Sole proprietorship in Japan - ELI5 + specific questions about salary currency

[lavenda]

Hello.

Throwaway account because of a lot of sensitive data.

I will move to Japan soon with my spouse (Japan citizen) using spouse visa. For now, I have registered sole proprietorship in Poland ( https://pl.wikipedia.org/wiki/Przedsiębiorca_będący_osobą_fizyczną ) and have contracts with my clients. Both me and my clients want to continue our businesses.

I’m a programmer, so the business will be programming services.

It’s important to mention that I’ve been to Japan in the past for total time of over a year on WH and tourist visas (1Y WH visa -> few days trip to South Korea -> 3M tourist visa in Japan -> Poland).

I want close (or freeze) my SP in Poland and start the same in Japan, to pay taxes there and just be the “lawful resident” in “eyes of Japan”. However, I’m struggling with finding ELI5 guide to SP in Japan. Most of the English websites just copy-paste the same article that explains almost nothing and is kind of advertisement for their services.

I plan to receive my salary on my Polish bank account in Polish currency or Euro or USD, exchange to JPY and then “manually transfer” it to Japan (ATM withdrawal from Polish account -> ATM deposit to Japanese account) to avoid man-in-the-middle and their horrendous fees when making transfers from my clients to my bank account and silly questions from Japanese banks where from the money come (or maybe they will still call me after ATM deposit? Anyway, it’s an issue for later date.). There are no fees for withdrawal from my Polish bank account and also no fees in 7-11 ATMs. I have to figure out deposit fees in banks yet, if there are any.

Given the current exchange rate between Polish currency and JPY, I should earn around 8,723,148 JPY annually (probably more, because end of the year pay rises happening soon), before taxes.

My Japanese is still kind of low, so I will probably do a lot of things with help of my wife when it comes to city offices etc.

Given the background, my questions are:

• What should I do to start sole proprietorship in Japan properly?
• What kind of licenses, if any, I need for programmer/IT services?
• What kind of taxes and when should I pay them?
• What kind of invoice should I create each time for my clients?
• How should I handle the actual income, given the shenanigans with currency conversion (X currency into JPY)?
• Should I find an accountant for help with taxes (in Poland I do have one for about 6700 JPY / month)?
• Where I can find list of things, I can buy using my registered SP (“company purchases” (*1))?

(*1) – I’m not sure how to call it in English. Talking short, in Poland I can buy things using my registered SP and thanks of that pay lower taxes for the month of the purchase.

Thank you for your time.

 

[jandolphrohnson]

@lavenda

I plan to receive my salary on my Polish bank account in Polish currency or Euro or USD, exchange to JPY and then “manually transfer” it to Japan (ATM withdrawal from Polish account -> ATM deposit to Japanese account) to avoid man-in-the-middle and their horrendous fees when making transfers from my clients to my bank account and silly questions from Japanese banks where from the money come

I suspect you'll end up paying more fees / getting worse exchange rates that way.

(Also I assume you mean "business income" not "salary" - likely a language issue but be careful not to imply that you're an employee of your foreign clients, that would put you and them under a rather different tax etc. regime)

What should I do to start sole proprietorship in Japan properly?

Assuming it generates business income, send a notification to your local tax office and possibly also your municipal tax office. That's the minimum.

What kind of licenses, if any, I need for programmer/IT services?

None AFAIK.

What kind of taxes and when should I pay them?

Income tax, residence tax (file a tax return in February-March each year and pay at the normal times), possibly municipal taxes on sole proprietorships. You're below the threshold where it would be mandatory to register for consumption tax, but you might want to register voluntarily since it will probably be negative if your sales are offshore and your expenses are domestic; if you do then it's a similar timescale to income tax although I think the return is due at the end of February.

What kind of invoice should I create each time for my clients?

No particular requirements AFAIK.

How should I handle the actual income, given the shenanigans with currency conversion (X currency into JPY)?

If you convert immediately on receipt you can record the income in JPY. If you hold income in a foreign currency for a while then you have to calculate your foreign currency gain/loss when you convert it to JPY and report that on your taxes.

Should I find an accountant for help with taxes (in Poland I do have one for about 6700 JPY / month)?

In theory yes. It might be hard to find one who shares a language with you and knows the Japanese tax rules though.

Where I can find list of things, I can buy using my registered SP (“company purchases” (*1))?

There's no specific list, rather it's about having documented evidence that what you bought was exclusively for business use, or that a certain percentage of it was used for your business in an objectively measurable way.

 

[lavenda]

@jandolphrohnson

In theory yes. It might be hard to find one who shares a language with you and knows the Japanese tax rules though.

Well English speaking is good enough. Otherwise I will rely on my wife when communicating.

 

[l2e]

@jandolphrohnson

If you convert immediately on receipt you can record the income in JPY. If you hold income in a foreign currency for a while then you have to calculate your foreign currency gain/loss when you convert it to JPY and report that on your taxes.

Not OP, but just wondering about this line. Does it mean that if you never convert during the year when it was earned, the income will not be taxable?

 

[jandolphrohnson]

@l2e No, the income is taxable as income at its value in yen when it's accrued (or when it's received, since sole proprietors are allowed to use cash basis) and then whenever you convert foreign currency to yen the gain or loss from that is taxable (even if you're not operating a business, although it may fall under the income tax exemption of up to 200,000 for employees - in theory you still have to report it for residence tax though).

 

[l2e]

@jandolphrohnson That makes sense. Thanks!

 

[pete1507]

@l2e Yeah basically it’s like accounting two different incomes. One is your income when you receive and then the other is like capital gains income (or loss) on foreign exchange investment. L

I line item my incomes on a spreadsheet and mark the exchange rate based on when I received it and then the exchange rate of my conversion and tally it all up. You can use whatever conversion you want as long as it’s consistent.

 

[mellie]

@lavenda

Given the current exchange rate between Polish currency and JPY, I should earn around 8,723,148 JPY annually (probably more, because end of the year pay rises happening soon),

Just trying to clarify the bolded part - you're saying you're going to raise your prices?

One thing to consider is that the yen is about 30% cheaper than it was 18 or so months ago. Nobody knows what the yen will do, but the US-Japan rate differential narrowing seems quite plausible, so the yen could easily strengthen back to closer to the 115 range it was previously.

That would mean a 30% decline in the money you get when converting to JPY.

You're almost certainly going to get questions about frequent incoming wire transfers, as you should - it's the banks job.

Either way - you're going to pay a ton in various wire fees and/or get hit on nasty fx conversion fees, quite possibly on both ends.

You're going to need to figure out insurance/pension payments for you and your wife (unless your wife will also work), as well as resident taxes, which will go up a lot the second year you're here.

I have no idea about Poland tax laws; I'd absolutely try to get an accountant to help you set up the company and help you with initial tax and reporting questions. Tax is one area where mistakes are expensive - but largely avoidable, with proper advice.

 

[lavenda]

@mellie

Just trying to clarify the bolded part - you're saying you're going to raise your prices?

Well in essence, yes. tl;dr - All my long term contracts include a clause that every year we renegotiate the prices that have to result in some kind of increase in accordance to various in-country and world events, like inflation etc. This is similar to normal contract workers salary increase, so i call it the same way in short.

One thing to consider is that the yen is about 30% cheaper than it was 18 or so months ago. Nobody knows what the yen will do, but the US-Japan rate differential narrowing seems quite plausible, so the yen could easily strengthen back to closer to the 115 range it was previously.

That would mean a 30% decline in the money you get when converting to JPY.

Yeah, I can see that. So there's a little gamble from my side on this. Maybe I can renegotiate the contracts (as stated above) to include the difference, or just find better or more clients in the meantime. Maybe it will be better to just go with JPY instead of gambling there, but it's something I still research.

Either way - you're going to pay a ton in various wire fees and/or get hit on nasty fx conversion fees, quite possibly on both ends.

Yeah, that's another thing I still research. Whether my Polish bank exchange rates are good enough for this or maybe I should find different "man in the middle" or just change contracts to JPY, as mentioned above.

 

[mixey]

@lavenda Why don't you just open a Wise account ?

If you're a business you can open bank accounts in Europe (based on Belgium) and then transfer to a Japanese bank here.

To open a kojin jigyo, go to the tax office of your city and sign a form. They stamp it and give you your copy.
Bring alien card.
It takes 5 minutes + wait time .

 

[jathan]

@lavenda It’s quite easy to take cash out of many foreign banks from Japanese ATMs. The 7-Eleven ATMs are everywhere. Research banks in Poland that have low or zero cost atm fees and connected to a global banking network, like Visa. For larger transfers, WISE is a good option. Also, until you are deemed a “permanent resident” your income outside Japan will not be taxed if that money stays outside Japan. Here is an English language Japan focused financial advisor website I just found with more info on that: https://www.tytoncapital.com/projects/japans-5-year-rule-overseas-investment-offshore-tax/

 

[kristhuy]

@jathan

your income outside Japan will not be taxed if that money stays outside Japan

That rule only applies to income that is taxably sourced outside Japan. OP is describing work they are performing while they are in Japan, for clients located outside Japan. That kind of work is taxably sourced in Japan, so the location of payment is irrelevant.

Income taxably sourced outside Japan would be, for example, interest paid on foreign bank accounts, dividends paid on shares in foreign companies, and rent paid in exchange for the lending of foreign real estate.

 

[jathan]

@kristhuy Thank you for that information. Makes sense. Since OP still has an entity in Poland, is there any corporate structure OP could take advantage of that could optimize his recognized income? For example, Client A pays OP's company $1,000, but after overhead, etc, OP gives himself a salary in Poland of $500.

 

[kristhuy]

@jathan

Since OP still has an entity in Poland

OP says they are operating as a sole proprietor in Poland. A sole proprietorship is not a legal entity. A sole proprietorship is the opposite of a company, in that sense.

Client A pays OP's company $1,000, but after overhead, etc, OP gives himself a salary in Poland of $500.

The main issue with this kind of arrangement is that the Polish company will need to file Japanese corporate tax returns, because OP's presence in Japan will mean that the company is operating in Japan. In most cases, it would be simpler to just incorporate in Japan, so that all the tax/accounting can be done in one jurisdiction, instead of trying to manage compliance with multiple jurisdictions' rules.