This article looks at the scope of Japanese taxation of non-resident individuals. This topic is also likely to be of interest to individuals who are giving up their Japanese residence status, such as non-Japanese expatriate individuals who have lived and worked in Japan for a few years who are returning to their home country or Japanese expatriates going to work overseas.
Individuals who come to work in Japan for short periods of time without becoming tax resident in Japan may also be impacted by the scope of Japanese taxation on non-resident individuals. The definitions of Japanese individual tax residence and semi-permanent and permanent resident status are given in this article.
Factors determining the Japanese tax obligation of a non resident individual
Similar to foreign corporations as discussed in this article, a non-resident individual is only taxed on his Japan source income. Also like a foreign corporation, the precise scope of Japanese tax for such an individual and the way in which it is assessed depends on the following factors:
- whether or not the individual has a taxable presence (a ‘permanent establishment’ or ‘PE’ in Japan)
- if the individual does have a taxable presence in Japan, the nature of that taxable presence (whether a branch, agent PE or a construction site PE)
- the underlying nature of the income concerned.
Scope of Japanese tax for a non-resident individual
This table explains the scope of taxation for non resident individuals. A difference between an non-resident individual and a foreign company is that, for practical purposes, it is very rare for an individual to have a branch or similar taxable presence in Japan while at the same time being non-resident. An individual would normally incorporate their business as a foreign or possibly domestic Japanese company for limitation of liability or other purposes rather than run it in their own name from overseas.
Short term visitors to Japan
An non-resident individual may find themselves sent to work in Japan for a short period of time, under terms where they do not become Japanese tax resident.
Under Japanese domestic law (which would apply to individuals resident only in countries that do not have a tax treaty with Japan, such as Hong Kong at the present time) Japanese withholding taxes are imposed on the employment income of such short term assignees along with an obligation to file a Japanese tax return to report the Japanese source income concerned. Any Japanese withholding taxes suffered would be creditable. There are a lot of practical issues in the administration and enforcement of this law, as many short term visitors to Japan may be unware of this position.
Fortunately many of Japan’s tax treaties include terms that provide exemption from taxation of individuals visiting Japan to work in the country for short periods of time. However the individual has to be entitied to the benefits under the treaty concerned and also certain other conditions specified in the applicable tax treaty have to be met. These conditions relate to matters such as the length of the individual’s stay in Japan and whether or not the costs of their compensation is borne by a taxable presence in Japan (for example, by the Japanese branch of their employing entity).
To understand the tax position of short term non-residents working in Japan under a tax treaty, reference should be made to the precise terms of the treaty concerned. However a common pattern is to exempt employment income from Japanese taxation where the non-resident has been in Japan less than 183 days and their costs are not borne by a Japanese PE.
Understanding the table
The table illustrates the scope of Japanese taxation for an individual. Rows give the type of income. Columns A to C show the scope of taxation on the different types of income depending on the individuals presence in Japan. Columns A and B show the rare case of individuals who are non resident but maintains a taxable presence in Japan while column C is the much more common case of non-resident individuals with no taxable presence in Japan.
Three ways to discharge a Japanese tax liability
The colouring in the table indicates three ways in which a non resident individual can be taxed on their Japan source income:
- Including the income on a Japanese tax return where it is subject to Comprehensive Taxation – that is, aggregated with other income and subject to tax at marginal rates. The individual tax filing process is outlined in this article.
- Through suffering withholding tax and then including the income on a Japanese tax return and subjecting it to Comprehensive Taxation, as above.
- Withholding tax is a final tax for the non-resident individual and no further tax return filing is required.
Note that under the Japanese domestic law for a number of income sources non-resident taxpayers without a taxable presence (that is those shown in column C) are still required to file a Japanese tax return to report certain sources of income. These sources include income from assets having a Japan source, other Japan source income, consideration for the sale of land, consideration for business of providing personal services and rental income (rows 7, 8, 10, 11 and 12 of the spreadsheet).
A non resident earning these types of income would have to either file a treaty claim exempting the income from Japanese tax or arrange to file a Japanese tax return. Although the Japanese tax authority web site provides guidance for individuals filing Japanese tax returns, it may help to appoint a local representative for these purposes.
Future articles will review in more detail the definition and calculation of income from the different sources shown.