Japan: Permanent Establishment (PE) Rules

Japan is the world’s third largest economy in the world - bigger than the UK and Germany combined. In 2014 it made up 6% of world Gross Domestic Product (GDP). Japan remains a high-tech powerhouse economy of Asia, so it’s not surprising that companies would want to do business there.

A key consideration for an international business will be the potential local tax implications of doing business in or with Japan.

Under domestic Japanese tax law, the scope of taxable Japan-source income in respect of a foreign corporation depends on its in-country taxable presence. 

The types of taxable presence that a foreign corporation might have in Japan include:

1. Direct PE

Under Japanese tax law, a "Direct PE" may arise if a foreign corporation has a branch office, factory, warehouse or any other fixed place of business in Japan which is carrying out its business activities. 

A Direct PE may arise if a foreign corporation has an employee in Japan for a certain period of time to conduct business activities. This will however depend on the level of the activities (i.e., if the activities exceed the level of a "preparatory or auxiliary" character of activities).

There is no specific length of time for creating a Direct PE provided under the Japanese domestic tax law, but 6 months (or 6 months in aggregate over multiple years) is generally a benchmark for this determination.

2. Agent PE

Under Japanese tax law, a foreign corporation would be considered to have an “Agent PE” in Japan if a foreign corporation has an agent in Japan that:

  • Has and exercises the authority to conclude contracts regarding the business of the foreign corporation on behalf of the foreign corporation;
  • Maintains inventories to meet Japanese customer demands/transfers such inventories to the customers on behalf of the foreign corporation; or
  • Performs important activities in Japan such as taking orders, negotiating or other activities in order to conclude contracts exclusively or almost exclusively for the foreign corporation. 

The term "conclusion of contracts" applies to an agent who has the authority to bind the foreign corporation’s decision to conclude contracts (e.g. an agent which discusses or negotiates material elements of a contract).

If you identify with either of the above situations or you are planning on doing business in Japan and have not sought local tax advice, contact info@geanetwork.com to find out how we can help you.

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