Japan: 105% Markup Entity Tax Structure

Intended Audience

Business owners whose Japanese subsidiary company engages in auxiliary business activities such as sales support and market research in the Japanese market.


Most foreign-owned Japanese subsidiaries, both KK and GK, are appointed as sales support entities by their overseas parent company. 

With this setup, the parent company directly conducts business with Japanese customers and the subsidiary company is only assigned auxiliary business functions like marketing and sales support(assisting in closing customer contracts, etc.).

Calculating the Japanese subsidiary company’s revenue and profit then becomes delicate and subjective. 

The parent company, being able to directly conduct business with Japanese customers might justify that their Japanese subsidiary company must declare zero revenue and only recognize their operating expenses; their auxiliary role regarded external to the actual ongoing transaction between business and customer.  

The assumption of zero revenue is invalidated by the Japanese tax agent. A Japanese subsidiary company must acknowledge at least some revenue derived from business activities carried out in the Japanese market.

105% Markup Tax Structure

The “105% Markup” or simplified profit calculation method is adopted by most Japanese subsidiary companies to resolve revenue and profit calculation difficulties like the one stated above. 

It classifies “service fees” as annual revenue for the Japanese subsidiary company. The annual revenue is determined by calculating 105% of the total annual operating expenses. 

The Japanese subsidiary company acknowledges 5% of the annual revenue as its taxable profit and, calculated with the approximate effective corporate tax rate, will decide its payable corporate tax.

Here is an example of the 105% Markup calculation:
Approximate effective corporate tax rate: 23%
Total operating expenses: 1,000,000 yen


105% markup service revenue to overseas parent company: 1,000,000 x 105% = 1,050,000 yen
Taxable profit: 1,050,000 (revenues) – 1,000,000 (expenses) = 50,000 yen

Corporate tax: 50,000 x 23% = 11,500 yen

In this case, the Japanese subsidiary company’s annual revenue is 1,050,000 yen. 

The taxable profit is 50,000 yen and corporate tax to be paid is 11,500 yen.

Basis of the 105% Markup Tax Structure

In 2018, the national tax agent disclosed that the new transfer pricing guidance for a Japanese subsidiary company whose business was routine and support service at limited risks, a 5% markup on total costs could be assumed as arm’s length price as long as certain terms and conditions were met.

This scheme is customarily adopted by most of foreign owned Japanese subsidiary companies and, to some degree, implicitly condoned by the tax agent because it is not feasible to calculate the exact revenue amount of the sales support entity.

Our professional team considers 105% to 110% is arm’s-length rate to calculate taxable profit.

Requirements to Apply for 105% Markup

Service agreement between the overseas parent company and the Japanese subsidiary company stating 105% markup service fees is charged to the parent company

Certain terms and conditions are required.


In case the Japanese subsidiary company, a sales support entity, adopts a 105% markup scheme, we recommend the submission of tax report for election of consumption taxpayer to the national tax office and qualify for the consumption tax filer.

 In doing so, the Japanese company will be able to claim refund for the consumption tax incurred in the total annual operating expenses and the service fee charged to the overseas parent company is exempt for consumption tax which is a big advantage.

Here is the example of consumption tax refund calculation.

Corporate tax: 11,500 yen
Total operating expenses: 1,000,000 yen (including 10% consumption tax)
105% markup service fee: 1,050,000 yen


10% consumption tax: 1,000,000 / 110% x 10% = 90,909 yen

As demonstrated, although the Japanese subsidiary company has to pay the corporate tax of 11,500 yen, the company is able to claim a consumption tax refund of 90,909 yen.

If you have further questions, please feel free to book for a free consultation.
We are happy to provide value added free advice to assist in your decision-making for market entry in Japan.


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