Legal Framework
Different Legal Status of Nonprofit Organizations in Japan
The term “NPO” entered the Japanese vocabulary around the time of the enactment of Law to Promote Specified Nonprofit Activities in 1998, which is now known as the “NPO law.” The corporate entities created by this law – Specified Nonprofit Corporations – are generally referred to as “NPO corporations.” Needless to say, “NPO” is made up of the initials of the English words Non-Profit Organization, or Not-for-Profit Organization.
Narrow and Broad Definitions of NPO
Due to these origins, the term “NPO” is often equated with “NPO corporations” by many Japanese people, but this is a somewhat narrow interpretation. In a broader sense, “NPO” refers to civil society organizations and various types of private, voluntary activities that take on different corporate forms. This broader definition includes unincorporated citizen groups, which operate at the grassroots level, as well as long-standing neighborhood and village associations in rural areas. On the other hand, “NPO” also encompasses organizations such as Public Interest Corporations (Public Interest Foundations and Public Interest Associations), which tend to have a longer history and a wider regional scope than NPO Corporations, along with Social Welfare Corporations, Private School Corporations, Medical Corporations, and Religious Corporations.
All of these corporate categories could be classified similarly to 501(c)(3) organizations, the most well-known type of nonprofit corporation in the United States. Furthermore, if the definition of a nonprofit is broadened to include mutual interest organizations, then entities working for a common interest—such as consumers’ cooperatives and labor unions—can also be considered a type of “NPO.”
Together, these different layers of NPOs form the civic sector in Japan.
NPO Corporations and Certified NPO Corporations
An NPO Corporation (or Specified Nonprofit Corporation) falls under the jurisdiction of either the prefecture where its main office is located or a government-designated city. After completing the required procedures and submitting the necessary documents to the jurisdiction office, the organization is “authenticated” as an NPO Corporation, provided it meets the established criteria. As of July 2024, there were 49,719 NPO Corporations.
NPO corporations that have cleared the standard conditions and received approval from the director of the National Tax Administration Agency become Approved Specified Nonprofit Corporations. Donors who donate to Approved Specified Nonprofit Corporations are able to receive income tax deductions under the tax system. It is hoped that an increase in Certified Specified Nonprofit Corporations will lead to an increase in donations to NPOs, but Certified Specified Nonprofit Organizations make up less than 3% of all NPOs (as of July 2024).
Background of NPO Corporations
Before the establishment of the NPO Law, when an organization in Japan gained corporate status with no intention to distribute profit, it usually became a Public Interest Corporation, such as a Public Interest Association or Public Interest Foundation, as prescribed by Article 34 of the Civil Code of 1896. In order to become a Public Interest Corporation, however, the group had to allow its activities to be regulated through a top-down system of government supervision, as well as adhere to strict establishment conditions, and this was unsuitable for many citizen organizations. For this reason, many groups remained as private, unincorporated organizations. When a formal corporate entity was needed, these organizations often became joint stock companies and limited liability companies, despite the fact that profit was not their goal. For these reasons, from the 1980s, citizen groups began to advocate the need for a nonprofit corporation system that would clarify the lack of profit motivation and allow a greater degree of freedom by reducing government oversight.
Public Interest Corporations
Public Interest Corporations (Public Interest Associations and Public Interest Foundations, sometimes referred to as Public Interest Incorporated Associations/Foundations) are organizations that carry out government-sanctioned public interest projects and receive approval to establish themselves based on the regulations of the Civil Code (Article 34), enacted in 1896. In 2008, Public Interest Corporation reforms were introduced. Today, under Reform Law 3, public interest approval councils (similar to the UK’s charity commissions) evaluate organizations to determine whether they meet specific criteria, such as having public interest projects as their primary objective. Once an organization receives approval from the relevant administrative authority (either the Cabinet Office or a prefectural government), it becomes a Public Interest Association or Public Interest Foundation. These corporations benefit from preferential treatment under the tax system.
General Corporations
With the Public Interest Corporation reforms in 2008, a new category of corporate entities called General Corporations was introduced. As long as the requirements of corporate law are met, a General Association or General Foundation (also referred to as a General Incorporated Association/Foundation) can be established through a simple registration process, making it relatively easy to obtain corporate status. Following the Great East Japan Earthquake in 2011, many groups involved in relief efforts chose to become General Associations due to the ease of incorporation, as opposed to NPO Corporations, which still require several authentication hurdles to incorporate.
There is now an equivalence between NPO Corporations obtaining Certified NPO Corporation status and General Corporations obtaining Public Interest Corporation status, with the key advantage of the latter being that donors can receive tax deductions. This relationship can be illustrated as follows.
Two-Stage System of Obtaining Donor Tax Deductions
Social Welfare Corporations
Social Welfare Corporations are established under the Social Welfare Law of 1951 to carry out social welfare programs. These organizations manage facilities such as daycare centers for disabled and elderly individuals. This category also includes social welfare councils organized by prefectures or municipalities, which aim to promote community-based social services and support volunteer activities. Additionally, they oversee charity collections that raise funds for promoting and educating the public about welfare activities. As of April 2021, there are approximately 21,000 Social Welfare Corporations in Japan.
Medical Corporations
Medical Corporations were established under the Medical Law of 1948 and have been forming since 1950. The creation of a Medical Corporation requires approval from the prefectural governor, and the decision involves consulting the prefectural Council on Medical Service Facilities. As of March 2024, there are approximately 59,000 Medical Corporations.
Private School Corporations
Private School Corporations are entities established under the Private School Law of 1949 for the purpose of founding private schools. As of 2021, there are approximately 7,600 such corporations. They are classified as Public Interest Corporations under tax law and fall under the jurisdiction of the Ministry of Education.
Religious Corporations
Religious Corporations are religious organizations based on the Religious Corporation Law of 1951, and the main purpose of these organizations is “spreading religious doctrine, conducting ceremonial events, and working toward the enlightenment and cultivation of believers.” Their corporate approval process is under the jurisdiction of the Ministry of Education, but once they have been approved, Religious Corporations are not subject to further government oversight. As of December 2022, there are over 179,000 Religious Corporations, making them the most numerous type of nonprofit corporation.