Evaluation of Financial Stability When Reporting a “Deficit” in Side Business Tax Returns#
In recent years, as more Japanese companies permit secondary employment, an increasing number of foreign nationals working in Japan under a status of residence (visa) are engaging in side businesses. Consequently, questions arise regarding tax returns, specifically: “If I report a deficit (loss) in my side business, how will it affect my visa renewal or application for Permanent Residence?”
This article provides an objective explanation of how the Immigration Services Agency evaluates “financial stability” (the ability to support oneself) when a foreign national declares a deficit in their side business tax return.
The Basic Concept of Financial Stability#
When examining applications for an extension of the period of stay, a change of status, or Permanent Residence, the Immigration Bureau assesses whether the applicant has sufficient assets or skills to earn an independent living in Japan. This is known as the requirement for an “independent livelihood.”
Generally, for work-related visas (such as “Engineer/Specialist in Humanities/International Services”), the applicant is expected to receive remuneration equal to or greater than that of a Japanese national. The standard is usually interpreted as having an income level that allows one to live without relying on public assistance (welfare). While no specific minimum figure is officially published, an annual income of approximately 3 million JPY is often cited as a general benchmark for a single individual.
Profit/Loss Offset and Impact on Tax Certificates#
If a side business is registered and reported as “Business Income” (Jigyo Shotoku) and results in a deficit, the Japanese tax system allows for a mechanism called “aggregation of profit and loss” (Soneki Tsusan). This allows the taxpayer to offset the loss from the side business against the profit (salary income) from their main job.
Using this mechanism reduces the “Total Income Amount” on the tax return. Consequently, the Residence Tax for the following year may be significantly reduced or, in some cases, become non-taxable. Immigration examiners verify an applicant’s financial status primarily through the “Certificate of Tax Payment” (Nouzei Shomeisho) and the “Certificate of Taxation” (Kazei Shomeisho) for Residence Tax.
It is crucial to understand that Immigration’s focus is not on whether the applicant successfully saved on taxes, but on “actual solvency and the stability of their lifestyle.”
Specific Impacts of Deficits on Immigration Review#
The impact of reporting a side-business deficit is generally analyzed through the following three scenarios:
1. When Main Income Alone Is Sufficient#
If the salary from the primary visa-sponsoring employer is high, and the “Total Income Amount” remains well above the financial stability benchmark (e.g., over 3 million JPY) even after deducting the side business loss, it is unlikely to be evaluated negatively. In this scenario, the deficit is viewed as a temporary business fluctuation, and the foundation of the applicant’s livelihood is considered secure.
2. When Total Income Drops Significantly Due to the Deficit#
Caution is required when the main salary is modest, and offsetting it with a large side-business deficit causes the income shown on the Tax Certificate to drop to an extremely low level (e.g., the 1 million JPY range or tax-exempt level).
Even if this tax treatment is legally valid under tax law, it raises a red flag under the Immigration Control Act regarding the “ability to live stably in Japan.” Since extremely low taxable income statistically implies a lack of funds to cover living expenses, examiners may question how the applicant is financing their daily life.
3. Reality of Business and Validity of Expenses#
Immigration authorities look beyond the numbers. If a side business consistently reports large losses, examiners may suspect whether the business activity is genuine or if it is a scheme to evade taxes by inflating expenses. Specifically, if expenses are high while revenue is negligible, aimed solely at offsetting salary income to pay zero Residence Tax, this can be viewed strictly. For Permanent Residence applications, this could negatively affect the “good conduct” requirement or the evaluation of fulfilling tax obligations.
Points to Consider for Application Strategy#
If you must apply for a visa renewal or change while reporting a deficit in a side business, it is advisable to consider the following points and provide explanatory documents if necessary:
- Business Plan Explanation: Clarify that the deficit is temporary (e.g., initial investment) and provide a roadmap for future profitability.
- Stability of Main Job: Emphasize that the employment contract with the main sponsor is intact and that the salary itself is paid consistently (submit withholding slips and pay stubs).
- Proof of Funds: Even if the taxable income on the certificate appears low, submitting bank balance certificates can prove that the applicant is not in financial distress.
Conclusion#
Reporting a deficit in a side business tax return does not automatically result in the denial of a visa application. However, there is a distinct risk if the deficit significantly lowers the taxable income, causing the applicant to appear financially unstable on paper. Furthermore, aggressive tax avoidance strategies can negatively impact the Immigration Bureau’s impression of the applicant’s compliance.
In the Immigration Control System, what is “legal” for tax purposes is not always equivalent to “stable and eligible” for visa purposes. It is essential to carefully assess whether the figures on the tax return might undermine the objective proof of the financial foundation required for residence in Japan.