The taxes a sole proprietor pays are not only income tax, residence tax, and consumption tax. Once your business income exceeds ¥2.9 million, the "individual enterprise tax" (a prefectural tax) applies. It is a tax that many people first learn about only when a tax notice suddenly arrives in August, but the mechanism is simple. This article explains, with sources, which types of business are covered, how it is calculated, the pitfall that the blue-return special deduction does not apply, and even which occupations are not taxed.
① It applies to businesses in the statutory business categories (70 categories). The rates are 5% for Category 1, 4% for Category 2, and 5% for Category 3 (partly 3%)[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
② Because there is a business-owner deduction of ¥2.9 million, it does not apply if your business income (revenue minus expenses) is ¥2.9 million or less.
③ In the calculation, the blue-return special deduction (¥650,000) cannot be subtracted. Even when "income tax is zero, the individual enterprise tax may still apply."
④ In principle no separate filing is required (the income tax final return is enough). You pay it twice, in August and November, via a tax notice from the prefecture.
⑤ The individual enterprise tax you have paid can be treated as an expense (taxes and dues) — a major difference from income tax and residence tax.
Which business types are covered and which are not
The individual enterprise tax applies only to businesses that fall within the statutory business categories (70 categories) set by the Local Tax Act[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
| Category | Rate | Examples of business types |
|---|---|---|
| Category 1 (37 types) | 5% | Goods sales, restaurants, real estate leasing, contracting, advertising, parking lots, and most other commercial businesses |
| Category 2 (3 types) | 4% | Livestock farming, fisheries, charcoal/firewood manufacturing |
| Category 3 (30 types) | 5% (partly 3%) | Doctors, tax accountants, designers, consultants, beauty and other liberal professions (massage, shiatsu, etc. are 3%) |
Category 1 (37 types) / 5%
Most ordinary commercial activity sits here, including real estate leasing, parking lots and contracting[Local Tax Act, Art. 72-2 (in Japanese)][Tokyo Metropolitan Bureau of Taxation (in Japanese)].
| Goods sales | Insurance | Money lending |
| Goods rental | Real estate leasing | Manufacturing |
| Electricity supply | Earth and stone quarrying | Telecommunications |
| Transport | Freight forwarding | Warehousing |
| Parking lots | Contracting | Printing |
| Publishing | Photography | Venue rental |
| Hotels and inns | Traditional restaurants | Food and drink service |
| Brokerage of transactions | Agency | Intermediation |
| Wholesale commission | Money exchange | Public bathhouses (steam baths, etc.) |
| Theatrical promotion | Amusement arcades | Sightseeing facilities |
| Ship mooring facilities | Commodity trading | Real estate trading |
| Advertising | Private investigation | Guide services |
| Ceremonial occasions |
Category 2 (3 types) / 4%
Only three types, and those carried on mainly with the family's own labour are excluded by cabinet order[Local Tax Act, Art. 72-2 (in Japanese)].
| Livestock farming (excluding what is incidental to agriculture) | Fisheries (excluding small-scale catching) | Charcoal and firewood manufacturing |
Category 3 (30 types) / 5%, partly 3%
Mostly licensed professions and liberal professions. Of the 30 types, 28 are taxed at 5% and only 2 at 3%[Local Tax Act, Art. 72-49-17 (in Japanese)].
| Medical practice | Dentistry | Pharmacists |
| Veterinary practice | Attorneys | Judicial scriveners |
| Administrative scriveners | Notaries | Patent attorneys |
| Tax accountants | Certified public accountants | Accountants (keirishi) |
| Labour and social security attorneys | Consultants | Design supervisors |
| Real estate appraisal | Design | Teachers of traditional arts |
| Barbers | Beauty salons | Dry cleaning |
| Public bathhouses (sento) | Dental hygienists | Dental technicians |
| Surveyors | Land and house investigators | Maritime procedure agents |
| Printing plate-making | ||
| Taxed at 3% (2 types): anma massage, shiatsu, acupuncture, moxibustion, judo therapy and other businesses similar to medical practice / farriers (Local Tax Act, Art. 72-2, para. 10, items 5 and 7) | ||
When does renting out property become a "business"?
If you rent out apartments or parking spaces, you are taxed as a real estate leasing or parking business once the scale passes a threshold. Tokyo publishes the recognition criteria below. Buildings, rooms and parking spaces are counted including vacancies[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
| Type and use | Scale of the rented property (vacancies included) |
|---|---|
| Buildings / residential / detached houses | 10 or more buildings |
| Buildings / residential / other than detached houses | 10 or more rooms |
| Buildings / non-residential / independent houses | 5 or more buildings |
| Buildings / non-residential / other than independent houses | 10 or more rooms |
| Land / for housing | 10 or more contracts, or a total rented area of 2,000 m² or more |
| Land / other than for housing | 10 or more contracts |
| Holding several of the above types | 10 or more in total, or meeting any one of the criteria above |
| Below the above criteria but still recognised | Total floor area of the rented buildings is 600 m² or more and the rental income is ¥10 million or more a year (key money, renewal fees, common-area charges and the like excluded) / property fitted out for entertainment such as theatres, cinemas or golf practice ranges / inns, hotels, hospitals and the like of a certain scale |
| Parking / lots that take custody of vehicles | 1 space or more |
| Parking / structures or mechanical parking | 1 space or more |
| Parking / any other parking lot | 10 spaces or more |
· Co-owned property is judged on the whole property, regardless of your share. Only the tax amount is then calculated in proportion to your share. Property held in trust also counts towards the number of rentals[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
· A building with two or more independently partitioned rooms is judged by the number of rooms even when the whole building is let to one tenant.
· For land, if one contract covers two or more plots, each plot counts as one.
This is a different standard from the income tax "5 buildings or 10 rooms" rule (Income Tax Basic Circular 26-9). For the income tax side, which decides the blue-return special deduction and the treatment of asset losses, see Business-scale real estate income: the 5-building, 10-room rule.
Occupations that are not taxed, and why
The individual enterprise tax only applies to the statutory business categories. Turning that around, work that appears nowhere in the 70 categories above is not taxed. Here are the three grounds that come up most often.
- Writers, painters, composers, manga artists and the like: there is no matching category in the list of 70. Neither Tokyo's list nor Article 72-2 of the Local Tax Act mentions writing as a business category, so it is not taxed[Local Tax Act, Art. 72-2 (in Japanese)][Tokyo Metropolitan Bureau of Taxation (in Japanese)].
- Agriculture: Article 72-2, paragraph 9, item 3 of the Local Tax Act expressly says "excluding agriculture" for businesses similar to Category 2. Livestock farming carried on incidentally to agriculture is excluded as well[Local Tax Act, Art. 72-2 (in Japanese)].
- Anma massage, shiatsu, acupuncture, moxibustion and judo therapy performed by people with visual impairments: paragraph 10, item 5 of the same article excludes work "performed by a person who has lost the sight of both eyes or who has a comparable visual impairment specified by cabinet order"[Local Tax Act, Art. 72-2 (in Japanese)].
It depends on whether the work counts as "contracting" in Category 1, or as "consultants" or "design" in Category 3. The scope of each category is left to cabinet order (Local Tax Act, Art. 72-2, para. 11), and no published material sets out where programming work falls. Because it turns on the form and the reality of the contract, check with the prefectural tax office if a notice puzzles you. Tokyo states that "almost every business falls under" the categories, so being outside them is the exception[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
How it is calculated (the blue-return special deduction does not apply!)
"Business income" is revenue minus expenses and payments to family employees. The important points here are as follows.
- The blue-return special deduction (up to ¥550,000, or ¥650,000 with e-filing) cannot be subtracted: because it does not apply to the individual enterprise tax, the amount you deducted for income tax is added back. Even if a blue return brings your income tax to zero, the individual enterprise tax may still apply.
- The business-owner deduction is ¥2.9 million (prorated monthly if the business period is less than one year)[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
- Example: income of ¥5 million, Category 1 → (¥5 million − ¥2.9 million) × 5% = ¥105,000.
The business-owner deduction is prorated (the year you start or close)
In a year when the business period is shorter than 12 months, the deduction shrinks month by month[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
| Business period | Business-owner deduction |
|---|---|
| 1 month | ¥242,000 |
| 2 months | ¥484,000 |
| 3 months | ¥725,000 |
| 4 months | ¥967,000 |
| 5 months | ¥1,209,000 |
| 6 months | ¥1,450,000 |
| 7 months | ¥1,692,000 |
| 8 months | ¥1,934,000 |
| 9 months | ¥2,175,000 |
| 10 months | ¥2,417,000 |
| 11 months | ¥2,659,000 |
| 12 months | ¥2,900,000 |
Five points where it differs from income tax
Even though both start from "business income," these five items are handled differently[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
| Item | Treatment for the individual enterprise tax |
|---|---|
| Blue-return special deduction | Does not apply. The amount deducted for income tax is added back to income before the tax is calculated (prefectural handling circular, ch. 3, 11-4) |
| White-return deduction for family employees | Capped at ¥860,000 for a spouse and ¥500,000 per other family employee (Local Tax Act, Art. 72-49-12, paras. 2 and 3) |
| Blue-return salaries to family employees | The amount you treated as a necessary expense for income tax is deductible here too |
| Losses on selling business assets | Losses from selling machinery, equipment, vehicles and the like used directly in the business can be deducted from business income (land, buildings and the like are excluded). Blue-return filers can carry them forward for 3 years (para. 13) |
| Carrying losses forward | Blue-return filers: 3 years (para. 6). White-return filers can also carry forward losses on business assets caused by earthquakes, storms, floods or fire for 3 years (para. 7) |
The loss on selling a business vehicle is easy to overlook: for income tax it is a capital loss, but for the individual enterprise tax it comes straight off business income.
For the basics of bookkeeping, see The basics of account titles and journal entries, and for the ¥650,000 deduction, see Blue returns and white returns.
The filing and payment flow
- In principle no separate filing is required: the filing deadline is March 15, but if you have completed your income tax final return (there is an enterprise tax field on the second table) or your residence tax filing, no separate enterprise tax filing is needed. If you close the business during the year, you file within one month of closing (within four months if the business ends because of death)[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
- Payment is twice, in August and November: the first instalment is due August 31 and the second November 30 (the next business day if that falls on a holiday). The tax notice arrives from the prefectural tax office in August[Tokyo Metropolitan Bureau of Taxation (in Japanese)]. Besides account transfer, you can also use cashless payment via eL-QR. For the yearly schedule, see the tax calendar.
- The amount you pay becomes an expense: because the individual enterprise tax is a "tax on the business," it can be included in necessary expenses as taxes and dues (income tax and residence tax cannot).
- There are also reduction or exemption systems for cases such as closing the business in the previous year or in the event of a disaster.
The FY2026 tax reform outline contains no item revising the rates, the business-owner deduction or the statutory business categories of the individual enterprise tax[MIC, FY2026 local tax reform (in Japanese)]. As of September 2026 the framework is unchanged: rates of 3–5%, a ¥2.9 million business-owner deduction, and payment in August and November[Tokyo Metropolitan Bureau of Taxation (in Japanese)].
FAQ
From what level of income does the individual enterprise tax apply?
It applies once your business income (revenue minus expenses, etc.) exceeds the business-owner deduction of ¥2.9 million. If it is ¥2.9 million or less, the tax is zero and no notice arrives. In a year when the business period is less than one year, the deduction is prorated monthly.
If I file a blue return, does the individual enterprise tax also become cheaper?
The blue-return special deduction (up to ¥650,000) cannot be subtracted in the individual enterprise tax calculation. So even if your income tax drops significantly, the individual enterprise tax stays as "(income − ¥2.9 million) × rate." On the other hand, salaries paid to blue-return family employees are also deductible as an expense for the individual enterprise tax.
Does it also apply to freelance engineers and writers?
It depends on the type of business. Work that does not fall within the statutory business categories, such as writing, is not covered. Engineers may be taxed if the actual nature of the contract is judged to be a "contracting business," and the handling varies from prefecture to prefecture. If you have doubts about a notice, check with the prefectural tax office.
Does it apply if I only rent out an apartment building or a parking lot?
It depends on the scale. Under Tokyo's criteria, residential property other than detached houses is recognised at 10 rooms or more, non-residential independent houses at 5 buildings or more, and parking at 10 spaces or more (1 space or more for lots that take custody of vehicles and for mechanical parking). Even below those thresholds, you are recognised if the rented buildings total 600 m² or more of floor area and bring in ¥10 million or more of rent a year. Co-owned property is judged on the whole property, regardless of your share.
Is the individual enterprise tax changing in FY2026?
No. The FY2026 tax reform outline contains no item revising the rates, the business-owner deduction or the statutory business categories. Rates of 3–5%, the ¥2.9 million business-owner deduction and payment in August and November all stay as they are (as of September 2026).
Can I treat the individual enterprise tax as an expense?
Yes. Because it is a tax imposed on the business, it can be included in the necessary expenses (taxes and dues) of the year you pay it. Income tax and residence tax cannot be treated as expenses, so be careful not to confuse them.
Data sources
- The 70 statutory business categories and rates, the ¥2.9 million business-owner deduction and its monthly proration, the payment dates (August 31 / November 30), and the recognition criteria for real estate leasing and parking businesses: Tokyo Metropolitan Bureau of Taxation — Individual enterprise tax (in Japanese)
- The classification of the business categories and the exclusions for agriculture and for people with visual impairments: Local Tax Act, Article 72-2 (e-Gov, in Japanese)
- The rates (5% / 4% / 5% / 3%): Local Tax Act, Article 72-49-17 (e-Gov, in Japanese)
- No change for FY2026: Ministry of Internal Affairs and Communications — FY2026 tax reform (local taxes, in Japanese)
* The individual enterprise tax is a prefectural tax, and the recognition of business types and the procedures may be handled differently from prefecture to prefecture. This article provides general information; for individual judgments, please confirm with a prefectural tax office or a tax accountant.
