Related-Party Transactions in Japan – Part 2

Why Are Supporting Documents Important?

Last time, we explained what a related-party transaction is.

This week, let's look at a simple question:

Why does Japan require supporting documents for these transactions?

The tax office wants to understand the transaction

When two unrelated companies do business, the price is usually decided through normal market negotiations.

However, when related companies do business with each other, the tax office may ask:

• Why was this price chosen?

• What service was provided?

• Is the payment reasonable?

Supporting documents help answer these questions.

Contracts alone may not be enough

A contract may show that a payment was agreed.

However, it may not explain:

• how the amount was calculated,

• what work was actually performed,

• or why the payment was necessary.

In these cases, additional documents may be required.

Good records help avoid future problems

Keeping clear records can help:

• explain transactions during a tax audit,

• reduce misunderstandings,

• and support the company's tax position.

This is especially important for international groups and foreign-owned businesses.

For foreign business owners

If your Japanese company pays:

• management fees,

• service fees,

• royalties,

• or other amounts to a related company,

make sure you keep documents that explain the purpose and calculation of the payment.

Good documentation today can prevent tax issues later.

Key takeaway

For related-party transactions, tax authorities want to understand what happened and why.

Clear supporting documents help demonstrate that the transaction is genuine and properly priced.