Japan Consumption Tax: Where It Departs from Group VAT

Japan's consumption tax (消費税, shohizei) is a value added tax. Under the Consumption Tax Act (消費税法, Shohizei-ho), it is charged at 10% on most sales of goods and services made in Japan and at 8% on food and newspaper subscriptions, and a taxable business deducts the tax it paid on purchases from the tax it collected on sales. Japan departs from a group VAT template in four places: the start-up exemption is tested against the parent group, reverse charge covers only B2B online and performer services, full input credit needs a supplier's T-number invoice, and the return is annual with interim payments.

Key Takeaways

• No start-up holiday for group subsidiaries: the two-year exemption for new companies is tested against the parent group, so a subsidiary of a large group is normally taxable from its incorporation date.
• Invoice registration is a separate step: being taxable does not make the subsidiary a qualified invoice issuer, and Japanese customers get full credit only on an invoice carrying the seller's T-number.
• HQ flows rarely carry Japanese tax: services HQ performs abroad are outside the scope, online B2B services fall under reverse charge, and services the subsidiary sells to HQ are usually zero-rated.
• Unregistered suppliers cost money: only 70% of the tax on purchases from unregistered suppliers can be credited since 1 October 2026, according to the NTA, and the share keeps falling in scheduled steps until it reaches zero.
• Annual return, but not annual cash: the return is due two months after year-end, while interim payments, up to 11 a year, start once the prior year's national consumption tax passes JPY 480,000 (NTA Tax Answer No. 6609).

Japan Consumption Tax Against the Group VAT Template

Japan's consumption tax works like VAT, and each of its eleven core obligations maps onto a program the group VAT template already runs.

The map below sets each Japanese obligation against the group program it belongs to, so the tax team can see which local procedures the template does not already cover. All of these obligations come from the Consumption Tax Act and fall on the Japan subsidiary itself as the taxable business. The parent is not the taxpayer for its subsidiary's sales, even when the parent's figures decide whether the subsidiary is taxable.

Obligation	Threshold or trigger	Deadline or timing	Group program it maps to
Taxable status as a specified new corporation	A shareholder holds more than 50%, and that shareholder or a related company has Japan taxable sales over JPY 500 million or total revenue over JPY 5 billion (Consumption Tax Act Enforcement Order Art. 25-2; NTA Tax Answer No. 6503)	First and second fiscal years	Indirect tax registration
Taxable status as a new corporation with JPY 10 million of capital	Capital of JPY 10 million or more at the start of the fiscal year	First and second fiscal years	Entity setup and capitalisation
Base-period test	Taxable sales over JPY 10 million in the fiscal year two years earlier (NTA Tax Answer No. 6501)	From the third fiscal year	Annual registration review
Specified-period test	Taxable sales over JPY 10 million in the first six months of the prior fiscal year	From the second fiscal year	Annual registration review
Qualified invoice issuer registration	Voluntary, but Japanese customers need the T-number for full credit	Apply within the first tax period to be registered from incorporation	Customer invoicing and accounts receivable
Qualified invoice content	Every invoice issued as a registered issuer	With each invoice	Billing system and invoice templates
Reverse charge on B2B online services and specified services from abroad	Applies under the general method when the taxable sales ratio is below 95% (NTA Tax Answer No. 6118)	Reported in the return for the period	Accounts payable and self-assessed VAT
Zero rating of services to a non-resident	Recipient is a non-resident, with no Japan branch involved and no in-Japan benefit	Each sales invoice to HQ	Intercompany billing
Input credit on purchases from unregistered suppliers	70% of the tax from October 2026; capped at JPY 100 million of purchases per supplier a year (NTA, 2026 tax reform)	Each purchase, recorded in the books	Accounts payable and VAT recovery
Final return and payment	Every taxable business	Two months after year-end, or three months with the extension notification	Indirect tax compliance calendar
Interim returns and payments	Prior-year national consumption tax over JPY 480,000 (NTA Tax Answer No. 6609)	Two months after each interim period	Treasury and cash forecast

Rates: 10%, 8%, and the food rate cut from April 2027

Both the standard and the reduced rate combine a national consumption tax and a local consumption tax, according to NTA Tax Answer No. 6303 (2026). The reduced rate covers food and non-alcoholic drinks other than dining out, and newspapers published at least twice a week on subscription. Under NTA Tax Answer No. 6303, the rate on food is scheduled to be reduced for two years from 1 April 2027.

For most foreign-owned subsidiaries selling services to businesses, almost every sale is at 10%. The reduced rate matters on the purchase side (staff refreshments, client gifts of food) and to any subsidiary that sells food. The interim payment thresholds use the national portion of the tax only.

Who Must Register: Why a Group Subsidiary Is Taxable From Day One

A new Japan subsidiary of a large group is usually taxable from incorporation, because the start-up exemption tests the group, not the entity.

The JPY 10 million small-business exemption

Japanese law exempts a business whose taxable sales in its base period (基準期間, kijun kikan) were JPY 10 million or less. For a company with 12-month fiscal years, the base period is the fiscal year two years before the current one (NTA Tax Answer No. 6501, 2026). The exemption is lost early if taxable sales in the specified period (特定期間, tokutei kikan), generally the first six months of the prior fiscal year, exceed JPY 10 million. A Japanese company may use total salaries paid instead of sales for that six-month test.

A new company has no base period in its first two fiscal years, which is where the familiar "two free years" idea comes from, and a group template that assumes that holiday for any new company will understate the subsidiary's first-year obligations. Two rules close that gap for a subsidiary.

The capital test

Under the Consumption Tax Act, a company with no base period whose capital is JPY 10 million or more at the start of the fiscal year is taxable in that year. A capital increase to JPY 10 million or more during the first year makes the second year taxable as well.

The specified new corporation test

A subsidiary capitalised below JPY 10 million is still taxable if it is a specified new corporation (特定新規設立法人, tokutei shinki setsuritsu hojin). That applies under the Act when another person holds more than 50% of its shares, directly or with companies it wholly controls (Consumption Tax Act Enforcement Order Art. 25-2), and that shareholder or a company specially related to it had taxable sales over JPY 500 million in the matching base period. For fiscal years beginning on or after 1 October 2024, the test is also met if the shareholder or related company had total sales and revenue over JPY 5 billion, including revenue outside Japan, according to NTA Tax Answer No. 6503 (2026).

The JPY 5 billion revenue test is the one that catches foreign parents. Before October 2024 a foreign parent whose group had no Japanese sales never met the JPY 500 million test; now a parent, or a company related to it, whose own worldwide revenue is above that threshold makes its new subsidiary taxable from the first day. The subsidiary must file a specified new corporation notification, and the test runs on the parent group's shareholding and revenue figures. Because shares held through wholly controlled companies count toward the 50% under the Act, a parent that owns the subsidiary through wholly owned holding companies is still caught, as shown in why a new subsidiary of a large group is not exempt in its first two years.

Year three and the registration lock-in

From the third fiscal year the subsidiary has its own base period, and the Act's JPY 10 million tests apply to its own sales. A company that is a registered qualified invoice issuer stays taxable regardless of its sales, so in practice a registered subsidiary does not drop out of the system in year three even if its first-year sales were small. A company that is not otherwise taxable can also opt in by filing an election to be a taxable business (課税事業者選択届出書, kazei jigyosha sentaku todokedesho); once elected, it generally cannot opt out for two years.

Flows With HQ: Reverse Charge, Out-of-Scope Services and Zero Rating

Most HQ recharges into Japan sit outside Japanese tax or under reverse charge, while services the subsidiary sells to HQ are usually zero-rated.

Each flow needs a contract and an accounting code that match its treatment, and place of supply is decided differently for each type of service. A service is generally taxed where it is performed. A telecommunications service, such as software, cloud access or online content, is taxed where the recipient is located. Where a contract covers work done both in Japan and abroad, a reasonable split of the fee in the contract decides the treatment; without one, the location of the provider's office that performs the service decides it (NTA Tax Answer No. 6210, 2026).

Reverse charge on services from abroad

Japan's reverse charge is narrower than an EU-style general reverse charge. It covers only B2B telecommunications services supplied by a foreign business and specified services, which are performances in Japan by foreign entertainers and athletes. The Japanese recipient reports the tax as a specified taxable purchase (特定課税仕入れ, tokutei kazei shiire). Under NTA Tax Answer No. 6118 (2026), a business whose taxable sales ratio (課税売上割合, kazei uriage wariai) is 95% or more under the general method, or one using simplified taxation, treats these purchases as if they did not exist: nothing is reported and nothing is credited.

For a sales subsidiary with almost entirely taxable sales, the reverse charge is therefore often reported only in years when the ratio falls below that level, for example because of large zero-rated or non-taxable income. A software licence, a management fee and a cost recharge from HQ can each land in a different category, so each needs its own fee structure, agreement and invoice wording, as set out for intercompany service fees and cost recharges from HQ. A fee that clears consumption tax can still fail the corporate tax deductibility test if the subsidiary cannot show the benefit it received, which is the evidence question behind intercompany management fees and service agreements.

Zero rating of services sold to HQ

Services provided to a non-resident are generally exempt as exports (輸出免税, yushutsu menzei), which works like zero rating: no output tax is charged, and the tax on related purchases remains creditable. NTA Tax Answer No. 6567 (2026) lists the exceptions: transport or storage of assets located in Japan, meals and lodging in Japan, agency for Japanese real estate (from 1 October 2026), and similar services whose benefit is received directly in Japan. A non-resident with a branch or office in Japan is treated in principle as receiving the service through that branch, so the export exemption does not apply.

A subsidiary that bills HQ for sales support or R&D and buys most of its inputs locally will often pay out more input tax than it collects, which turns its return into a refund claim. That refund position rests on the export rules in consumption tax on cross-border exports and imports, and the claim itself follows the steps for consumption tax refunds for a zero-rated Japan subsidiary.

Flow between HQ and the Japan subsidiary	Example	Japan consumption tax treatment	What the file should show
HQ services performed entirely outside Japan	Group finance, legal or HR support delivered from the HQ office	Outside the scope; no Japanese tax and no reverse charge	Intercompany agreement stating where the work is performed
HQ services performed partly in Japan	HQ staff working on site in Tokyo for a project	Domestic part is HQ's own Japanese taxable sale if the contract splits the fee (no reverse charge; HQ is the taxpayer); otherwise judged by the location of the HQ office performing the service	Fee split by location in the agreement or invoice
Group software, cloud or data services delivered online by HQ	SaaS licence or group ERP access recharged to Japan	B2B telecommunications service; reverse charge when the subsidiary's taxable sales ratio is below 95% under the general method (NTA Tax Answer No. 6118)	Accounts payable code for specified taxable purchases
Consumer-type online services bought from a foreign provider	Online subscriptions not limited to business users	Foreign provider reports and pays the tax; not a reverse-charge purchase	Supplier invoice and its registration status
Foreign entertainer or athlete performing in Japan	Paid performance at a customer event	Specified service; reverse charge by the subsidiary on the same conditions	Contract and accounts payable code for specified taxable purchases
Subsidiary services sold to HQ	Sales support, marketing or R&D services for the parent	Export exemption (zero rated); input tax on related costs remains creditable	Contract with the non-resident entity and invoices addressed to it
Recharges of meals, lodging or transport in Japan	Hotel and dinner costs for HQ visitors rebilled to the parent	Taxable at 10% even though HQ is a non-resident (NTA Tax Answer No. 6567)	Separate invoice lines for in-Japan benefits
Goods shipped from HQ and imported by the subsidiary	Inventory, demo units or equipment	Import consumption tax paid to customs by the importer	Import declaration and customs payment record

Qualified Invoices: Registration and Issuance

A subsidiary must register separately to issue qualified invoices, and registering in its first tax period backdates registration to incorporation.

Registering as a qualified invoice issuer

Japan's qualified invoice system (適格請求書等保存方式, tekikaku seikyusho-to hozon hoshiki) requires a registration separate from taxable status: a qualified invoice (適格請求書, tekikaku seikyusho) can only be issued by a business registered with the tax office, and a company's registration number is the letter T followed by its corporate number. A new company that files its application during its first tax period is treated as registered from the first day of that period, normally the incorporation date, according to the NTA's 2026 page for new businesses (新規開業者向けページ, Shinki kaigyosha muke peji). Because the tax office takes some time to issue the number after the application is filed, the steps in how a new subsidiary registers as a qualified invoice issuer start at incorporation.

For a subsidiary that sells to Japanese companies, the practical deadline is the first sales invoice, because a customer can look up the T-number on the NTA's public register of invoice issuers, and the same number must appear on every invoice when issuing qualified invoices to Japanese customers.

What a qualified invoice must show

According to the NTA's 2026 page About the invoice system (インボイス制度について, Inboisu seido ni tsuite), a qualified invoice must show the issuer's name and registration number, the transaction date, a description of what was supplied (with reduced-rate items marked), the total consideration by tax rate with the applicable rate, the tax amount by rate, and the customer's name. According to the NTA's 2026 Q&A on the qualified invoice method for input tax credit (適格請求書等保存方式に関するQ&A, tekikaku seikyusho-to hozon hoshiki ni kansuru Q&A), fractions of a yen in the tax amount are rounded once per rate per invoice, not line by line, by a method the issuer chooses, which is where group billing systems that compute VAT per line produce rounding differences under the qualified invoice system for foreign companies.

Group billing platforms often hold these fields in the wrong place or not at all, especially the T-number and the per-rate totals, so both fields have to be mapped in the billing and ledger software before the first invoice goes out, the setup described in what the invoice system means for your accounting software.

Input Tax Credit After 1 October 2026

Unregistered-supplier purchases now earn only a 70% credit, stepping down to 50% and 30%, so the supplier master must record each T-number.

The Act allows input credit only where the company keeps both the qualified invoice and a ledger recording the prescribed details of the purchase (NTA Tax Answer No. 6498, 2026). For purchases from suppliers that are not registered, a transitional rule allows a fixed share of the tax to be credited. Under the 2026 tax reform, that share became 70% from 1 October 2026, falls to 50% two years later and to 30% two years after that, and ends altogether one year later, according to the NTA's 2026 tax reform page for the invoice system. The step-down applies by purchase date, so one supplier's invoices can carry different credit shares across a fiscal year, a point our consumption tax guide for foreign companies sets against the wider regime.

According to the same NTA page, the reform also set an annual cap of JPY 100 million (tax-inclusive) on purchases from any one unregistered supplier that qualify for the transitional rule, for tax periods beginning on or after 1 October 2026. Purchases above the cap get no credit at all. Large unregistered suppliers need a running total per supplier to find the point where the cap bites, as worked through for the input tax credit transitional rule for unregistered suppliers.

The share that cannot be credited is a real cost to the subsidiary. Under tax-exclusive accounting it is added to the cost of the purchase rather than held as a receivable, which moves it into the profit and loss account and, for capital items, into the asset value. Common sources in a new subsidiary are freelance contractors, small landlords, sole-trader interpreters and local event suppliers.

Filing Frequency, Interim Payments and the Books

Japan files consumption tax annually, two months after year-end, with interim payments of up to 11 a year set by the previous year's tax.

The annual return and the one-month extension

A taxable corporation files its consumption tax return within two months of the end of each tax period, which for a company is its fiscal year, so the return period follows the subsidiary's fiscal year (NTA Tax Answer No. 6610, 2026). A company that already has the corporate tax filing extension can extend the consumption tax deadline by one month by filing a notification before the end of the fiscal year, but it then pays interest tax for the extended period. Group calendars built on monthly or quarterly VAT returns need a single annual date by default, aligned with the corporate tax return on the Japan tax filing schedule.

Interim returns

Interim returns (中間申告, chukan shinkoku) depend on the national consumption tax in the prior year's return (NTA Tax Answer No. 6609, 2026). At JPY 480,000 or less no interim return is required, though a company may file one voluntarily; over JPY 480,000 triggers 1, 3 or 11 interim payments, rising with the prior year's tax in the tiers listed in consumption tax filing deadlines in Japan.

Each interim return and payment is due within two months after its interim period ends, except that a company on 11 payments files its first monthly interim within two months after the second month of the year ends (NTA Tax Answer No. 6609, 2026). The payments are credited against the final return. A company may instead calculate each interim on actual figures for the period, but a loss in an interim period does not produce a refund. Interim payments fall on the subsidiary's cash account, so the treasury forecast needs them from the second year onward.

Tax-exclusive accounting and group reporting

A taxable business may keep its books on a tax-exclusive basis (税抜経理方式, zeinuki keiri hoshiki), with output tax recorded as a liability and input tax as an asset, or on a tax-inclusive basis with the tax inside each sales and cost line (NTA Tax Answer No. 6375, 2026). Both give the same tax payable, and an exempt business must use the tax-inclusive basis for corporate tax. Tax-exclusive accounting matches IFRS and US GAAP reporting, where VAT is not revenue or cost, so it keeps the bridge to the Japan subsidiary monthly reporting package short.

The balances that most often fail to reconcile to the group pack are the net consumption tax payable, interim payments held as prepayments, the non-creditable share on unregistered suppliers, and refund receivables. Each one is booked to its own account, using the journal entries in consumption tax accounting for interim payments and group reporting, and each is one line in the statutory-to-group bridge described in Japan subsidiary finance for the group CFO.

A Calendar for the Subsidiary's First Three Fiscal Years

Year one sets registration and tax codes, year two adds interim payments and the six-month sales test, and year three adds the base-period test.

The dates run from the incorporation date and the fiscal year-end the articles set, and a short first fiscal year shifts every one of them, which is one reason to settle the year-end before incorporation when aligning the Japan subsidiary's fiscal year with the parent.

Fiscal year one

• At incorporation: confirm whether the capital test or the specified new corporation test makes the company taxable, using the parent group's shareholding and revenue figures, and file the specified new corporation notification if it applies.
• Before the first invoice to a Japanese customer: apply for qualified invoice issuer registration, alongside the other post-incorporation filings.
• Before the first month-end: set the accounting basis to tax-exclusive and create tax codes for the standard and reduced rates, zero-rated exports, out-of-scope HQ charges, non-taxable items, specified taxable purchases and the transitional rate for unregistered suppliers.
• Before the first HQ invoice: sign the intercompany agreements that set out where services are performed and which entity receives them.
• First six months: this is the specified period for year two; record taxable sales and salaries for those months separately.
• Two months after year-end: file the first return. No interim returns are due in year one.

Fiscal year two

• Start of the year: the company still has no base period, so the capital and specified new corporation tests apply again, together with the specified-period test on year one's first six months.
• During the year: interim returns begin if the year-one tax crossed the interim threshold; a refund position in year one means no interim payments.
• First six months: this is the specified period for year three, so record taxable sales for those six months separately.
• Supplier review: recheck which suppliers are unregistered and which transitional rate applies to purchases made on each date.

Fiscal year three

• Start of the year: the company is tested on its own base period (year one) and specified period.
• During the year: the interim schedule resets on the year-two tax, so the number of interim payments can change from one year to the next.
• Year-end: review the taxable sales ratio, since it decides whether reverse charge purchases from HQ enter the return.

FAQ

Can a Japan subsidiary file consumption tax quarterly?

Yes, by election: a corporation can split its fiscal year into three-month or one-month tax periods by filing a tax period election notification (消費税課税期間特例選択・変更届出書, shohizei kazei kikan tokurei sentaku henko todokedesho) before the first shortened period begins. Each shortened period then has its own return, due two months after it ends. The election cannot be withdrawn for two years unless the business closes (NTA Tax Answer No. 6137, 2026).

Does the foreign parent company have to register for Japanese consumption tax?

Not because of its subsidiary: the parent is taxable in Japan only on taxable sales it makes in Japan itself, tested against the same JPY 10 million thresholds on its own figures (NTA Tax Answer No. 6501, 2026). If it does become taxable, a foreign business (国外事業者, kokugai jigyosha) with no permanent establishment in Japan at the start of a tax period beginning on or after 1 October 2024 cannot use the simplified taxation method (NTA Tax Answer No. 6505, 2026).

How does import consumption tax work in Japan?

The importer files an import declaration with customs and pays consumption tax on or before taking the goods out of the bonded area, whether or not it is a business. The tax base is the CIF value plus customs duty and any other excise taxes, and local consumption tax is levied with it (NTA Tax Answer No. 6563, 2026).

Working with AQ Partners. Our Tokyo team provides qualified invoice issuer registration, accounting software setup, monthly bookkeeping, customer invoicing administration and annual tax filings, including the consumption tax return, for foreign companies operating in Japan. Book a consultation to discuss your situation.