantial rent adjustment may be viewed by tax authorities as a new lease arrangement, triggering new tax treatment requirements.

Rent adjustments may also affect the treatment of rent-free periods or renovation subsidies that have been previously spread evenly. For example, if rent is increased midway through the lease term, the average rent to be recognized in each period over the entire lease term may need to be recalculated, which may result in the need for adjustments to the tax treatment in prior periods.

Changes to the length of a contract can also have complex tax implications. If the lease period is extended, it may be necessary to recalculate the amount of rent that should be recognized in each period, including the rent-free period or decoration subsidies that have been evenly distributed before. This may result in a reduction in the amount of rent recognized each period, affecting the tax treatment in future periods. If the lease period is shortened, it may result in the less recognized rent in the early period needing to be recognized faster in the remaining period, which may result in a significant increase in tax burden in the short term.

In terms of consumption tax, changes to the lease contract may require the issuance of a supplementary invoice or a red letter invoice to reflect the change in rent. Some countries may require a one-time payment or refund of excise tax on the entire amount of the change when the contract is changed, while other countries may allow adjustments to be made in installments over the remaining term of the lease.

In addition, major contract changes may be regarded as the termination of the original contract and the beginning of a new contract, which may trigger tax treatments related to the termination of the original contract, such as the recognition of liquidated damages, etc. Therefore, when negotiating contract changes, both parties need to fully consider the potential tax implications and clearly stipulate relevant tax treatment responsibilities in the contract.

Considering the complexity of changes to lease contracts, it is recommended to consult a tax professional when making major changes to fully assess the potential tax implications and develop an appropriate tax response strategy. At the same time, maintain complete documentation including the reasons, process and results of the changes to provide necessary support during possible future tax inspections.

6.5 Tax treatment of termination of lease

Lease termination is another tax matter that requires special attention, which may involve the payment of liquidated damages, the return of security deposits, and the treatment of unamortized lease-related costs.

The tax treatment of liquidated damages generally depends on the reason for termination and the nature of the liquidated damages. If the liquidated damages are paid due to the lessee’s early termination of the lease, the payer can usually deduct them as a pre-tax item, while the receiver needs to include them in taxable income. However, if the liquidated damages are essentially compensation for future rent, then revenue may need to be recognized in installments over the remaining term of the original lease.

The tax laws of some countries may have special provisions on liquidated damages. For example, it is treated as a receipt and expenditure of a capital nature, thereby affecting its treatment for income tax and consumption tax purposes. In some cases, if the amount of liquidated damages is too large, the tax authorities may question its commercial substance and require additional supporting documentation.

The return of the security deposit itself usually does not have a direct tax impact because it is essentially a temporary payment. However, if the security deposit accrues interest during the lease period, this interest will generally need to be taxed as interest income. If for some reason the security deposit is not returned in full, the unreturned portion may need to be tax treated as additional income to the lessor or as additional expenses to the lessee.

When terminating a lease, you also need to pay attention to the treatment of unamortized lease-related costs. For example, if there are renovation expenses or prepaid rent that have not been amortized, they usually need to be recognized as expenses or income in a lump sum in the current period of termination. This may result in a significant increase in tax liability in the current period of termination.

For the lessor, if the value of the asset recovered at the end of the lease is significantly lower than the book value, it may need to consider making an asset impairment provision, which may result in additional tax deductions.

In terms of GST, termination of a lease may require the issuance of a red letter invoice to reverse unearned rental income. If consumption tax has been paid in full upfront on the rent for the entire lease term, you may need to apply for a tax refund.

In addition, if the lease termination involves a cross-border transaction, the treatment of withholding tax also needs to be considered. For example, liquidated damages paid to an overseas lessor may require withholding income tax.

Considering the significant tax implications that may arise from lease termination, it is recommended that both parties clearly agree on possible termination situations and their tax treatment when signing the lease contract. When termination actually occurs, tax professionals should be consulted in a timely manner to ensure that all tax matters are handled correctly and complete documentation records are retained to deal with possible tax inspections.

6.6 Tax considerations for foreign currency rentals

In cross-border leases or leases denominated in foreign currencies, exchange gains and losses caused by exchange rate fluctuations are an important and complex tax issue. This not only affects the calculation of corporate income tax, but may also have a profound impact on consumption tax and accounting treatment.

In terms of corporate income tax, realized exchange gains and losses should usually be included in current profits and losses and affect taxable income. For example, if rent is paid monthly in a foreign currency, the difference due to exchange rate changes at each payment should be recognized as an exchange gain or loss. However, different countries may have different treatment methods for unrealized exchange gains and losses on the balance sheet date. Some countries allow unrealized exchange gains and losses to be included in current profits and losses, while others require deferred recognition until the relevant transactions are actually settled.

Certain countries may have special regulations regarding exchange gains and losses on long-term foreign currency liabilities (such as long-term leases). For example, it is allowed to be capitalized and included in the cost of related assets rather than directly included in the current profit and loss. This treatment method can reduce the impact of exchange rate fluctuations on the company’s current profits and losses, but it also increases the complexity of accounting.

In terms of the treatment of consumption taxes (such as value-added tax), foreign currency rent involves the determination of the tax basis. Generally speaking, foreign currency rent should be converted into local currency according to the spot exchange rate on the actual date of payment or the date of accrual. This means that even if the foreign currency rental amount agreed in the lease contract remains unchanged, the amount of consumption tax payable in each period may be different due to exchange rate fluctuations.

However, the situation may be more complicated if a fixed exchange rate is agreed upon in the lease contract. The tax laws of some countries may allow conversion at an agreed exchange rate, while other countries may require the use of the actual exchange rate. This difference may lead to inconsistencies between accounting treatment and tax treatment, requiring corresponding adjustments when filing.

The tax treatment of rent paid or received in advance in foreign currency is more complex. There may be differences between the exchange rate used at initial recognition and the subsequent exchange rate when income or expenses are actually recognized, which requires reassessment and recognition of corresponding exchange gains and losses at each balance sheet date.

In cross-border leasing, special attention needs to be paid to the issue of withholding income tax. Many countries impose a withholding tax on rental income paid to non-residents. In this case, it is necessary to determine the applicable tax rate (which may be affected by bilateral tax treaties) and withhold the corresponding tax when paying rent. The calculation basis for withholding income tax is usually the local currency amount converted at the spot exchange rate on the date of payment.

Considering the complex tax issues caused by foreign currency rentals, it is recommended that enterprises formulate detailed foreign currency management policies that clearly stipulate the selection of exchange rates and the recognition methods of exchange gains and losses. At the same time, the tax treatment of foreign currency leasing should be reviewed regularly to ensure compliance with the latest tax law requirements. Where possible, consider using financial instruments such as hedging to manage exchange rate risk, but be aware of the additional tax implications that may arise from these financial instruments themselves.

Finally, given the complexity of foreign currency transactions, it is critical to maintain complete and accurate transaction records and exchange rate files so that detailed explanations and certifications can be provided to tax authorities if required.