Business Safety Mutual Relief System in Japan?

(Uploaded on: 2024/6/12)

Overview

The Business Safety Mutual Relief System (also known as the Mutual Relief System for the Prevention of Bankruptcies of Small and Medium-sized Enterprises) is a system designed to prevent Small and Medium-sized Enterprises (SMEs) in Japan from falling into a chain reaction of bankruptcies or financial difficulties when a business partner goes bankrupt. It allows SMEs to borrow up to 10 times the amount of their contributions (up to a maximum of JPY 80 million) without collateral or guarantors. The contributions are deductible expenses, thus reducing taxes. Additionally, low-interest loans are available. If contributions have been paid for a certain period, the full amount of contributions can be received as a cancellation allowance upon termination of the contract, but this allowance is taxable, so timing is crucial.

In Japanese, it is called “経営セーフティ共済制度(中小企業倒産防止共済制度)”

Key Benefits and Caution

Contributions are Deductible Expenses

Monthly contributions can be freely chosen from JPY 5,000 to JPY 200,000 and can be increased or decreased. The maximum total accumulated contribution is JPY 8 million. Contributions are treated as deductible expenses, thereby reducing individual income tax or corporate income tax. However, for contracts terminated and re-enrolled on or after October 1 2024, contributions paid within two years from the date of cancellation are not considered deductible expenses. The rule was revised because many companies were immediately rejoining after cancellation to reduce taxes.

Borrowing up to 10 Times Contributions without Collateral or Guarantors

If a business partner goes bankrupt and accounts receivable become difficult to collect, a loan can be used. Mutual aid loans can be received without collateral or guarantors. The borrowing limit is the lesser of “the amount of accounts receivable that became difficult to collect” or “10 times the total contributions paid (maximum JPY 80 million).”

Utilizing Temporary Loans

Temporary loans can be utilized even if the business partner has not gone bankrupt, in cases where funds are needed. The loan amount is up to 95% of the cancellation allowance receivable upon termination. The loan is intended for business funds (operating funds, equipment funds). The interest rate is 0.9% per annum as of April 2024. The loan period is one year, but it can be renewed.

Receiving a Cancellation Allowance, Which is Taxable

Upon termination of the mutual aid, a cancellation allowance can be received. Even if termination is voluntary, 80% or more of the total contributions will be refunded if contributions have been paid for 12 months or more, and the full amount will be refunded if paid for 40 months or more (less than 12 months is forfeited). However, the cancellation allowance is considered income, making it subject to individual income tax or corporate income tax. Therefore, terminating during periods of poor performance or when there are many other income deductions (for individuals) can reduce the tax burden.

Eligibility for Enrollment

Eligibility varies by industry. For example, businesses can enroll if they meet the following conditions (There are also conditions, such as having been in business for at least one year.)

– For manufacturing, construction, and transportation industries, capital of 300 million yen or less, or 300 employees or fewer.

– For wholesale industries, capital of JPY 100 million or less, or 100 employees or fewer.

– For service industries, capital of JPY 50 million or less, or 100 employees or fewer.

How to Enroll

Documents must be submitted to financial institutions, chambers of commerce etc. that accept enrollment applications.

Summary

The Business Safety Mutual Relief System (also known as the Mutual Relief System for the Prevention of Bankruptcies of Small and Medium-sized Enterprises) not only helps prevent chain bankruptcies and financial difficulties but also allows for tax savings by treating contributions as expenses. The system also provides loan options, offering benefits in terms of cash flow. However, careful consideration of the timing of termination is necessary to avoid losses due to the taxation of cancellation allowances. It is advisable to consider the overall benefits, including enrollment, loans, and termination, before utilizing this system.

(Note: It is difficult to include all details of the system.)

You may also be interested in this article (Small Business Mutual Aid Program).