Incorporation Consumption Tax Exemption Simulator (Japan)

Estimate for free how many fiscal years a newly incorporated company can remain exempt from Japanese consumption tax after a sole proprietor incorporates, along with the estimated tax savings.

What Is the Incorporation Consumption Tax Exemption Simulator?

The Incorporation Consumption Tax Exemption Simulator estimates how many fiscal years a newly incorporated company can remain exempt from Japanese consumption tax after a sole proprietor incorporates. Just enter capital at establishment, expected specified period taxable sales and salary payments, and whether the company plans to register as an invoice-issuing business, and you'll get the exemption period (0-2 fiscal years) and an estimated tax savings.

If a sole proprietor is already a taxable person, or is about to become one, incorporating resets the base period as a new corporation, which can restore tax-exempt status under certain conditions. Understanding this effect in advance helps inform decisions about incorporation timing and capital settings.

How to Use

Enter your current taxable sales Enter your current annual taxable sales as a sole proprietor. Used to estimate tax savings.
Enter your planned incorporation date Choose the date you plan to incorporate. Used to calculate the approximate exemption end date.
Enter capital at establishment Keep it below ¥10 million if you are aiming for tax exemption.
Enter expected specified period sales and salary payments Enter expected taxable sales and salary payments for the first six months after incorporation.
Select your invoice registration plan If you plan to register, the result shows no exemption period.

Tips for getting more out of it

Keeping capital at establishment below ¥10 million is the essential prerequisite for the maximum 2-year exemption. At ¥10 million or more, the new corporation rule makes the company taxable from its first fiscal year.
For the specified period judgment, you can choose whichever of "taxable sales" or "salary payments" is more favorable. Even if sales spike right after incorporation, the company may stay exempt in its second year if payroll remains small.
Even if you were already a taxable person as a sole proprietor, incorporating resets the base period as a new corporation. That said, be aware that incorporating purely to dodge consumption tax liability can invite scrutiny of the business's real substance during a tax audit.
Estimated tax savings is a rough calculation based on current taxable sales as a sole proprietor × the standard 10% rate × the number of exempt fiscal years. This estimate is less accurate if a large share of sales falls under the reduced 8% rate.
If the company plans to register as an invoice-issuing business, it will not benefit from any exemption period. Check in advance whether your clients actually require you to issue qualified invoices.

Use Cases

Deciding when to incorporate as a sole proprietor

Sole proprietors considering incorporation right before or after becoming taxable can see in advance how much exemption period they can secure.

Setting capital at establishment

Use this alongside your funding plan to check whether keeping capital below ¥10 million secures an exemption period.

Deciding invoice registration timing

Use this to weigh how registering as an invoice-issuing business at the same time as incorporation eliminates the exemption period.

Glossary

Incorporation (Hojin-nari): The process of a sole proprietor converting their business into a corporation. It resets the consumption tax base period, which can restore tax-exempt status under certain conditions.
New Corporation Rule: A rule that makes a corporation in its first or second fiscal year (with no base period) a taxable person if its capital at establishment is ¥10 million or more.
Specified Period: A supplementary judgment period. For a corporation, this is the first half (first six months) of its first fiscal year after incorporation.
Base Period Reset: The effect by which incorporating a sole proprietorship restarts the base period results used for consumption tax judgment from zero, as a new corporation.
Invoice-Issuing Business: A business registered to issue qualified invoices. Once registered, it becomes a taxable person regardless of its sales scale.
Estimated Tax Savings: A rough estimate of the amount saved by being exempt from consumption tax liability during the exemption period, calculated as taxable sales × the standard 10% rate × the number of exempt fiscal years.

Frequently Asked Questions

If you keep capital at establishment below ¥10 million and do not register as an invoice-issuing business, the new corporation's base period resets, so in principle the first fiscal year is exempt. However, if expected specified period taxable sales and salary payments both exceed ¥10 million, the company becomes taxable from its second fiscal year.

Incorporating right before you would otherwise become a taxable person as a sole proprietor (before the year in which base period taxable sales exceed ¥10 million) lets you use up your exemption as a sole proprietor before switching to the exemption period as a corporation. However, this requires weighing fiscal year settings and your overall business plan, so consult a tax accountant.

A new corporation with capital of ¥10 million or more becomes taxable from its first fiscal year under the "new corporation rule," regardless of base period results. Keeping capital below ¥10 million is the basic requirement if you want to secure an exemption period.

This tool is a simplified approximation of the general rules. It does not reflect finer exceptions such as the specified new corporation rule (for subsidiaries of large businesses) or fiscal year timing differences, so please confirm the final determination with a tax office or accountant.

Side Note — How Incorporation Can Stretch the Exemption Period to Nearly 4 Years

When a sole proprietor incorporates, the new corporation's base period resets, allowing up to two fiscal years of tax exemption. If the timing of incorporation is aligned with the moment the sole proprietor would otherwise have become taxable, the remaining exemption period as a sole proprietor can combine with the two exempt fiscal years as a corporation, resulting in nearly four years of avoided consumption tax liability in some cases. This effect arises directly from how the system judges taxable status based on base period results from two years prior.

This mechanism isn't unlimited, though. The 2011 tax reform introduced the "specified period" test, which switches a company to taxable status from its second fiscal year if sales or payroll surge in its first six months. In addition, a new corporation with capital of ¥10 million or more becomes taxable from day one regardless of base period results. Extreme capital settings or timing adjustments aimed purely at extending the exemption period risk being viewed by tax authorities as an artificial avoidance scheme, so this should be considered only within the scope of a genuine business plan.

Most sole proprietors considering incorporation weigh far more than the consumption tax exemption period alone — the gap between income tax and corporate tax effective rates, higher social insurance costs, and the cost of establishing and maintaining a company all factor in. Treat the consumption tax exemption period as just one input into that broader decision, and consult a tax accountant before finalizing it.

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