Japan

Japan

Permanent residents are taxed on their worldwide income whereas non-permanent residents are taxed on their Japanese-sourced income, regardless of where it is paid, and their foreign-sourced income paid in and/or remitted into Japan. Non-residents are taxed on Japanese-sourced income only. Individual income taxes in Japan consist of a national income tax (NIT) and a local inhabitant tax (LIT). Tax treatment is dependent upon residency status.

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Income tax

Liability for income tax

A person’s liability for Japanese tax is determined by residency status. There are two categories of individual taxpayers: resident and non-resident. A resident is an individual who has a domicile in Japan or has resided in Japan for a continuous period of one year or more. A resident is further classified as either a non-permanent resident or a permanent resident. 

A non-permanent resident is a resident who is not a Japanese national and has had a domicile or resided in Japan for more than 1 year and 5 years or less in the last 10 years. A non-permanent resident is taxed on the individual’s Japanese-sourced income, regardless of where it is paid, and foreign-sourced income paid in and/or remitted into Japan.

A permanent resident is a resident who is a Japanese national, or who has a domicile/resided in Japan for more than 5 years in the last 10 years.  A permanent resident is subject to income tax on worldwide income regardless of source. 

A non-resident is an individual other than resident. A non-resident is taxed only on Japanese-sourced income, and generally no deductions or exemptions are available. If a non-resident is a resident of a country with which Japan has concluded a tax treaty, income may be either exempt or subject to a lower rate of tax. Extended business travelers are likely considered nonresidents for Japanese tax purposes unless their assignment periods are one year or longer.

Definition of source

Employment income is basically considered to arise at the location in which employment services are rendered. Therefore, salary, wage, bonus, or similar remuneration paid to an employee for services performed in Japan is generally considered Japanese-sourced income.

Japan also levies a 10 percent local inhabitant tax.

Tax trigger points

Technically, there is no threshold/minimum number of days that exempts the employee from the requirements to file and pay tax in Japan. Generally, Japan’s double tax treaties are in line with the OECD Model Treaty with respect to the tax-exempt treatment of foreign employees temporarily working in Japan. The Japanese tax authorities currently do not adopt the economic employer approach.

Types of taxable income

For extended business travelers, the types of income that are generally taxed are Japanese-sourced employment income.

Tax rates

For residents, net taxable income is taxed at graduated rates ranging from 5.105 percent to 45.945 percent as national income tax, plus 10 percent local inhabitant tax. Non-residents are subject to national income tax at a flat rate of 20.42 percent. (Note: starting from 2013, surtax of 2.1% on national income tax amount is added for 25 years.)

Exit tax

A special tax regime, exit tax, to impose income tax on unrealized capital gains on financial assets held at departure from Japan was introduced.  The exit tax is effective for covered individual departing Japan on or after July 1, 2015.

Social security

Liability for social security

The social insurance program in Japan consists of health insurance, nursing care insurance, pension insurance, employment insurance, and workers’ accident compensation insurance. Any individuals who meet the prescribed conditions are expected to participate in these systems as an insured person, regardless of nationality. Individuals who are paid from outside Japan have no

mechanism to pay the Japan Social security contribution through offshore payroll. An exemption can be applied where there is a totalization agreement between Japan and the home country.

Compliance obligations

Employee compliance obligations

Tax returns are due by March 15 following the tax year-end, which is December 31. When a taxpayer leaves Japan, the taxpayer must file a tax return before the departure date or by March 15 of the following year if a tax agent is appointed before the departure date. Extensions of the filing deadline are not available. In addition, under some conditions, overseas assets and/or assets and liabilities reporting statements need to be submitted by March 15 following year.

Employer reporting and withholding requirements

If compensation is paid through an onshore payroll, the employer is required to withhold income tax on the payments. If the employer of non-residents has an office or place of business in Japan and Japanese-sourced compensation is paid to non-residents outside Japan, the employer is required to withhold non-resident income tax on payments.

In addition, starting from 2012, a new reporting requirement for foreign stock based compensation was introduced.  The Japanese subsidiary or the Japan branch is required to prepare and submit a statement to report foreign stock based compensation (Form 9-(3)) to the tax authorities by March 31 of the following year.

Other

Work permit/visa requirements

A visa must be applied for before the individual enters Japan. The type of visa required will depend on the purpose of the individual’s entry into Japan.

Double taxation treaties

Japan has an extensive tax treaty network. In addition to Japan’s domestic arrangements that provide relief from international double taxation, Japan has entered into double taxation treaties with more than 50 countries to mitigate double taxation and allow cooperation between Japan and overseas tax authorities in enforcing their respective tax laws.

Permanent establishment implications

The Japanese Corporation Tax Law provides three types of permanent establishments: a fixed place of business permanent establishment, a long-term construction project permanent establishment, and an agency permanent establishment. There is potential that a permanent establishment of a foreign corporation could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has for the foreign corporation.

Indirect taxes

Consumption tax is applicable at 8 percent on taxable supplies. The tax rate was increased from 5% to 8% on April 1, 2014. Consumption tax registration may be required in some circumstances.

Transfer pricing

Japan has a transfer pricing regime. Transfer pricing implications could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in another jurisdiction, in other words, a cross-border benefit is being provided. This would also be dependent on the nature and complexity of the services performed.

Local data privacy requirements

Japan has data privacy laws.

Nondeductible costs for assignees

Nondeductible costs for assignees include contributions by an employee to non-Japanese pension funds with minor exceptions.

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