#17 Understanding Japan's Fixed Asset Tax and Depreciable Asset Tax

Expanding into Japan comes with various tax obligations, including fixed asset tax (固定資産税) and depreciable asset tax (償却資産税). Many foreign companies with a presence in Japan struggle to understand these taxes and ensuring compliance. Without proper planning, unexpected tax liabilities can arise. This guide will help you grasp the fundamental rules, understand compliance requirements, and implement optimal tax strategies to minimize risks and maximize efficiency.

🔍 How Japan’s Fixed Asset Tax and Depreciable Asset Tax Work

Fixed asset tax is an annual tax imposed on businesses and individuals who own real estate and business-use depreciable assets. It consists of three categories:

Land (土地)
Buildings (家屋)
Depreciable Business-Use Assets (償却資産)

📌 Key Facts:

Fixed Asset Tax: Applies to land and buildings.
Depreciable Asset Tax: A subset of fixed asset tax that applies specifically to business-use tangible assets (e.g., machinery, equipment, and certain vehicles) that meet the taxable threshold.
Tax Rate: 1.4% of the taxable value, though local governments can increase it up to 2.1%.
Tax Authority: The municipality where the asset is located (In Tokyo’s 23 wards, the Tokyo Metropolitan Government assesses and collects the tax).
Tax Obligation Date: The tax is assessed based on ownership as of January 1 of each year. Even if the property is sold later in the year, the January 1 owner remains responsible for that year's tax.

👉 More details on fixed asset tax

🏢 Who Is Subject to These Taxes?

You are required to pay fixed asset tax if you own land or buildings in Japan.

You are required to pay depreciable asset tax if you own business-use assets that meet the following conditions:

✅ The asset is tangible and used for business purposes.

✅ The asset is subject to depreciation under Japanese tax law.

✅ The total taxable value of all business-use assets in a municipality exceeds JPY 1.5 million.

✅ The asset is still in use as of January 1 of the tax year.

💡 Example:

Real Estate Owner: A foreign company purchases an office building in Tokyo. Since it owns real estate, it is liable for fixed asset tax annually.
Manufacturing Business: A factory in Osaka owns machinery and equipment worth JPY 5 million. Since the total value exceeds JPY 1.5 million, it must pay depreciable asset tax.
Small Business: A consulting firm owns office furniture and computers worth JPY 1 million. Since the total value does not exceed JPY 1.5 million, it is exempt from depreciable asset tax.

📜 Taxable Asset Categories and Valuation

Fixed Asset Tax (Land & Buildings)

Land and buildings are assessed based on their taxable value, which is determined by the municipal government.

Land: Valued based on publicly assessed prices, primarily using the route price (路線価方式) method.
Buildings: Valued based on their reconstruction price (再建築価格方式), adjusted for depreciation.

Depreciable Asset Tax (Business-Use Assets)

For depreciable business-use assets, the taxable value is determined using the following formula:

📌 Taxable Value = Acquisition Cost × Depreciation Rate

Depreciation rates are set by the government, and the value of an asset gradually declines over time for tax purposes.

💡 Example: A company purchases a piece of machinery for JPY 10 million. If the designated depreciation rate is 20%, the taxable value after one year is:

🔹 JPY 10 million × (1 - 20%) = JPY 8 million (Taxable Value for Year 2)

🏢 Filing and Payment Deadlines

Fixed Asset Tax

Tax is based on ownership as of January 1 each year. Even if a property is sold later in the year, the individual or entity registered as the owner on January 1 remains responsible for that year’s tax payment.
In Japan, it is common business practice for the buyer and seller to prorate the fixed asset tax based on the number of days each party owns the asset during the year and settle the adjusted amount at the time of sale.
The local government issues a tax notice in April or May each year.
Payment is typically due in four installments throughout the fiscal year.

Depreciable Asset Tax

Businesses must self-report taxable business-use assets by January 31 each year.
The local government calculates the tax amount based on the filed report.
Payment is due in April, July, December, and the following February (varies by municipality).

⚠️ Failure to file by the deadline may result in penalties or additional asessments!　　　　

💰 Tax Reduction and Exemptions

Certain conditions may allow businesses to reduce or eliminate their tax liability.

📌 Fixed Asset Tax Reductions:

Newly built factories and office buildings may qualify for tax reductions in designated areas.
Disaster relief measures may reduce tax burdens for assets damaged by natural disasters.
Burden Adjustment Measures: To avoid sudden tax increases, commercial and residential landowners may receive tax adjustments based on prior-year assessments.

📌 Depreciable Asset Tax Exemptions:

Businesses with total depreciable asset values below JPY 1.5 million per municipality are exempt.
Certain small and medium-sized enterprises (SMEs) may receive tax incentives.
High-tech investments in government-designated zones may qualify for reduced rates.

💡 Example: A startup invests in advanced robotics and benefits from a 50% tax reduction under Japan’s SME innovation program.

📌 Final Takeaway

Japan’s fixed asset tax and depreciable asset tax are significant cost considerations for businesses with property and tangible assets. Proper planning and compliance can help optimize your tax position. Additionally, businesses should be aware of potential disputes regarding property valuation and leverage available exemptions or reductions to minimize tax costs.

🚀 Don't get caught off guard—plan ahead and make informed tax decisions!

If you are considering expanding your business to Japan, please contact Quantum Accounting Inc. for a free consultation during the planning phase or general consultation (available in both English and Japanese). Quantum Accounting's professionals are experts in accounting, tax, legal, and labor issues. Our goal is to provide you with a one-stop professional firm for all the services you need to expand your business into Japan. We are confident that we can help you.