Consumption Tax
In our earlier articles, we covered when a business can be tax-exempt, and the extra rules that apply to newly established companies. But there's a separate system that changes the calculation entirely for many small and new businesses: Japan's Qualified Invoice System, in place since October 2023. Even if you qualify as tax-exempt on paper, this system can put real pressure on you to register as a taxable enterprise anyway.
Recall from our first article that when a business buys from a supplier, it can normally deduct the consumption tax it paid on that purchase from the tax it owes on its own sales. Since 2023, there's a new condition attached to that deduction: the buyer can only claim it if the purchase came with a Qualified Invoice, and only businesses registered as Qualified Invoice Issuers can issue one.
Here's the catch: to register as a Qualified Invoice Issuer, you generally have to become a taxable enterprise. A tax-exempt business, by definition, isn't collecting consumption tax from its customers in the first place, so it has nothing to put on a Qualified Invoice.
This means that if your customers are other businesses that need to claim the purchase tax credit, staying tax-exempt is no longer simply a matter of “small enough to skip the paperwork.” It can directly affect how attractive you are as a supplier.
Whether this matters to you depends heavily on who your customers are.
If you mainly sell to individual consumers, who can't claim a purchase tax credit anyway, your exempt status has little effect on them, and there's often no strong reason to register.
If you mainly sell to other businesses, particularly larger companies with careful accounting practices, the picture is different. A business customer who can no longer fully deduct the tax on what they buy from you may ask you to lower your price to compensate, or may simply prefer working with a supplier who can issue Qualified Invoices. For a small supplier competing for corporate contracts, remaining exempt can become a genuine competitive disadvantage, even though it's legally optional.
This is exactly the kind of decision that comes up often for small businesses and freelancers doing work for foreign-affiliated companies in Japan, since those companies tend to have exacting accounting requirements and may be less flexible about the deduction issue than a smaller local client would be.
If you do decide to register as a Qualified Invoice Issuer, you're effectively giving up your tax-exempt status. From your registration date onward, you become a taxable enterprise: you'll need to charge consumption tax, file returns, and pay the difference between what you collect and what you pay, just like any other taxable business.
To soften this transition, the government introduced a temporary relief measure that lets many small businesses that became taxable specifically because they registered pay only 20% of their collected consumption tax, rather than calculating the full purchase tax credit. It's simpler to calculate and, for many small businesses, cheaper than the standard method.
This relief is time-limited, and the details differ depending on your business type, so the timing matters. As of the time of writing, this 20% relief is scheduled to end for corporations at the fiscal year that includes September 30, 2026, with no announced extension for companies. Sole proprietors have been granted a separate, extended relief measure at a 30% rate, running through the 2027 and 2028 filing years. Because these deadlines and rates are subject to further tax reform each year, it's worth confirming the current rules with us before deciding when to register.
Deciding whether to register as a Qualified Invoice Issuer, and when, is one of the more consequential judgment calls a small or newly established business in Japan will face. It depends on your customer base, your margins, and how much of a compliance burden you're ready to take on. If you're weighing this decision, it's worth working through the numbers with us before your customers, or the calendar, make the decision for you.
This article is for general informational purposes only and does not constitute tax advice for any specific situation. Rules and relief measures described here are subject to change through future tax reform. If you're setting up a business in Japan, feel free to reach out to us about your particular circumstances.