What Obligations Come After Receiving a Subsidy? A Complete Guide to the Business Progress Report

This article explains, from a practical standpoint, the obligations you must fulfill after receiving a subsidy, the specific requirements of the business progress report (事業化状況報告), common pitfalls seen in real cases, and how to operate properly to protect your company.

Understanding the Legal Nature of Post-Award Subsidy Obligations

In Japan, a subsidy (補助金) is not a gift with no strings attached. The moment your company receives a subsidy, it automatically incurs post-award obligations with strong legal force. This is not a "multiple choice" question—it is a "must answer" one.

Under the Act on Proper Execution of Budget Pertaining to Subsidies (補助金の交付に係る予算の執行の適正化に関する法律), the applicant must:

1. Use the funds strictly in line with the subsidy's purpose—no diversion to other uses
2. Report on business progress at regular intervals—this is the business progress report
3. Retain complete supporting documents—for at least 7 years
4. Submit to inspections by government authorities—including on-site verification
5. Disclose management data truthfully—financial statements, sales figures, and so on

A Chinese business owner running an apparel trading company in Tokyo once received a subsidy of 500万日元 to modernize his factory. He later used 200万日元 of it to pay rent unrelated to the business. As a result, he was ordered to return the subsidy plus a penalty, and ultimately paid 700万日元. This is not an isolated case.

The Specific Content and Process of Subsidy Reporting Obligations

Core Elements of the Business Progress Report

The business progress report (事業化状況報告書) is the single most important document in post-award subsidy management. It must be submitted at regular intervals after the subsidized project is completed and typically covers the following:

1. Progress report on the business

• Specific work completed during the period
• Explanation of any deviations from the original plan
• Amount of subsidy used
• Comparison of actual expenditure against budget

2. Financial status report

• Itemized details of exactly how the subsidy was used (down to each individual expense)
• Amount of self-funded capital invested
• Cash flow statement
• Profit and loss statement

3. Performance indicator report

• Sales growth (e.g., if sales were 1000万日元 before the subsidy, the report should show specific growth figures for the reporting period)
• New product development results
• Changes in the number of employees hired
• Achievement of technical targets

4. Business continuity report

• Follow-on operating plan for the subsidized business
• Commitment to a minimum equipment retention period (usually 3–5 years)
• Expected economic effects

Reporting Cycle and Timing Requirements

Subsidy reporting obligations generally fall into three phases:

Interim report (usually every six months)

• Submitted every 6 months during the execution period of the subsidized project
• Requires supporting documents such as expense receipts, invoices, and receipts
• Late submission may result in subsequent payments being frozen

Completion report (upon project completion)

• Submitted within 30 days after the subsidized project is fully completed
• This is the most important report and must be prepared with particular care
• Must include copies of the original supporting documents for all expenditures

Post-project evaluation report (1–3 years after completion)

• Some subsidies require continued reporting for 3–5 years
• An annual report on business performance must be submitted
• Tracks whether the subsidy's effect met expectations

A concrete timeline example:

• March 2024: Subsidy approved (500万日元)
• September 2024: First interim report (250万日元 spent)
• March 2025: Second interim report (450万日元 spent)
• April 2025: Completion report (full 500万日元 spent)
• April 2025–March 2028: Post-project evaluation report submitted every April

Strict Rules for Using a Subsidy

What Counts as "Compliant" Subsidy Use?

Many Chinese business owners do not fully grasp what "use in line with the subsidy's purpose" means. Let me illustrate with a few real cases:

Case 1: The equipment-purchase trap

• What went wrong: Received a subsidy to purchase a CNC machine tool, but actually bought a cheaper one and used the 50万日元 saved to cover the company's day-to-day operating expenses
• Consequence: Ruled to be misappropriation; the entire subsidy had to be returned plus a penalty
• The right way: If you buy cheaper equipment, you must report this to the subsidy authority in advance and adjust only after obtaining approval

Case 2: The outsourcing problem

• What went wrong: 150万日元 of the subsidy budget was allocated to "system development fees," but the work was awarded to an affiliated company wholly controlled by the owner
• Consequence: Deemed self-dealing; the subsidy was clawed back
• The right way: You must run an open tender or obtain at least three competing bids to demonstrate that the price is reasonable

Case 3: The limits on personnel costs

• What went wrong: The subsidy budget included 500万日元 in wages for R&D staff, but those staff spent only 30% of their time on the subsidized project
• Consequence: Only the proportional amount (150万日元) could be recognized; the rest was clawed back
• The right way: Submit a detailed staff time-allocation table and calculate on a pro-rata basis only after approval

The Focus of Subsidy-Use Reviews

When government authorities review how a subsidy was used, they focus on the following:

Cost-efficiency review

• Whether procurement prices are reasonable (compared against market prices)
• Whether there are any non-essential expenditures
• Whether the procurement process was transparent

Authenticity review

• Whether invoices and receipts are genuine (suppliers may be contacted to verify)
• Whether payment was actually made
• Whether the goods or services were actually received

Relevance review

• Whether the expenditure relates to the subsidized project
• Whether it conforms to the plan submitted at the time of application
• Whether the results match the inputs

I once handled a review of a subsidy from Japan's Small and Medium Enterprise Agency. The reviewer uncovered fabricated expenses this way: they asked the company for all procurement invoices, then randomly selected a few suppliers and called them directly to ask whether the company had actually made the purchases. This is exactly why any false reporting gets discovered.

A Practical Guide to the Business Progress Report

Report Document Checklist

A complete business progress report should include the following documents (using a 200万日元 subsidy as an example):

| No. | Report item | Specific content | Notes | |------|--------|--------|------| | 1 | Progress report | Explanation of how the subsidized project was carried out | A4 paper, 4–6 pages | | 2 | Expense itemization | Every expense listed individually | Excel spreadsheet, needs totals | | 3 | Invoice copies | Original supporting documents for all expenses | Arranged chronologically | | 4 | Receipts and issued receipts | Especially for cash payments | Must bear the handler's signature | | 5 | Bank transfer proof | Screenshots of payment records | Include date, amount, and payee | | 6 | Financial statements | Profit and loss statement | Subsidy authority's designated format | | 7 | Proof of results | Photos of products and deliverables | Date-stamped | | 8 | Employment contracts | Employment contracts for newly hired staff | If applicable | | 9 | Time-allocation table | Tally of staff working hours | If personnel costs are involved | | 10 | Status of commitments | Proof of completion for items promised in the original application | Explained item by item |

Common Reporting Mistakes and How to Fix Them

Mistake 1: Incomplete invoices

• Common situation: only a receipt, with no formal invoice
• Fix: additionally obtain a formal invoice issued by the supplier (with the item name, amount, date, supplier name, and seal)
• Impact: part of the expenditure may be disallowed

Mistake 2: Wrong expenditure dates

• Common situation: the subsidy period is April 2024–March 2025, but the report includes expenses from April 2025
• Fix: remove out-of-period expenses from the report, or apply to extend the subsidy period (requires prior approval)
• Impact: in serious cases, it may be ruled as false reporting

Mistake 3: Figures that don't match

• Common situation: the total of the itemized expenses is 1,950万日元, but earlier you stated "2,000万日元 of the subsidy has been used"
• Fix: carefully check all figures to ensure there are no errors in decimal points, ten-thousands place, etc.
• Impact: the entire report will be returned for correction

Mistake 4: Misclassified expense categories

• Common situation: the cost of buying office supplies is classified as "R&D expenses"
• Fix: reclassify according to the budget line items in the subsidy application
• Impact: may be deemed a budget diversion

Post-Award Inspections and Review Procedures

How the Subsidy Authority Conducts Inspections

After you receive a subsidy, the subsidy authority has the right to inspect your company—this is not optional. Under Japan's subsidy regulations, inspections include the following types:

Documentary inspection (most common)

• Reviews the reports and supporting documents you submitted
• If questions arise, you must provide supplementary explanations
• Takes 2–3 months on average

On-site inspection (spot-check basis)

• The subsidy authority sends staff to the company's premises
• They inspect physical equipment, inventory, and financial ledgers
• They select some transactions for detailed review
• This type of inspection occurs with roughly a 10–15% probability

Bank account review

• Contacts the company's bank directly
• Verifies the records of the subsidy flowing in and out
• Traces where the funds went

Supplier visits

• Calls the suppliers listed on the invoices directly
• Confirms whether the relevant products/services were actually sold to the company
• Verifies the authenticity of the invoice amounts

A manufacturing owner from Zhejiang whom I represented once went through an on-site inspection. The inspector examined all the machinery and equipment purchased, checked whether each unit's serial number matched the invoice, and even requested the equipment's operating logs and maintenance records. The inspection took a full two days, but precisely because the company operated by the book, it passed the review smoothly.

The Consequences of Being Reported or Found in Violation

If improper use of a subsidy is discovered, the consequences can be very serious:

Tier 1 penalty: partial clawback

• Only the amount used improperly is clawed back
• For example: the original subsidy was 500万, and 50万 was used improperly, so 50万 is clawed back
• The clawed-back amount must be paid within the specified deadline

Tier 2 penalty: full clawback

• The entire amount of the subsidized project is clawed back
• Applies when the improperly used amount exceeds 5%, or when there are repeated violations
• Must be paid within 3–6 months, or interest is charged

Tier 3 penalty: additional charge

• In addition to clawing back the full subsidy, an additional charge is payable (10–20% of the clawed-back amount)
• Applies to serious violations such as deliberate concealment, false reporting, or misappropriation

Administrative penalty

• The company is placed on a list of "unreliable entities"
• Cannot apply for new subsidies for 3–5 years
• Credit records are affected, which may affect bank financing

Legal penalty

• Where a criminal offense is involved (false reporting, fraud), prosecution is possible
• The legal representative may face a fine or detention
• In Japan, subsidy fraud carries a maximum prison term of 3 years

Special Obligations for Different Subsidies

Obligations for National-Level Subsidies

Japan's national-level subsidies (such as those from the Ministry of Economy, Trade and Industry, or the Ministry of Health, Labour and Welfare) have the strictest requirements:

The longest ongoing reporting period

• Usually requires a post-project evaluation report for 3–5 years
• Management performance data for the prior year must be submitted annually

The highest requirements for economic impact

• You must achieve the targets promised at the time of application—sales growth, profit growth, increased employment, and so on
• If you fail to meet the targets, you must explain why and submit an improvement plan

The strictest review

• The probability of an on-site inspection is as high as 20–30%
• Reviews take longer and are more detailed

Obligations for Local Government Subsidies

Local government (prefectural, municipal) subsidies have varying requirements:

Tokyo and Osaka Prefecture subsidies

• A relatively short reporting period (1–2 years)
• But they require a detailed assessment of regional economic impact

Small-town subsidies

• May require the company to commit to continued operation in the area for a certain number of years
• If you relocate, you must return the subsidy
• Some localities require subsidized companies to actively participate in local economic activities

Regional revitalization subsidies

• Have clear requirements for hiring new local employees
• Require an employee roster and social insurance payment records
• Some subsidies require a local procurement rate of at least 70%

Obligations for Subsidies in Special Fields

Subsidies in certain special fields carry additional requirements:

Environmental subsidies

• Require periodic submission of environmental indicator reports
• Equipment must be operated in compliance
• If you stop the environmental project, you must return the subsidy

R&D subsidies

• Require detailed research logs and technical reports
• Ownership of resulting intellectual property may be subject to agreement
• Some subsidies require that project results be made public

Employment subsidies

• The strictest reporting requirements
• New employees must meet certain conditions (education, age, etc.)
• If an employee leaves, it may affect the continued payment of the subsidy

Frequently Asked Questions (FAQ)

Q1: I've already received a subsidy and used it all up, and only now realize that a certain expense may not meet the requirements. What do I do?

A: This situation requires immediate remedial action. First, proactively disclose the expense to the subsidy authority, explaining the reason and the amount. Although you may need to return part of the subsidy, voluntary disclosure will greatly reduce the penalty. In my experience, companies that disclose voluntarily usually only have to return the improperly used amount itself, whereas those who are caught may face a clawback plus a penalty. The specific steps are: (1) prepare a written explanation detailing the circumstances of the expense; (2) if you can supplement it with a legitimate justification or related documents, submit them together; (3) propose a remedy, such as reducing other expenditures or adding self-funded capital to offset it; (4) pay the corresponding amount as required by the subsidy authority. I recommend consulting a professional advisor immediately to prevent the penalty from escalating.

Q2: After using up the subsidy, I want to sell or transfer the related equipment or products. Do I need the subsidy authority's approval?

A: It depends on the specific terms of the subsidy. Generally, fixed assets purchased with the subsidy (such as equipment and machinery) cannot be freely disposed of within a certain period (usually 3–5 years). If you sell or transfer them within that period, you must report to the subsidy authority in advance and obtain approval. Some subsidies require that if the sale of the asset generates a gain, that gain must be returned to the government. For example, if a machine bought with a 500万 subsidy is sold five years later for 300万日元, the 300万日元 must be returned to the subsidy authority on a pro-rata basis. Even absent such a requirement, if the subsidy authority discovers that you disposed of the asset within the specified period without permission, it may still claw back the corresponding subsidy. The right approach is: keep the asset until the specified period, and if you must dispose of it early, apply to the subsidy authority in advance and proceed only after approval.

Q3: In the business progress report, if my company failed to meet its original targets due to the pandemic, an economic downturn, or similar reasons, how should I explain it?

A: Failing to meet targets in itself will not cause the subsidy to be clawed back, but you must explain the reason fully. In the report, you should: (1) clearly list a comparison of the data for the original targets versus actual results (e.g., the target was 30% sales growth, but actual growth was only 10%); (2) analyze in detail the objective reasons for missing the targets, with supporting evidence attached (notices of business restrictions during the pandemic, reports of industry data declines, etc.); (3) explain what measures you took to strive to meet the targets under difficult conditions; (4) present a follow-on improvement plan and an expected recovery timeline; (5) if there is no problem with the use of the subsidy itself, these deviations from targets are usually considered acceptable. But if you deliberately conceal unfavorable circumstances, being found out will be treated as fraud. I recommend keeping all relevant evidence—news reports, industry association data, government notices, and the like—as supplementary explanation.

Q4: How long must I keep all the supporting documents for the subsidy's use? When will the subsidy authority stop coming to review?

A: Under Japan's subsidy regulations, a company must retain all supporting documents related to the subsidy for at least 7 years. These 7 years are counted from the date the subsidized project is completed, not from the date the subsidy was received. For example, if you received the subsidy in March 2024 and the project was completed in April 2025, the documents must be kept until April 2032. The government's review authority is also bound by this period and generally will not continue pursuing the matter after 7 years. Note, however, that if leads are discovered during a review (for instance, a supplier reports a fake invoice), the review period may be extended. As for how to store them, I recommend: (1) keep at least one copy of the originals; (2) important documents can be scanned into electronic backups; (3) establish a clear document numbering and indexing system for quick retrieval; (4) if you relocate, be sure to move the documents carefully to prevent loss or damage.

Q5: My company is currently applying for a subsidy, but last year we were ordered by a subsidy authority to return a subsidy due to improper operation. Will this affect the new application?

A: It will have an effect, but the degree depends on how you handled it. If you have already fully returned the previous subsidy, the situation is "a one-time violation that has been corrected," and most subsidy authorities will approve the new application. But if there is still an unreturned portion, the new application will be rejected. More importantly, in the new application, the reviewing authority will pay special attention to your company and the review will be stricter. The recommended approach is: (1) make sure the previous clawback amount has been paid in full and keep the bank transfer records; (2) in the new application form, proactively explain the previous violation and the corrective measures taken, to demonstrate sincerity; (3) operate with particular rigor this time and prepare all supporting documents thoroughly; (4) consider consulting a professional advisor to ensure the new application is compliant. Generally, for a company that has learned its lesson and now operates by the book, the reviewing authority will actually feel more reassured. But if you conceal the previous violation record, the consequences will be more serious once it is discovered.

Summary and Action Recommendations

Receiving a subsidy is good news, but the post-award obligations that come with it are legal responsibilities that must be taken seriously. To protect your company and yourself, I recommend:

Short-term actions (immediately after receiving the subsidy)

• Set up a dedicated subsidy account, separate from your day-to-day operating account
• Draw up a detailed usage plan and timeline
• Keep the originals and copies of all expense supporting documents

Mid-term actions (during project execution)

• Submit reports at regular intervals as required by the subsidy authority
• Establish an internal review mechanism to ensure every expense is compliant
• Communicate proactively with the subsidy authority and raise any questions promptly

Long-term actions (after project completion)

• Properly retain all supporting documents for at least 7 years
• Submit post-project evaluation reports on time
• If you find a problem, disclose it voluntarily and correct it

Special reminders

• Do not attempt any form of false reporting or misappropriation—the cost of being caught far exceeds the amount saved
• If you are unclear about the subsidy terms, be sure to confirm with the subsidy authority before using the funds
• Consider hiring a professional advisor; the cost is far lower than the risk of being penalized

If you are struggling with post-award subsidy obligations, or need a specific compliance plan tailored to your company's situation, you are welcome to a free consultation with our team of subsidy specialists. Based on your specific circumstances, we will help you clarify your list of obligations, standardize your operating procedures, and reduce the risk of a clawback.