2-3 How Does Japanese Consumption Tax Apply to Digital Services Provided by Foreign Companies?
YamaguchiYoshioWhen a foreign company provides apps, e-books, videos, music, cloud services, subscription services, or other digital services to customers in Japan via the internet, the transactions may be subject to Japanese consumption tax.
For foreign companies, it is particularly important to determine whether the service falls into either of the following categories:
- B2B digital services
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B2C digital services
For B2B digital services, the Japanese customer generally files and pays consumption tax under the reverse charge mechanism. The foreign company is not required to file or pay Japanese consumption tax on the transaction.
For B2C digital services, the foreign company providing the service generally files and pays Japanese consumption tax. However, different rules apply if the foreign company qualifies as a tax-exempt business or if the platform taxation rules apply.
Key Takeaways
- Digital services provided to customers with an address or establishment in Japan may be subject to Japanese consumption tax.
- Not every transaction conducted via the internet qualifies as a digital service.
- Whether a service is classified as B2B or B2C depends on the nature of the service and its terms and conditions—not simply on whether the customer is a company or an individual.
- For B2B digital services, the Japanese customer, rather than the foreign company, files and pays consumption tax under the reverse charge mechanism.
- For B2C digital services, the foreign company generally files and pays Japanese consumption tax.
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For sales made through certain designated platforms, the platform operator files and pays consumption tax.
In Which Country Is a Digital Service Deemed to Be Supplied?
Japanese consumption tax applies to transactions conducted in Japan, regardless of whether the supplier is a Japanese or foreign company.
However, the rules for determining whether a transaction is conducted inside or outside Japan differ between sales of physical goods and supplies of digital services.
Sales of Physical Goods
For sales of physical goods, whether a transaction is domestic or foreign is generally determined by the location of the goods at the time of sale.
- Goods located in Japan: Domestic transaction
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Goods located outside Japan: Foreign transaction
When goods located outside Japan are imported into Japan, however, import consumption tax is imposed at the time of importation.
More precisely, a sale of goods located outside Japan is outside the scope of Japanese consumption tax, but import consumption tax is imposed when those goods are subsequently imported into Japan.
Provision of Digital Services
For digital services such as e-books, apps, and cloud services, whether the transaction is domestic or foreign is determined by the address or other relevant location of the customer.
Accordingly, even when a foreign company provides a service from outside Japan, the transaction is generally treated as a domestic transaction if the customer’s address or other relevant location is in Japan. See the National Tax Agency’s guidance on foreign transactions.
In practice, a customer’s location may be determined using objective information such as the billing address, registered credit card information, IP address, mobile telephone country code, and similar data.
Transactions That Qualify as Digital Services
In this article, “digital services” refers to services provided through the internet or other telecommunications networks. The statutory term under Japanese consumption tax law is the “provision of telecommunications utilization services.”
Typical examples include:
- Distribution of e-books, digital newspapers, music, and videos
- Download sales of software, games, and apps
- Access to cloud-based software, including SaaS
- Provision of cloud storage
- Distribution and placement of online advertisements
- Access to online marketplaces and auction websites
- Provision of an online marketplace through which apps, games, and other digital products can be sold
- Online reservation platforms for accommodation facilities and restaurants
- Online content and data provided to paid members
Transactions That Do Not Qualify as Digital Services Even Though the Internet Is Used
A transaction does not ordinarily qualify as a digital service merely because the internet is used for communications, delivery of work products, or reporting.
The relevant question is not simply whether the internet is used. The question is whether the service itself is provided through a telecommunications network.
Custom Development of Software and Other Copyrighted Works
A company may engage a foreign company to develop software, designs, videos, or other copyrighted works and use the internet to provide instructions and receive the completed work.
In this situation, the substance of the transaction is the custom development or creation of the work. Because the internet is used only to provide instructions and deliver the completed work, the transaction ordinarily does not qualify as digital services.
Management or Operation of Assets Located Outside Japan
Services involving the management or operation of assets located outside Japan do not ordinarily qualify as digital services merely because instructions and reports are communicated via the internet.
The same applies when online banking is used to manage or transfer funds located outside Japan.
However, if a separate fee is charged for cloud-based asset management software, the software-related portion may qualify as a digital service.
Information Collection and Analysis Performed at a Customer’s Request
Suppose a foreign company collects and analyzes information at the request of a specific customer and delivers its findings by email or another online method. In that case, the substance of the transaction is the collection and analysis of information.
The transaction therefore does not ordinarily qualify as a digital service merely because the internet is used to deliver the report.
By contrast, if a company independently collects and analyzes information, places it in a database, and charges customers for access, the service qualifies as a digital service.
Human-Provided Services Delivered Online
Services provided by individuals in real time, such as online English lessons taught by overseas instructors or online consulting provided by professionals, do not ordinarily qualify as digital services when the internet is merely the means of communication.
However, services that allow users to access recorded lectures or educational materials on demand, as well as access to online learning platforms, may qualify as digital services.
A service’s failure to qualify as a digital service does not necessarily mean that it is not subject to Japanese consumption tax. In that case, whether the service is supplied inside or outside Japan must be determined under the general place-of-supply rules for services.
Difference Between B2B and B2C Digital Services
Once a transaction has been identified as a digital service, the next step is to determine whether it is a B2B or B2C digital service.
This classification is not determined solely by whether the actual customer is a company or an individual.
B2B Digital Services
A B2B digital service is a service that, based on its nature or terms and conditions, would normally be supplied only to businesses.
Services Classified as B2B Based on Their Nature
Typical examples include:
- Distribution of online advertisements
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Provision of an online marketplace through which apps and similar products can be sold
By their nature, these services would normally be used only by persons carrying on a business.
Services Classified as B2B Based on Their Terms and Conditions
A service may qualify as B2B when the parties individually negotiate its content, enter into a customer-specific agreement, and the agreement clearly establishes that the customer will use the service for business purposes.
By contrast, labeling a cloud service as “corporate” or “for business” on a website does not necessarily make it a B2B service if anyone, including an individual consumer, can subscribe.
The key question is whether the terms and conditions genuinely restrict applications from persons not acting as businesses.
Reverse Charge Mechanism
When a foreign supplier provides a B2B digital service, the Japanese business purchasing the service, rather than the foreign supplier, must report and pay the consumption tax.
This is known as the reverse charge mechanism.
The foreign company therefore does not need to charge or report Japanese consumption tax on a B2B digital service.
The foreign company must also notify the Japanese customer in advance that the service is subject to the reverse charge mechanism and that the customer is responsible for paying the consumption tax.
Transitional Measure for Customers With a Taxable Sales Ratio(*) of 95% or More
A transitional measure currently applies to the reverse charge mechanism.
If the Japanese customer’s taxable sales ratio is 95% or more during the relevant taxable period, the purchase of the digital service from the foreign company is deemed not to have occurred for consumption tax purposes. The customer therefore does not report the transaction under the reverse charge mechanism.
For example, suppose US Company A provides a B2B cloud service worth JPY 1 million to Japanese companies.
The foreign company does not need to check the Japanese customer’s taxable sales ratio or how it calculates consumption tax.
Once the service qualifies as a B2B digital service, the foreign company has no Japanese consumption tax filing or payment obligation for that transaction, regardless of the customer’s taxable sales ratio.
(*) What Is the Taxable Sales Ratio?
The taxable sales ratio is the proportion of a business’s total sales that consists of taxable sales and export sales qualifying for zero-rating.
It is calculated broadly as follows:
Taxable sales ratio =
(Taxable sales + zero-rated export sales) ÷
(Taxable sales + zero-rated export sales + tax-exempt sales)
Tax-exempt sales include sales of land, residential rent, sales of securities, and interest on bank deposits.
B2C Digital Services
A B2C digital service is a digital service that does not qualify as a B2B digital service.
Typical examples of services offered to the general public include:
- Distribution of e-books, music, and videos
- Sales of games and apps
- Cloud services available to general users
- Online storage
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Subscription services
Even when a website states that a service is “for businesses,” the service will be classified as B2C if applications from non-business customers cannot effectively be restricted.
A service may also be classified as B2C even when the actual purchaser is a Japanese company, provided that the same service is widely available to general consumers.
Filing and Payment Obligations of Foreign Companies
When a foreign company provides B2C digital services to customers in Japan, the foreign company must generally file and pay Japanese consumption tax.
However, a foreign company may be exempt from consumption tax if, for example, its taxable sales during the base period were JPY 10 million or less and it satisfies the other applicable requirements.
If a foreign company provides both B2B and B2C digital services, the JPY 10 million threshold is generally determined using sales of B2C digital services for which the foreign company itself is responsible for filing and paying consumption tax. B2B sales subject to the reverse charge mechanism are not included.
However, a foreign company may still become a taxable business even if its taxable sales do not exceed JPY 10 million due to factors such as:
- Registration as a Qualified Invoice Issuer
- The stated capital test
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The specified period test
Platform Taxation
Japan introduced platform taxation for certain B2C digital services supplied by foreign companies through designated digital platforms on or after April 1, 2025.
Platform taxation applies when all of the following requirements are met:
- The service is a B2C digital service supplied by a foreign company.
- The service is supplied through a platform operated by a Specified Platform Operator.
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The consideration for the service is collected through that Specified Platform Operator.
For eligible transactions, the Specified Platform Operator is deemed to have supplied the service and is responsible for filing and paying the consumption tax instead of the foreign company.
The foreign company therefore excludes sales subject to platform taxation from both the taxable sales reported in its own consumption tax return and the taxable sales used to determine whether it is required to pay consumption tax. See the National Tax Agency’s guidance on platform taxation.
Specified Platform Operators
As of August 2026, platform taxation applies to the following platform operators:
Epic Games Commerce GmbH has been designated as a Specified Platform Operator, but the designation will take effect on December 1, 2026.
The latest information is available in the National Tax Agency’s List of Specified Platform Operators.
When Should a Foreign Company Consider Invoice Registration?
The term “B2C digital services” does not mean that every actual customer is an individual consumer. Japanese companies may also purchase SaaS, cloud services, and other services that are generally available to the public.
When the Japanese customer is a business, it generally needs to retain a qualified invoice to claim an input tax credit.
If the foreign company is not registered as a Qualified Invoice Issuer, the customer may be unable to claim all or part of the input tax credit. Foreign companies with substantial sales to Japanese businesses should therefore consider registering as Qualified Invoice Issuers.
However, once a foreign company registers as a Qualified Invoice Issuer, it must file and pay Japanese consumption tax even if its taxable sales are JPY 10 million or less.
The decision should therefore take into account not only the benefit to Japanese customers but also the foreign company’s own compliance costs and pricing strategy.
Conclusion
When a foreign company supplies digital services to customers in Japan, it should determine the Japanese consumption tax treatment in the following order:
- Does the service qualify as a digital service?
- Does the customer have an address or other relevant location in Japan?
- Is the service classified as B2B or B2C?
- Is the service supplied and paid for through a Specified Platform Operator?
- Is the foreign company a taxable business or a Qualified Invoice Issuer?
A particularly important point is that the classification cannot be made simply by assuming that a service is B2B when the customer is a company and B2C when the customer is an individual.
The appropriate treatment must be determined for each type of transaction after reviewing the nature of the service, application requirements, contractual terms, range of eligible customers, and payment arrangements.