Reducing Capital for Tax Advantages in Japan
May 31, 2017
The capital of a company is often used as a parameter for trustworthiness. However, it is important to note that once the capital exceeds 100 million yen, one may have difficulties obtaining certain advantages designed for small and medium enterprises (“SMEs”).
For example, for SMEs with financial year beginning during 1 April 2012 and 31 March 2017, the corporate tax for yearly income amount below 8 million has been reduced from 19% to 15% for the relevant financial year. A SME has been defined as an ordinary corporation (excluding a subsidiary wholly owned by a corporation with more than 500 million yen capital) that has less than 100 million yen capital at the end of each financial year.
The following guide published by the Ministry of Economy, Trade and Industry, although slightly outdated, provides background on the significance and support to SMEs.
It is very possible that similar incentives may be in place in the future to support SMEs.
The Companies Act has a section that states the required procedures in reducing the capital of a stock company. Firstly, a resolution has to be passed by shareholders’ meeting (Art.447). It is also required that the company publish a public notice in the official gazette for at least a month listing required details for any creditors to object. Company should also notify known creditors individually (Art. 449). Update of company registration is also required.
In recent years, even Sharp has contemplated reducing its capital during its turbulent times.
Understanding the tax rate system and limiting the tax liability is a common strategy to benefit the growth of a company.