A taxable business is obligated to pay consumption tax. Sales are the primary determining condition for being a taxable business, but tax-exempt businesses can voluntarily elect to become taxable businesses. When a taxable business files and pays consumption tax, it pays the amount of tax deducted from the amount of tax charged on purchases.

This article provides basic knowledge of taxable businesses, explaining the conditions for taxable businesses and transactions that are subject to taxation. In addition, we will explain the relevant items on the Tax Report for Election of Consumption Taxpayer that tax-exempt businesses submit when they voluntarily become taxable businesses.

What’s in this article?

• What is a business subject to consumption tax?
  
• What are the requirements for a taxable business?
  
• What is a taxable transaction for consumption tax purposes?
  
• Consumption tax returns and payments
  
• Notes on the Tax Report for Election of Consumption Taxpayer
  

What is a business subject to consumption tax?

A consumption tax taxable business is liable for consumption tax, which is a tax on the purchase of goods and services that customers pay.

However, customers do not pay consumption tax directly to the government; rather, they pay it to the business in addition to the price of purchased goods. The business that receives the consumption tax then pays the difference to the relevant tax office after deducting the amount of the consumption tax burden it paid to the source of purchase (this deduction is the purchase tax credit).

So the consumption tax is the responsibility of the customer, not the business, and the business pays it indirectly on behalf of the customer.

On the other hand, tax-exempt businesses don’t pay consumption tax.

Until now, there was no way for customers to know whether a store selling goods or services was taxable or tax-exempt. However, to meet the requirements of an invoice or Simple Invoice as defined in invoice reporting, businesses must now also mark receipts with a Qualified Invoice System registration number, so even ordinary customers have more opportunities to see such documents, and it is possible to determine whether a business is taxable or not by its registration number. Note that only taxable businesses (qualified invoicing businesses registered under the Invoice System) can issue qualified invoices.

What are the requirements for a taxable business?

A business must meet several conditions to qualify as taxable. If a business meets any of these conditions, it is taxable and must pay consumption tax:

Taxable sales for the previous two years (or the previous two fiscal years) exceeded ¥10 million.

To determine whether a business is taxable or tax-exempt, the key point is whether its taxable sales for the previous two years for a sole proprietor or for a corporation exceed ¥10 million for the previous two fiscal years. This makes the business taxable in the following year (or the following fiscal year in the case of corporations).

Example: Tax-exempt businesses, including sole proprietorships, with taxable sales of ¥8 million from January 1 to December 31, 2023, and ¥11 million from January 1 to December 31, 2024, will be tax-exempt in 2025 but will become taxable in 2026.

Taxable sales for the first half of the previous year exceeded ¥10 million (sole proprietor)

If a sole proprietor’s taxable sales or wages paid exceed ¥10 million in the first half of a specified period (January 1 to June 30), the proprietor becomes taxable in the following year. Businesses that meet these conditions are liable for consumption tax regardless of their taxable sales in the previous two years, as described. However, even if taxable sales during the specified period exceed ¥10 million, if the total amount of salaries and other payments does not exceed ¥10 million, the business is tax-exempt based on the amount of salaries and other payments.

Taxable sales for the first six months of the previous fiscal year exceeded ¥10 million (corporation)

A corporation becomes taxable if its taxable sales or salaries, etc., paid exceed ¥10 million in the first six months of the preceding fiscal year. Note that in this case, as with the sole proprietorship condition, the business becomes taxable regardless of its taxable sales in the previous two fiscal years.

As with sole proprietorships, even if taxable sales during a specific period exceed ¥10 million, a business is tax-exempt based on the amount of salary and other payments if the total amount of salary and other payments never exceeds ¥10 million.

In addition to the above conditions related to the amount of sales and salaries, etc., paid during a certain period, the following cases also qualify as taxable businesses:

Newly established corporations with capital of ¥10 million or more

In principle, a newly established corporation with capital of less than ¥10 million is tax-exempt for its first and second fiscal years, but if its capital exceeds ¥10 million or more, it becomes taxable from its first fiscal year of establishment. On the other hand, a sole proprietorship, which has no concept of capital, is tax-exempt for the first two years after opening because it has no sales revenue to check whether it is subject to taxation at the time of opening.

Specified newly established corporations

Specified newly incorporated corporations are those in which the parent company, affiliated businesses, or individuals own more than 50% of the corporation’s shares and the taxable sales of the owners exceed ¥500 million. In this case, even if the capital of the newly established corporation is less than ¥10 million, it is a taxable business from the first year of its establishment and is not eligible for tax exemption.

Businesses submit the Tax Report for Election of Consumption Taxpayer to the tax office

Even businesses that fall under the category of tax-exempt business can change to a taxable business by voluntarily submitting a Tax Report for Election of Consumption Taxpayer. For more information on the submission deadline, refer to “Notes on the Tax Report for Election of Consumption Taxpayer”.

A tax-exempt business must submit the Tax Report for Election of Consumption Taxpayer when it voluntarily becomes a business subject to consumption tax. Therefore, tax-exempt businesses are not obligated to pay consumption tax and can remain tax-exempt.

Registered as a qualified invoicing business operator under the Invoice System

In addition to the Tax Report for Election of Consumption Taxpayer procedures, there are also cases in which small businesses, such as sole proprietorships, become taxable for consumption tax purposes.

If you register as a qualified invoicing business, you will become a taxable business even if you do not meet the conditions for a taxable business, which is a single proprietorship with sales of ¥10 million or less. Therefore, to avoid becoming a business subject to consumption tax without realizing it, deepen your understanding of the Invoice System and consider the size of your business and profit/loss before deciding whether to become a qualified invoicing business operator.

If you become a qualified invoicing business, as a measure to comply with the Invoice System, you might want to consider implementing a system that lets you issue, store, and manage documents that meet the requirements for a qualified invoice in a single system. Stripe Invoicing, which can handle invoice-related needs and create invoices in compliance with the Invoice System, will help fine-tune back-office operations. Stripe Tax, which has automatic consumption tax calculation that you can customize according to your needs, automates tax processing for all electronic transactions, allowing for smooth and efficient operations.

What is a taxable transaction for consumption tax purposes?

A taxable transaction is one that is subject to consumption tax. A transaction is taxable if it meets all of these requirements:

• Transactions conducted in Japan: Consumption tax covers transactions conducted in Japan. Therefore, Japanese consumption tax does not apply to transactions conducted in the US or Europe. For example, at the time of “transfer or loan of assets,” if the assets are in Japan, that is a domestic transaction, and similarly, if you conduct “provision of services” in Japan, that is a domestic transaction.

• Transactions conducted by a business as a business: “Business” refers to sole proprietorships and corporations, and “as a business” means repetitive, continuous, and independent conduct of transactions. For example, the sale of a private car, home, etc., not as a business but solely as an individual, is not subject to consumption tax.

• Transactions for consideration: “Transactions for consideration” includes receiving payment for the sale of goods, renting an office and receiving rent, and so on. Therefore, you are not charged sales tax on donations, grants, or services received for free.

• Transactions that are a transfer of assets, a loan of assets, or the provision of services (services): As noted in ”Transfer of assets, etc.” by the National Tax Agency (NTA), these transactions are related to the above “transactions for consideration,” and you conduct them as a business for a fee (e.g., the sale of goods; loans of assets to others; and the provision of services based on expertise or competence, such as certified public accountants and lawyers).

Note that if a business does not meet any of those requirements, consumption tax will not apply.

Reference materials: NTA articles “What transactions are covered?” and ”Taxable”

Consumption tax returns and payments

For corporations and sole proprietors, submit tax returns to the tax office with jurisdiction over the place of tax payment.

As for payment, because the tax office does not send you a payment slip after you submit your tax return, it is important that you make the appropriate payment on your own.

You must submit consumption tax returns and payments within two months from the day after the end of the fiscal year (the last day of the fiscal month) in the case of corporations. For example, if the fiscal year begins April 1 and ends March 31 of each year, the due date for payment is May 31.

As for the filing deadline for sole proprietors, it is until March 31 of the following year (or the following Monday if it falls on a Saturday or Sunday), but note that the date is different from the income tax filing deadline (March 15).

You can file tax returns at the tax office, by mail, or by e-Tax. You can pay at the tax office or through other means such as credit card payment and payment at convenience stores. For more information, refer to “Payment Procedures for National Taxes.”

Notes on the Tax Report for Election of Consumption Taxpayer

As explained, whether or not a business is taxable is based on conditions such as taxable sales. If an exempt business that does not meet the conditions of being taxable becomes taxable, make the change by submitting a Tax Report for Election of Consumption Taxpayer.

Here are a few items tax-exempt businesses should know before submitting a report:

When to submit a Tax Report for Election of Consumption Taxpayer

According to the NTA’s Tax Report for Election of Consumption Taxpayer procedure page, businesses must submit a Tax Report for Election of Consumption Taxpayer by the day before the first day of the taxable period (the last day of the fiscal year) for which they want to make the change.

For example, if a corporation has a fiscal year from April 1 to March 31 and becomes taxable from the next fiscal year, the deadline for submitting a Tax Report for Election of Consumption Taxpayer is March 31 of the current fiscal year. For sole proprietors, the notification must be submitted by December 31 of the year before the year in which they become taxable.

How can I become a tax-exempt business again after the election procedure to become a taxable business?

In such a case, follow the Tax Report for Nonsuitability for Election of Consumption Taxpayer procedure. Note that after selecting a taxable business, it is not possible to change to a tax-exempt business for two years from the first day of the taxable period.