Consumption Tax Start-Up Exemption: Large-Group Subsidiaries
Japan's start-up exemption lets a newly incorporated company stay outside consumption tax (消費税, shohizei) in the business years that have no base period (基準期間, kijun kikan), which are normally its first two. A new Japan subsidiary of a large group rarely gets it. The Consumption Tax Act withdraws it when share capital is too high or when a large group controls the company. For the wider picture, see our guide to Japan consumption tax for a foreign-owned subsidiary.
Key Takeaways
- Capital is tested first. A 10 million yen KK or GK is taxable from incorporation, whatever its sales (Consumption Tax Act Art. 12-2).
- Indirect ownership still counts. Shares held through a wholly owned regional holding company are added to the ultimate parent's holding for the over-50% control test (Act Art. 12-3), so the ultimate parent is a party whose size is tested.
- Worldwide revenue now counts. For periods from 1 October 2024, a controlling party's worldwide revenue above 5 billion yen brings the subsidiary inside the size test (Act Art. 12-3).
- Years one and two are tested separately. A capital increase or an ownership change during year one can change the answer for year two.
- Group-caught subsidiaries file their own notification. NTA No. 6629 lets the notification of establishment stand in for the new corporation notification only; it lists no substitute for the specified new corporation notification.
How the Start-Up Exemption Works for a New Japan Company
A new company has no base period in its first two years, so it starts exempt unless a capital, group, registration or election rule applies.
For a twelve-month business year the base period is the year before last (NTA Taxation Answer No. 6501, FY2026). A tax-exempt business (免税事業者, menzei jigyosha) neither charges consumption tax nor credits the tax on its purchases. The 10 million yen capital rule (Consumption Tax Act Art. 12-2) and the specified new corporation rule (Art. 12-3) apply to a kabushiki kaisha (KK) and a godo kaisha (GK) alike.
The 10 Million Yen Share Capital Test
Capital of 10 million yen or more on the first day of a year with no base period makes a new company taxable for that year.
Measured on the first day of each year
A subsidiary incorporated with 5 million yen that makes a capital increase to 20 million yen in month eight keeps its year-one status but enters year two as a new corporation (新設法人, shinsetsu hojin), because NTA Taxation Answer No. 6503 (FY2026) applies the capital test on the first day of each business year.
The Specified New Corporation Rule for Subsidiaries of Large Groups
A subsidiary with capital under 10 million yen is still taxable if one party controls over half of it and that party, or a company specially related to it, passes a size test.
The control test
Under Article 12-3 of the Consumption Tax Act (e-Gov, current text), the control test is met when another party holds, directly or indirectly, more than 50% of the company's issued shares or capital (excluding treasury shares), or controls it under the criteria in the Cabinet Order. A subsidiary wholly owned by a foreign parent meets it automatically.
The size test and the October 2024 change
The controlling party and each specially related company are tested on their own, not on combined group figures. The subsidiary is caught, as a specified new corporation (特定新規設立法人, tokutei shinki setsuritsu hojin), if any one of them has taxable sales above 500 million yen in the period corresponding to the subsidiary's base period (Act Art. 12-3). For periods beginning on or after 1 October 2024, it is also caught if any one of them has total revenue above 5 billion yen, and NTA Taxation Answer No. 6503 confirms that total revenue includes sales made outside Japan and income other than sales.
Before that change, a foreign parent with no Japanese sales usually failed the sales test, leaving a thinly capitalised subsidiary exempt. A KK set up with 5 million yen of capital through a wholly owned regional holding company, whose ultimate parent has worldwide revenue of several billion euros, is a specified new corporation in years one and two under the Act.
Decision Table: Capital, Parent Size and Taxable Status
Six combinations of capital, control and parent size decide status in years one and two; only a small, independently owned or below-threshold-group company starts exempt.
An exempt company still becomes taxable if it registers or elects to be taxable.
| Capital on the first day of the year | Control by one party | Controlling party or a specially related company | Year one | Year two |
|---|---|---|---|---|
| 10 million yen or more | Any | Any | Taxable (new corporation, Act Art. 12-2) | Taxable if capital is still at or above the threshold |
| Below the threshold | More than 50%, direct or indirect | Taxable sales over 500 million yen | Taxable (specified new corporation, Act Art. 12-3) | Taxable if control and size are still met |
| Below the threshold | More than 50% | Total revenue over 5 billion yen, worldwide (periods from 1 October 2024) | Taxable (specified new corporation, Act Art. 12-3) | Taxable if control and size are still met |
| Below the threshold | More than 50% | Below both size tests | Exempt unless registered or elected | Retested on capital, control and size; if none apply, the year-one specified period test |
| Below the threshold | No party holds more than half | Not relevant | Exempt unless registered or elected | Retested on capital and control; if neither applies, the year-one specified period test |
| Below the threshold, election to be taxable filed | Any | Any | Taxable | Taxable |
From year three, year-one taxable sales form the base period and decide the status. A taxable subsidiary needs its monthly bookkeeping set up for the tax from incorporation.
Notifications and Deadlines After Incorporation
A new subsidiary files its notification of establishment, one of its corporate tax post-incorporation filing requirements, within two months and any new or specified new corporation notification promptly. Each notification goes to the tax office for the company's place of tax payment (NTA Taxation Answer No. 6629 on consumption tax notifications, FY2026).
| Notification | When it is required | Deadline |
|---|---|---|
| Notification of establishment (法人設立届出書, hojin setsuritsu todokedesho) | Every new company | Within 2 months of incorporation (Corporate Tax Act Art. 148); if it states the required items, it makes the new corporation notification unnecessary |
| New corporation notification (消費税の新設法人に該当する旨の届出書, shohizei no shinsetsu hojin ni gaito suru mune no todokedesho) | Capital at or above 10 million yen in a year with no base period | Promptly once the rule applies |
| Specified new corporation notification (消費税の特定新規設立法人に該当する旨の届出書, shohizei no tokutei shinki setsuritsu hojin ni gaito suru mune no todokedesho) | Control and size tests met | Promptly once the rule applies |
| Taxable business notification for the specified period (消費税課税事業者届出書, shohizei kazei jigyosha todokedesho) | Specified period taxable sales over 10 million yen (Act Art. 9-2) | Promptly once the result is known |
| Election to be a taxable business (消費税課税事業者選択届出書, shohizei kazei jigyosha sentaku todokedesho) | An exempt company that wants to recover input tax | Day before the period starts; in the first period, by its last day |
| Simplified taxation election (消費税簡易課税制度選択届出書, shohizei kan'i kazei seido sentaku todokedesho) | A company choosing the simplified method | Day before the period starts; in the first period, by its last day |
| Qualified invoice issuer application (適格請求書発行事業者の登録申請書, tekikaku seikyusho hakko jigyosha no toroku shinseisho) | A company that will issue qualified invoices | A new company that applies by the last day of its first business period can be registered from its first day; this deadline does not move to the next business day (NTA page for new businesses) |
Year-Two and Asset Rules That Catch Subsidiaries Out
Three rules catch subsidiaries after incorporation: the year-two specified period test, the fixed asset lock-in, and qualified invoice registration.
The specified period test for year two
A company that is exempt in year one is retested for year two on its specified period (特定期間, tokutei kikan), generally the first six months of the previous business year. If taxable sales in that period exceed 10 million yen (Act Art. 9-2), year two is taxable and its return follows the normal consumption tax filing and payment deadlines; the company may measure salaries paid in the period instead.
Large purchases in a taxable start-up year
An adjusted fixed asset (調整対象固定資産, chosei taisho kotei shisan) is a non-inventory asset such as a building, fixtures, machinery, vehicles or tools worth 1 million yen or more per transaction, excluding consumption tax (Act Art. 2 and its Cabinet Order). If a new corporation or specified new corporation buys one in a year with no base period and files that year under the general method, it stays taxable up to and including the period containing the date three years after the first day of the purchase year, and cannot elect simplified taxation (簡易課税, kan'i kazei) before that period starts. A year-one office fit-out can trigger this rule.
Qualified invoice registration ends the exemption anyway
A registered qualified invoice issuer is never exempt, whatever its base-period sales (NTA Taxation Answer No. 6531, FY2026). A subsidiary that sells to Japanese businesses will usually register as a qualified invoice issuer, which keeps it taxable for as long as it stays registered.
Decisions That Fix Consumption Tax Status Before Incorporation
Capital, the ownership chain, customer invoicing needs and the timing of large purchases each decide consumption tax status in years one and two.
- Ownership chain. Identify the controlling party.
- Size test evidence. Written figures for the Japanese taxable sales and total revenue of the controlling party and each specially related company.
- Customer invoicing. Whether Japanese business customers will need qualified invoices from the first sale; HQ charges to the subsidiary may fall under the reverse charge on intercompany HQ charges.
- Capital expenditure timing. When the year-one fit-out and other large purchases fall.
FAQ
Can a new subsidiary use simplified taxation in year one?
Yes, if it is taxable and files the simplified taxation election by the end of its first period, the election applies from that period (NTA No. 6629), unless the adjusted fixed asset rule (調整対象固定資産, chosei taisho kotei shisan) applies.
Does the start-up exemption work differently for a Japan branch of a foreign company?
A branch is not a new company, but for periods beginning on or after 1 October 2024 the outcome is much the same. NTA Taxation Answer No. 6503 says a foreign corporation with a base period that starts taxable business in Japan after the last day of that base period is treated as having no base period for that year. The capital and specified new corporation tests then apply to the foreign corporation itself, so a parent with capital of 10 million yen or more (Act Art. 12-2) gets no start-up exemption by trading through a branch.
Is it a disadvantage for a new subsidiary to be taxable from day one?
Not always. A taxable company can credit the tax on its set-up costs, and a subsidiary whose income is mostly zero-rated management fees charged to HQ may be owed money back, because zero-rated cross-border sales carry no output tax while the tax on its costs stays creditable.
What happens if the new corporation or specified new corporation notification is filed late or not at all?
Taxable status arises under Arts. 12-2 and 12-3 of the Act when their conditions are met, not from the notification, so the return and payment for each taxable period are still due on the normal deadlines. File the missing notification once the omission is found.
Working with AQ Partners. Our Tokyo team provides annual tax filings, including consumption tax returns, monthly bookkeeping and qualified invoice issuer registration for foreign companies operating in Japan. Book a consultation to discuss your subsidiary's first two years.
Yuga Koda is a founding Director at AQ Partners, supporting foreign companies, funds, and families operating in Japan. His experience operating companies in both Japan and international markets gives him a practical understanding of back office operations from both sides.