In recent years, Japan’s space industry has been expanding, with new initiatives emerging across a wide range of sectors, including satellite communications, remote sensing, debris removal, space resource exploration, and space travel. A common and indispensable foundation for all of these activities is “access to space,” for which satellite launch services play a critical role. Consequently, the development of satellite launch service businesses might be regarded as a fundamental driver of growth for Japan’s space industry.
While satellite launch services involve important technological and regulatory considerations, they also raise tax-related issues. In particular, the consumption tax (VAT) treatment of launch services has been a key point of attention.
Against this backdrop, the Tokyo Regional Taxation Bureau (TRTB) published a written response to an inquiry regarding whether satellite launch service is subject to the VAT. The TRTB confirmed that such services are exempt from the VAT as a qualifying export exemption under Japan’s Consumption Tax Act (the VAT Act).
In this GT Alert, we provide an overview of the TRTB’s response and discuss its practical implications.
I. Overview of Japan’s VAT System
A. General Framework
Under the VAT Act, taxable transactions consist of “domestic transactions” and “import transactions.” Among these, “domestic transactions” are defined as the “transfer and other transactions of assets and certain purchases carried out by a business operator within domestic territory” (Article 4, Paragraph 1 of the VAT Act).
The term “transfer and other transactions of assets” refers to the “transfer or lease of assets and the provision of services performed for consideration in the course of business” (Article 2, Paragraph 1, Item 8 of the VAT Act). Accordingly, the provision of services performed by a business operator for consideration within domestic territory constitutes a “domestic transaction.”
Whether a service is considered to have been provided “within domestic territory” is determined based on the place where the service is actually performed (Article 4, Paragraph 3, Item 2 of the VAT Act). However, when services such as transportation or communications are performed across both domestic and outside of domestic territories, the determination is made based on specific locations, such as the place of departure or arrival (in the case of cargo transported across both domestic and outside of domestic territories), or the place of origin or reception (in the case of communication conducted across both domestic and outside of domestic territories) (Article 4, Paragraph 3, Item 2 of the VAT Act and Article 6, Paragraph 2 of the Order for Enforcement of the VAT Act).
If a transaction falls under a “domestic transaction,” it is subject to the VAT at the rate of 10% (or 8% in certain cases) (Article 29 of the VAT Act and Article 72-83 of the Local Tax Act).
B. Export Exemption
As noted above, when the provision of a service constitutes a “domestic transaction”, it is subject to the VAT at a rate of 10% (or 8% in certain cases). However, even if the provision of services is treated as a “domestic transaction,” VAT is exempt if the service is provided outside of domestic territory (export exemption). This “export exemption” regime is designed to prevent double taxation between countries.
In this regard, the VAT Act lists the types of transactions eligible for export exemption. For example, among domestic transactions, the “transportation of cargo conducted across both domestic and outside of domestic territories” qualifies for export exemption (Article 7, Paragraph 1, Item 3 of the VAT Act and Section 5-7-13 of the VAT Act Basic Circular Notice).
Accordingly, even where the provision of a service falls under a “domestic transaction,” it will still be eligible for export exemption (i.e., not subject to the VAT) if the service constitutes the “transportation of cargo conducted across both domestic and outside of domestic territories.”
II. Inquiry to TRTB
A. Facts
The inquiring company plans to provide satellite launch services (the Service) to its customers. The Service will include the following processes:
- Preparation of launch vehicle: Procuring a launch vehicle capable of launching a customer’s satellite.
- Interface adjustment: Configuring and adjusting the structural components that connect the launch vehicle and the satellite, as well as components required for power supply, control-signal transmission, and communication standards.
- Launch preparation: Conducting all launch-related preparations, including filing applications for launch permission under the Act on Launching Spacecraft and Launch Vehicle and Control of Spacecraft (Act No. 76 of 2016) (the Space Activities Act)1.
- Integration of launch vehicle and satellite: Integrating the launch vehicle and satellite at a launch site in Japan.
- Execution of launch: Launching the launch vehicle from a launch site in Japan. For purposes of the Service, “launch” refers to the process from the initial intentional ignition2 through the insertion of the satellite into its designated orbit.
The purpose of the contract to provide the Service is for the company to transport the customer’s satellite to a designated orbit in outer space specified by the customer, and for the customer to pay the corresponding service fee.
Under the contract, payment becomes due once the customer’s completion inspection confirms that the satellite has been inserted into the designated orbit. However, even if the “launch” fails and orbital insertion cannot be achieved, the Service is deemed complete and the customer’s completion inspection passed, once the initial intentional ignition has been carried out. In such cases, the service fee is fully payable. Nevertheless, if the launch vehicle remains capable of being launched again, the “launch” is not treated as a failure, and a new launch shall be conducted.
B. Details of Inquiry
1. Conclusion
The inquiring company believes that the Service satisfies the requirements for the export exemption under the VAT Act, and is therefore exempt from VAT.
2. Reasons
a. Relevant Provisions of the VAT Act
Under the VAT Act, if the provision of a service constitutes “transportation of cargo conducted across both domestic and outside of domestic territories,” it falls under “domestic transaction” (i.e., taxable transaction), but also qualifying for export exemption (Article 7, Paragraph 1, Item 3 of the VAT Act and Section 5-7-13 of the VAT Act Basic Circular Notice).
b. Analysis
i. Whether the Service constitutes “transportation of cargo”:
The Service includes the entire process required to place a customer’s satellite into a designated orbit in outer space. Although the contract provides that service fee must be paid when customer’s completion inspection confirmed orbital insertion, it also stipulates that, even if the launch fails and the satellite is not inserted into designated orbit, the Service is deemed completed at the time of the initial intentional ignition, and the service fee is fully payable (i.e., the same amount as would be paid in case of a successful “launch” and orbital insertion of the satellite).
Also, the parties explicitly agreed that the purpose of the contract is not the execution of launch operations, but transporting the customer’s satellite to the designated orbit in outer space.
In addition, even if the orbital insertion cannot be achieved, in case a re-launch is technically possible, the “launch” is not treated as a failure and the launch is carried out to insert the customer’s satellite into the designated orbit.
Considering these elements, the contract as a whole is properly characterized as a transportation contract for transporting the customer’s satellite from a launch site to outer space (designated orbit).
Accordingly, the Service constitutes “transportation of cargo.”
ii. Whether outer space is “outside of domestic territory”:
Under the VAT Act, “domestic territory” refers to the area where the Act is enforced (Article 2, Paragraph 1, Item 1 of the VAT Act). In this regard, in principle, it is understood that a country may enforce laws and regulations only to the entire territory of the country, including its land, airspace, and territorial waters, and not to other areas. Therefore, the term “domestic territory” under the VAT Act refers to the territory over which Japan can exercise sovereignty, including land, airspace, and territorial waters.
On the other hand, Japan has ratified the Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, including the Moon and Other Celestial Bodies (the Outer Space Treaty), and is obligated to comply with its provisions. The Outer Space Treaty stipulates that “outer space, including the moon and other celestial bodies, shall be free for exploration and use by all States without discrimination of any kind, on a basis of equality and in accordance with international law, and there shall be free access to all areas of celestial bodies” (Article 1) and that “outer space, including the moon and other celestial bodies, is not subject to national appropriation by claim of sovereignty, by means of use or occupation, or by any other means” (Article 2).
Accordingly, given that outer space is not subject to the sovereignty of any country under Article 2 of the Outer Space Treaty, outer space does not fall under a “domestic territory” and may be regarded as “outside of domestic territory.”
iii. Whether the Service falls under a “domestic transaction”:
For “transportation of cargo conducted across both domestic and outside of domestic territories,” a service is treated as a “domestic transaction” when either the departure or arrival place is located in Japan (Article 4, Paragraph 3, Item 2 of the VAT Act and Article 6, Paragraph 2, Item 1 of the Order for Enforcement of the VAT Act).
In this regard, for the Service, a launch site is located in Japan. Therefore, since the departure place for the Service is located in Japan, this requirement is satisfied.
c. Conclusion
As discussed above, the Service constitutes transportation of a satellite from a launch site in Japan to outer space, which is considered “outside of domestic territory.” Accordingly, it constitutes “transportation of cargo conducted across both domestic and outside of domestic territories,” and is therefore treated as a “domestic transaction,” but also qualifies for the export exemption.
III. TRTB’s Response
While noting that different factual circumstances may lead to a different conclusion, the TRTB accepted the company’s interpretation and confirmed that the Service satisfies the requirements for export exemption.
IV. Analysis
Written responses from the National Tax Agency or regional taxation bureaus, including the TRTB, are not legally binding. However, they provide important interpretive guidance for similar transactions and taxpayers often rely upon them.
The TRTB’s response is significant because the TRTB explicitly recognizes outer space as “outside of domestic territory” for purposes of the VAT Act. This interpretation aligns with the provisions of the Outer Space Treaty and may provide useful guidance regarding the VAT treatment of satellite launch services. By confirming that transporting a satellite from a launch site in Japan to outer space constitutes “transportation across both domestic and outside of domestic territories,” the TRTB’s response strengthens the basis for treating launch services as qualifying for the export exemption.
This guidance might also influence the tax treatment of a broader range of space-related activities. As the space industry expands into areas such as on-orbit services and space resource exploration, the TRTB’s response may serve as a reference for assessing whether these services should likewise be treated as occurring “outside of domestic territory.” In this sense, the practical implications of the TRTB’s response may extend beyond the specific fact pattern addressed in the company’s inquiry.
V. Conclusion
As the global space industry continues to grow and cost competition intensifies, the application of a 10% VAT might significantly impact the profitability of business operators that conduct or intend to conduct business in Japan.
Although the TRTB’s response is not legally binding, it provides operators in the space industry with a strong basis for the interpretation that outer space falls under “outside of domestic territory” for purposes of the VAT Act and for the position that their services are exempt from the VAT. In this sense, the TRTB’s response has the potential to enhance cost competitiveness for operators in the space industry, giving it substantial practical significance.
Tax treatment across Japan’s increasingly diverse space-related sectors, including on-orbit services and space resource exploration, is expected to become more clearly defined, with this response serving as an important reference.
1 Under the Space Activities Act, a person intending to launch a spacecraft and launch vehicle from a launch site in Japan must obtain permission from the prime minister for each launch (Article 4 of the Space Activities Act).
2 “Initial intentional ignition” refers to the deliberate ignition conducted to activate the launch vehicle’s engine properly and generate thrust. It is typically carried out in the final stage before launch. Once the initial intentional ignition is successfully executed, the launch vehicle begins its ascent.