Personal vs. Company Ownership: Tax Implications for Purchasing Property in Japan (Part 1)
We are often asked a question by our overseas clients who are planning to invest or relocate in Japan : From a tax perspective, is it more advantageous to purchase Japanese property under an individual name or a company name? This issue involves complex tax regulations and personal circumstances. We will explore this topic and provide a comprehensive analysis to assist our clients in making informed decisions. In Part 1, we will introduce the tax comparison between individuals and companies when it comes to purchasing, holding, and selling properties in Japan.
- Differences in Taxation for Individuals and Companies on Real Estate Rental Income (Part 1)
- Advantages of Purchasing Property through Company
- Comparison of Taxation for Individuals and Companies When Selling Property
Differences in Taxation for Individuals and Companies on Real Estate Rental Income (Part 1)
Taxation on Real Estate Rental Income
for Individuals is “Income Tax”
for Companies is “Corporate Tax”
Since the tax rates for “Income Tax” and “Corporate Tax” differ, let’s compare which one offers more advantages:
“Income Tax” Imposed on Individual Income
Real estate rental income is subject to income tax, which also applies to other sources of income as well, such as salary income. If you have additional sources of income, they will be combined, and the total income will be taxed. Income tax is levied on individual income based on a progressive tax system, where the higher the taxable income, the higher the tax rate.
|Income Tax Rate
|￥3,300,000 – ￥6,949,999
|￥9,000,000 – ￥17,999,999
|￥40,000,000 or above
※Tax rates are subject to change based on Japanese policies.
“Corporate Tax” Imposed on Company Income
Company income refers to the profits generated from business activities conducted by the company. Corporate tax is levied based on the total amount of profits from all business activities, including real estate and others. The corporate tax rate varies depending on factors such as the size of the business.
|Effective 1 April 2017
|Effective 1 April 2019
|￥8,000,000 or above
Comparison of Taxation on Real Estate Rental Income
To simplify the comparison between “Income Tax” and “Corporate Tax,” if annual income exceeds 9 million yen, the corporate tax rate will be lower, making it more advantageous to purchase through a company. When considering real estate rental income, the tax rate is one of the criteria to consider when deciding whether to establish a company.
In the case of individuals, “Income Tax” and “Resident Tax” are levied on their income. However, for companies, in addition to “Corporate tax”, they are also subject to taxes such as “Corporate Resident Tax” and “Local Corporate Tax”. (If you want to know more about various taxes, please feel free to inquire.)
Advantages of Purchasing Property through Company
When purchasing real estate in Japan, whether in the name of an individual or a company, the buyer needs to pay real estate acquisition tax, registration tax (in Japanese: 登録免許税), and stamp tax, and the tax rates are the same.
For information on these taxes, please refer here.
However, compared to individuals, if you purchase your own residential property in the name of a company, it can be considered as the company renting the property to its senior executives, allowing more items to be classified as expenses and potentially achieving tax reduction effects in terms of corporate tax.
The following expenses can be listed as expenses for real estate purchased by a company:
Purchase costs: Costs, registration fees, etc. related to purchasing real estate
Management expenses: Costs related to management and maintenance, repair costs etc.
Insurance premiums: Fire insurance premiums, earthquake insurance premiums
Interest costs: Interest costs when borrowing in the name of the company
Depreciation expenses: Depreciation expenses calculated based on the useful life of the property
However, since living in a property registered under one’s own company can be categorized as part of employee benefits, it may increase the individual income tax amount. If you purchase property in the name of a company, it is recommended to pay rent to the company to reduce the individual tax burden.
If the real estate purchased in the name of the company is used for investment and incurs a loss, the loss amount can be carried forward for 10 years (in the case of individuals, it can only be carried forward for 3 years), reducing the annual corporate income and thereby alleviating the corporate tax burden. Additionally, if there was a profit in the previous fiscal year, the loss in the current year can offset the profit from the previous year, resulting in a partial refund of the corporate tax already paid in the previous year.
One of the drawbacks of purchasing property in the name of a company is the inability to enjoy mortgage loans. Mortgage loan deductions are for personal income tax. For a company, mortgage loan deductions cannot be utilized. Moreover, mortgage loans are generally provided to individuals, and corporations cannot obtain mortgage loans. Therefore, when purchasing residential real estate, a company may need to use commercial loans, which may result in higher interest rates compared to personal loans. However, the interest can be deducted as an expense.
Comparison of Taxation for Individuals and Companies When Selling Property
When you sell property and make a profit,
For individuals: “Capital Gains Tax” is paid.
For companies: “Corporate Tax” is paid.
The taxation method for individual “capital gains” is called separate taxation, where “capital gains” and “other income” are considered separately.
The capital gains tax rate varies depending on the period the property was held for sale.
Long-term capital gains (held for more than 5 years when sold)20%~20.315%Income Tax 15%
Resident Tax 5%
Special Reconstruction Income Tax 0.315%
|Long-term capital gains (held for more than 5 years when sold)
|Income Tax 15%
Resident Tax 5%
Special Reconstruction Income Tax 0.315%
|Short-term capital gains (held for 5 years or less when sold)
|Income Tax 30%
Resident Tax 9%
Special Reconstruction Income Tax 0.63%
※Tax rates are subject to change due to Japanese policies. The special reconstruction income tax will be levied until December 31, 2037.
As mentioned above, individuals who hold property for more than 5 years have a lower tax rate. Compared to corporate tax, if the holding period exceeds 5 years from January 1 of the year the real estate is sold, the individual tax rate is more advantageous. If the holding period is less than 5 years, the corporate tax is more favorable. It is important to note that the calculation of the holding period is from the date of purchasing the property to January 1 of the year the property is sold (not the date of sale itself).