The Official Definition of SMEs in Japan
Dual Determination by Employee Count and Capital
In Japan, the definition of an SME is stipulated by the Small and Medium-sized Enterprise Basic Act, using a dual determination standard of "employee count" and "capital." This means you need to satisfy at least one of the two conditions.
Manufacturing, construction, transportation, and other industries:
- Employees: 300 or fewer
- Capital: JPY 300 million or less
Wholesale:
- Employees: 100 or fewer
- Capital: JPY 100 million or less
Retail and services:
- Employees: 50 or fewer
- Capital: JPY 50 million or less
Chinese business owners should note that "employee count" here includes full-time, part-time, and dispatched employees, calculated as the average number of employees (usually the monthly average over the fiscal year). Many Chinese owners in restaurants, beauty, education, and training—service industries—do not realize they belong to "services" rather than "manufacturing," mistakenly assuming they can have 300 employees, only to be rejected at filing.
The Determination Logic in Practice
Suppose you run a Japanese imported-food trading company with 25 employees and JPY 20 million in capital. By definition, you belong to the wholesale category. Although 25 employees is well below the 100 cap, and JPY 20 million is well below JPY 100 million, you clearly meet the SME definition.
Consider another example: an IT system development company with 250 employees and JPY 15 million in capital. This belongs to "other industries"; 250 employees meets the 300-or-fewer standard, and the capital also meets the JPY 300 million or less standard, so it also meets the SME definition.
But if either the employee count or the capital exceeds the cap for that industry, even if the other figure is very low, the company will be judged a large enterprise and cannot apply for subsidies targeting SMEs.
The Separate Definition of Small-Scale Operators
The Difference from SMEs
Small-scale operators are a subset of SMEs, with a stricter definition. Japan treats small-scale operators as a separate support target because their difficulties in funding, technology, and manpower are more pronounced.
The standard for small-scale operators:
| Industry | Employee Cap | |-----|---------| | Manufacturing, construction, transportation, other industries | 20 or fewer | | Commerce (wholesale, retail), services | 5 or fewer |
This is a crucial distinction. Many Chinese restaurant owners, beauty salon owners, and classroom operators fall right in this range—service businesses with 5–50 people. If your team is 5 or fewer, congratulations: in addition to SME subsidies, you can also apply for subsidies specifically for small-scale operators, which often have looser review conditions and simpler filing procedures.
A Japanese-language training center with 4 employees meets the small-scale operator definition and can apply for the "Sustainability Grant" (持続化給付金) or the "Sustainability Subsidy for Small-Scale Operators" (小規模事業者持続化補助金) aimed at small-scale operators. An education group with 45 employees, though still an SME, cannot apply for the above subsidies.
How to Determine Your Company's Classification
Step 1: Confirm Your Main Business Classification
In Japan, a company's industry classification is determined according to the Japan Standard Industrial Classification (日本標準産業分類). This is not something you can classify however you like, but is based on your actual revenue composition.
Common classifications for Chinese companies:
Manufacturing: food processing plants, printing shops, handicraft making, etc. Classified as "製造業," with a standard of 300 employees / JPY 300 million capital.
Wholesale: imported-food wholesalers, clothing wholesalers, daily-goods agents, etc. Classified as "卸売業," with 100 employees / JPY 100 million capital.
Retail: convenience stores, supermarkets, e-commerce shops, etc. Classified as "小売業," with 50 employees / JPY 50 million capital.
Services: the classification with the most Chinese businesses, including restaurants, beauty, education, translation, cleaning services, etc. Classified as "サービス業," with 50 employees / JPY 50 million capital.
Key tip: If your company's revenue sources are mixed (e.g., both retail and services), you need to use the business with the highest revenue proportion as the main industry. For example, a Chinese restaurant that sells both takeout bento and dine-in service has "飲食サービス業" (food services) as its main industry, falling into the services category.
Step 2: Accurately Count Employees
Many Chinese owners make mistakes here. There are three key points in counting employees:
Scope: includes full-time employees, contract workers, part-timers, and dispatched employees, but not chairmen, executive directors, and other roles in name only (unless they also draw a salary).
Method: use the average number of employees over the fiscal year. For example, for a fiscal year starting April 2024 (Japan usually runs April to March), you calculate the number of employees each of these 12 months and then take the average.
Specific example:
- April: 15 people
- May: 16 people
- June–March: 18 people (average)
Average employees = (15+16+18×11) ÷ 12 = 234 ÷ 12 ≈ 19.5 people
At determination, 19.5 people would be treated as 20 people. If your service company counts this way, you are a small-scale operator; if it exceeds 20, you may fall into the "non-small-scale SME" range.
Step 3: Confirm the Capital Amount
Confirming the capital is relatively simple, but note a few things:
Where to check: the corporate registration certificate (法人登記簿), the articles of incorporation (定款), and the latest financial statements.
What counts as capital: the capital invested by shareholders, excluding retained earnings or debt.
Special case: if your business is a sole proprietorship (個人事業主), there is no formal concept of capital. In this case, sole proprietors are judged by a separate standard (see the next section).
A very common misunderstanding: a Chinese owner invests JPY 1 million when registering the company, but after years of operation the book assets reach JPY 50 million, and they assume their "capital" is JPY 50 million. This is wrong. The capital is still the original JPY 1 million invested (unless a capital increase was later made).
The Definition of Sole Proprietors (Freelancers)
The Difference Between Sole Proprietorship and a Corporation
In Japan, many Chinese also operate as sole proprietors (個人事業主)—for example, freelance translators, consultants, artists, and small-scale classroom operators. They are judged by different standards when applying for subsidies.
Sole proprietors are generally recognized as "small-scale operators," but they face different requirements when applying for subsidies:
- Income requirement: usually need to prove continuous commercial income, not part-time in nature.
- Operating history: many subsidies require at least 1 year of operating history.
- Bookkeeping: need clear bookkeeping records (blue-form filing recommended).
For example, a Chinese freelance Japanese-language teacher with monthly teaching income of JPY 5 million, 3 years of operating history, and complete books, applying for the "Sustainability Subsidy for Small-Scale Operators," would usually be approved because of the stable income and complete records.
Conversely, a student who has just started part-time daigou (personal shopping), with unstable monthly income and no complete books, would be rejected even if they wanted to apply, because they don't meet the "continuous commercial activity" standard.
Subsidy Eligibility for Sole Proprietors
The good news is that more and more Japanese government subsidies specifically support sole proprietors. Since COVID-19, subsidies for those classified as "freelancers" (フリーランス) and "sole proprietors" (個人事業主) have expanded their application scope:
- Sustainability Subsidy for Small-Scale Operators: usually does not distinguish between corporations and individuals, as long as the employee count is within the standard range.
- Monozukuri Subsidy, AI / IT Adoption Subsidy: restrictions on sole proprietors are being relaxed year by year.
- Local government subsidies: many local governments have set up subsidies specifically for sole proprietors to encourage entrepreneurship.
A Chinese web designer operating as a sole proprietor, with 0 employees (only themselves), can apply for various subsidies: management innovation subsidies, AI / IT Adoption Subsidy, etc.
Specific Requirements of Various Subsidies for the Applicant's Status
The Eligibility Thresholds of Major Subsidies
After understanding the definitions of SMEs and small-scale operators, you need to further understand the specific requirements of each subsidy for applicants. Different subsidies vary greatly in their standards.
Sustainability Subsidy for Small-Scale Operators (小規模事業者持続化補助金):
- Target: small-scale operators (manufacturing 20 or fewer, services 5 or fewer)
- Subsidy rate: 2/3
- Cap: JPY 1.5 million
- Filing difficulty: ★★☆ (relatively easy, an entry-level subsidy)
Monozukuri, Commerce & Services Productivity Improvement Subsidy (ものづくり・商業・サービス生産性向上促進補助金):
- Target: SMEs and small-scale operators
- Subsidy rate: 1/2–2/3
- Cap: JPY 7.5 million–12.5 million
- Filing difficulty: ★★★★ (requires a detailed business plan and cost documentation)
AI / IT Adoption Subsidy (IT導入補助金):
- Target: SMEs and small-scale operators
- Subsidy rate: 1/2–2/3
- Cap: JPY 4.5 million–15 million
- Filing difficulty: ★★★ (requires choosing a certified vendor; review is relatively strict)
Business Restructuring Subsidy (事業再構築補助金):
- Target: SMEs and small-scale operators
- Subsidy rate: 1/2–3/4
- Cap: up to JPY 150 million
- Filing difficulty: ★★★★★ (the highest difficulty; requires proving a fundamental transformation of the business)
Management Innovation Subsidy (経営革新補助金):
- Target: SMEs
- Subsidy rate: 1/2
- Cap: JPY 5 million
- Filing difficulty: ★★★ (requires approval of a management innovation plan)
A real case: a Chinese food import company with 8 employees meets both the "small-scale operator" definition (the services 5-person determination does not apply—it is wholesale) and the "SME" definition. So it can apply for all the above subsidies. But if this company had 35 employees, it could only apply for subsidies limited to "SMEs" and not those limited to small-scale operators.
Hidden Eligibility Requirements
Beyond the explicit employee count and capital, many subsidies have hidden requirements:
Financial soundness: even if you meet the size definitions, if your company has continuous losses or excessive debt, some subsidies will not approve.
Tax compliance: you must pay taxes on time with no arrears. Especially social insurance premiums—more and more subsidies require enrollment in employment insurance and welfare pension.
Labor management: employees must have labor contracts, comply with labor law, and there must be no record of unpaid wages.
Anti-social forces exclusion: although rare, you need to confirm no ties to organized crime when filing.
These hidden requirements are not a problem for well-run companies, but pose a risk to companies with compliance gaps. Some Chinese companies, to save on taxes, don't put employees on formal insurance, and this will immediately block a subsidy filing.
FAQ
Q1: My company has only JPY 1 million in capital and 20 employees—what business classification is it?
A: It depends on your industry. First confirm which industry classification you belong to. Assuming you are manufacturing, the standard is "300 employees or fewer AND JPY 300 million capital or less." Your 20 employees and JPY 1 million capital are both well below the thresholds, so you are an SME. If you are in services, the standard is "50 employees or fewer AND JPY 50 million capital or less," which also meets the SME definition. Further, if you are in manufacturing with only 20 employees (right at the boundary), you also meet the small-scale operator definition (manufacturing 20 or fewer); if you are in services with 20 employees, you do not meet the small-scale definition (5 or fewer) and only count as an SME. This subtle difference decides which subsidies you can apply for, so be sure to confirm the accurate industry classification.
Q2: Should my part-time and dispatched employees be counted in the total?
A: Yes, they must be counted. The "employee count" (従業員数) in Japanese subsidy definitions includes all forms of paid employees, whether full-time, contract, part-time, or dispatched. The calculation uses the "average number of employees," i.e., the average of the monthly employee count over the fiscal year. Many Chinese restaurants or retail stores have 5–10 part-time employees, and the owner mistakenly assumes "only full-timers count," only to be rejected at filing because the part-timers are counted and the total exceeds the cap. For example, a retail store with 3 full-time and 12 part-time employees has an average of 15 people; although this meets the retail SME threshold of 50, it does not meet the small-scale threshold of 5. Dispatched employees are also counted—if you dispatch 5 employees to your store via a staffing company, those 5 must also be counted.
Q3: I made JPY 5 million in profit last year—what should my capital be counted as this year?
A: Capital and profit (accumulated earnings) are two completely different concepts. Capital is the amount invested by shareholders at the company's founding or in a later capital increase, recorded in the corporate registration certificate, and generally unchanged. Annual profit goes into the "retained earnings" or "accumulated earnings" account, which is not capital. For example, if you invested JPY 2 million in capital when registering the company and made JPY 5 million in profit last year, your capital this year is still JPY 2 million; the book total assets may be JPY 7 million, but the "capital" used in the subsidy determination is that JPY 2 million. If you want to increase capital, you must go through a formal capital-increase procedure, amend the articles of incorporation, and re-register. This misunderstanding is common, leading some owners to mistakenly believe they have exceeded the capital cap when they haven't.
Q4: My company was just established this year and is still operating at a loss—can I apply for a subsidy?
A: Yes, but with conditions. Many subsidies have operating-history requirements, such as "annual sales in the fiscal year before filing above a certain amount" or "established for 2 years or more." The Sustainability Subsidy for Small-Scale Operators usually requires "a decline of 50% or more compared with the same month last year" or "continuous operation," which means you cannot be a brand-new company. But some subsidies (such as startup subsidies or special subsidies for specific periods) are aimed specifically at new ventures. In addition, even if the company is currently operating at a loss, as long as it has business income, keeps complete accounting records, and has employees enrolled in insurance, it can still apply. The key is to prove that you are engaged in "continuous commercial activity." If the company was established just 1 month ago with blank books and no business record at all, it definitely cannot apply for regular subsidies. I recommend new ventures first consult the requirements of the specific subsidy program and not blindly assume they don't qualify.
Q5: I can't tell whether I'm "wholesale" or "services"—does this affect subsidy eligibility?
A: It matters a lot; you must determine it accurately. The wholesale (卸売業) threshold is 100 employees and JPY 100 million capital; the services threshold is 50 employees and JPY 50 million. So if you are wholesale with 70 employees, you still meet the SME definition. But if you are wrongly classified as services, 70 people exceeds the cap. How to determine? Look at your main source of business revenue. If you are an imported-food wholesaler selling mainly to restaurants and retailers (B2B model), you are wholesale. If you are an imported-food supermarket selling mainly to consumers (B2C model), you are retail. If you have both wholesale and retail, determine by the larger share of revenue. The official reference for determination is the "Japan Standard Industrial Classification," which you can look up on the website of Japan's Statistics Bureau of the Ministry of Internal Affairs and Communications, or consult an accountant. A wrong classification can cause a subsidy application to be rejected, so this step is crucial.
How to Obtain Official Determination and Professional Consultation
Official Sources for the Determination Standards
If you still have questions about your classification, you can consult the following official resources:
SME Agency (中小企業庁) website: https://www.chusho.meti.go.jp/ Provides the latest subsidy information and detailed explanations of company definitions.
SME Support Centers of each prefecture (各都道府県の中小企業支援センター): every prefecture has an SME support center providing free consultation.
Chambers of Commerce and Industry (商工会議所): if your company is registered in a certain area, the local Chamber of Commerce and Industry provides free management and subsidy consultation.
Accountants and Zeirishi (会計士・税理士): professional accountants and tax accountants can accurately determine your company's classification—this is the most reliable method. Consultation fees are usually JPY 100,000–500,000, which is negligible compared to the subsidy amount.
Prepare the Necessary Documents
If you want to conduct an official consultation or apply for a subsidy, prepare the following documents in advance:
- Corporate registration certificate (法人登記簿謄本)
- Articles of incorporation (定款)
- Financial statements for the most recent term (sometimes two terms) (決算報告書), including the balance sheet and income statement
- Payroll ledger (給与台帳), proving the number of employees and their salaries
- Certificate of enrollment in employment insurance (雇用保険の加入証明書)
With these documents, an accountant can give you a clear classification determination within 1–2 weeks.
Conclusion: Clarify Your Status, File Accurately
Although the definitions of SMEs and small-scale operators may seem complex, they are not hard to understand once you grasp the core logic. The three key steps are: (1) confirm your industry, (2) count the average number of employees, (3) confirm your capital. These three figures determine your status in the subsidy system, and in turn decide which subsidies you can apply for and how much.
There are many cases of Chinese business owners in Japan suffering losses due to an unclear understanding of the definitions. Some companies think they are "too big" and dare not apply, when they actually still meet the SME standard; some don't know they are "small-scale" and miss subsidies specifically for small-scale operators; and some have applications rejected because they fail hidden requirements (such as tax compliance or employee insurance).
The correct approach is: work with a professional accountant or subsidy consultant to clearly classify your company based on your most recent financial statements, then apply for eligible subsidies in a targeted way. This avoids filing errors and maximizes your chances of obtaining subsidies.
Get a Free Professional Consultation
If you still have questions about your company's classification, or want to know which subsidies are suitable for you to apply for, feel free to contact our team of Japanese subsidy advisors. We provide professional subsidy filing guidance for Chinese businesses in Japan and have helped hundreds of companies successfully obtain hundreds of millions of yen in government subsidies.
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