This article outlines how individuals are taxed on dividend income for Japanese tax purposes.
As so often seems the case with Japanese individual taxation, what would be expected to be a simple tax matter is made overly complicated by a range of expiring tax benefits (that are often revised or extended) and a range of alternative obscure reporting elections, deductions or exemptions.
The table in the article and the notes below are intended to help clarify these matters. However a qualified Japanese tax attorney should always be consulted to confirm one’s tax position.
Lower rates of taxation for listed shares
The most important concessionary tax treatment applied to the taxation of dividends is a reduced rate of 7 per cent national withholding tax and 3 per cent local tax on dividends from listed shares or from certain other collective investments, as listed on the table. Such dividends do not have to be reported on a tax return filing, although they can be so reported, in which case the dividends will be taxed at marginal rates with a credit for the taxes withheld.
Non-resident holders of Japanese listed shares are not subject to the 3 per cent local tax and in some cases may be entitled to a reduced rate of withholding tax on dividends by virtue of a tax treaty, although it is uncommon for the treaty withholding tax rate to be reduced below 10 per cent for portfolio investments, in which case 7 per cent may be the final Japanese tax rate imposed.
It is also possible or an individual to report these dividends on these tax returns, apply the dividend deduction described below and pay taxes at their marginal rate with a credit for the withholding tax. Nomura securities has an excellent article on this calculation (in Japanese) which estimates that this would be beneficial for individuals with a total taxable income of JPY3.3m or less.
Individuals who hold substantial stakes in listed Japanese companies (five percent or more) are not entitled to the above concessionary dividend taxation but instead apply the treatment below for unlisted shares.
These concessionary tax rates themselves are due to expire for dividends paid from 1 Jan 2012 when withholding tax rates will revert to a 15 per cent national and 5 per cent local withholding tax.
Offset of capital losses from listed shares against dividend income
Where an individual realizes losses on disposal of listed shares the individual is allowed to offset those losses against their combined dividend income for the year from other listed shares. This should allow some relief for such losses, where the next best alternative would be to carry them forward to offset against future gains on the shares.
Dividends from unlisted shares
The withholding tax rate on dividends from unlisted shares is 20 per cent. Such dividends must in principle be reported by an individual on his tax return and subject to taxation at marginal rates, although an exemption from tax return reporting is allowed for relatively small amounts of dividends received from an unlisted shareholding. If this non reporting exemption is applied then the withholding tax is a final tax. The exemption applies at a rate of JPY100,000 per month, and please see the table for more details on the calculation.
If Japan tax resident individual receives dividends from unlisted shares below the non-reporting threshold then, when filing their tax return, they may consider whether or not their marginal rate of tax is around or below 20 per cent as in these circumstances it may be better to report the dividend on their return with a credit for the withholding taxes and application of the Dividend deduction below.
Most tax treaties will reduce the rate of withholding tax for a non resident without a permanent establishment in Japan to which the shares are attributable to 10 per cent or less if appropriate criteria are met. It may be possible to obtain the relief at source or to reclaim withholding tax suffered if the appropriate treaty form is completed, where the forms are available from links in this article.
To complicate matters further, a tax deduction (配当控除) is allowed for dividend income that reported on the individual’s tax return and subject to taxation at marginal rates, so does not apply to dividends that apply the exclusion from tax return reporting because they are listed shares or unlisted shares below the reporting exemption described above. The dividend deduction also does not apply to foreign shares.
The amount of the deduction is 12.8 per cent (10 per cent national, 2.8 per cent local) when overall taxable income is JPY10m or less and 6.4 per cent when above this amount (with adjustment when the amount of the deduction is just enough to bring total taxable income below the JPY10m threshold).
Marginal rates of tax on dividend income
The Nomura article includes a table which calculates the marginal rate of tax on dividend income subject to tax return reporting and taxation at marginal rates at the end of the article. This shows that an individual who is earning JPY18m or more would be subject to a marginal rate of tax on their dividend income of 43.6 percent (bottom row). Therefore an individual receiving dividend from unlisted shares of more than the above JPY100,000 per month non reporting threshold would expect to pay this rate of tax on their dividend income if their total taxable income was above JPY18m.
Given that the same individual would pay 7 per cent tax on income from listed shares and that a Japanese unlisted company will already have suffered an exceptionally high rate of tax by international standards at the company level, taxation at this level would not seem to be doing much to encourage that rare breed, the Japanese entrepreneur, to set up his own company in Japan!