Tax on the income of an individual as a no-resident in Japan for tax purposes
1. Non-resident in Japan
You are considered as a non-resident in Japan for tax purposes unless you have a domicile or have had a residence continuously for one year or more in Japan (See the “INCOME TAX AND SPECIAL INCOME TAX FOR RECONSTRUCTION GUIDE FOR ALIENS” for more information about resident status.).
2. Scope of taxable income
If you are a non-resident, the scope of income subject to income tax and special income tax for reconstruction in Japan is limited to domestic source income provided in the Income Tax Act.
The following incomes are examples which are treated as domestic source income.
(1) Income from business that would be attributed to a permanent establishment (PE) if the PE were an independent enterprise, taking into account the functions performed by the PE, assets used by the PE, internal transactions conducted by the PE with the other parts of the business, etc. (In case a non-resident conducts the business through the PE in Japan.
(2) Income from the management or holding of assets located in Japan.
(3) Income from the transfer of assets located in Japan.
(4) Distribution of profit from business conducted through a permanent establishment in Japan under a partnership contract prescribed in Article 667 of the Civil Code, etc., which is distributed under the said partnership contract.
(5) Consideration for the transfer of land, any right on land, building, etc. located in Japan.
(6) Consideration for the provision of certain types of personal services such as entertainers, professional athletes, lawyers, certified public accountants, architects, which is paid to a person who conducts business that is mainly for providing any of the said personal services in Japan.
(7) Rent of real estate, any right on real estate, etc. located in Japan.
(8) Interest on Japanese government bonds, Japanese municipal bonds, or bonds issued by domestic corporations, interest on bonds issued by foreign corporations pertaining to business conducted through their permanent establishments in Japan, interest on savings deposited at business offices located in Japan, etc.
(9) Dividends of surplus, dividends of profits, distribution of surplus received from domestic corporations, etc.
(10) Interest on loans to a person who performs operations in Japan, which pertain to the said operations.
(11) Royalties for industrial property rights, copyrights, etc., consideration for the transfer of these rights, or rent of machinery, equipment, etc., which are received from a person who performs operations in Japan and pertain to the said operations.
(12) Salaries, wages or other remuneration received for work or the provision of other personal services carried out in Japan (including work carried out outside Japan by a person acting as a director of a domestic corporation), public pensions, or retirement allowances, etc. derived from work carried out during the resident taxpayer period.
(13) Monetary award for the advertisement of business conducted in Japan.
(14) Pensions received under life insurance contracts, casualty insurance contracts, etc. concluded through business offices, etc. located in Japan.
(15) Compensation money for benefit which pertains to installment deposits accepted by a business office located in Japan, etc.
(16) Distribution of profit received under a silent partnership contract, etc. with respect to investment in a person who conducts business in Japan.
(17) Insurance proceeds, compensation, etc. related to operations performed in or assets located in Japan.
3. Outline of taxation methods
The outline of fundamental taxation methods for a non-resident is as follows.
Note. Certain incomes are differently treated by the Special Taxation Measures Law.
(1) Withholding tax system
In principle, when a payer of incomes mentioned in 2(4) to (16) above makes payment to a non-resident within Japan, the payer must withhold income tax and special income tax for reconstruction from the payment.
And when a payer who has domicile, residence or offices, etc. in Japan makes payment outside Japan, the payer also has to withhold income tax and special income tax for reconstruction because the payment is deemed to be made within Japan.
(2) Aggregate taxation
Aggregate taxation is a method to calculate the taxable income and the tax amount on the taxable income by aggregating all kinds of income for the year into a single taxable income and applying progressive tax rates on the taxable income. In this case, the non-resident must file a final tax return and pay the tax.
If the non-resident has a permanent establishment (PE) in Japan, income from business that would be attributed to the PE (incomes mentioned in 2(1) and (4) above) and incomes mentioned in 2(2), (3), (5) to (7) and (17) are subject to aggregate taxation. The PE means certain places for business such as a branch, an office or a factory, or a certain agent, which are provided in the Income Tax Act.
However, even if the non-resident doesn’t have a PE, incomes mentioned in 2(2), (3), (5) to (7) and (17) above are subject to aggregate taxation.
(3) Separate withholding taxation at source
Separate withholding taxation at source is a method to complete the taxation on each income only by applying withholding tax system mentioned in (1) above.
In general, as to a non-resident with no PE, incomes mentioned in 2(8) to (16) above are subject to separate withholding taxation at source in Japan and a tax rate of 20.42% (15.315% for incomes mentioned in 2(8) and (15) above) is applied on the amount to be paid for each income.
Note. If salaries, wages, other remuneration or retirement allowances, etc. mentioned in 2(12) above are paid outside Japan and aren’t subject to this withholding taxation, the non-resident must file “a quasi-final tax return”and pay the tax.
(4) Special provision for retirement income
When retirement allowances, etc. mentioned in 2(12) above are paid to a non-resident within Japan, a tax rate of 20.42% is applied on the amount paid as income from sources in Japan and taxation is completed by this separate withholding taxation at source mentioned above (3). But, pursuant to Article 171 of the Income Tax Act, you can opt to calculate income tax and special income tax for reconstruction for retirement allowances, etc. by deeming that you received them as a resident taxpayer and file a tax return. Income tax and special income tax for reconstruction is calculated by applying progressive tax rates on the retirement income.
In this case, it is deemed that you received the total amount of retirement allowances, etc. to be paid in the year as a resident taxpayer and the total amount is included in the calculation.
4. Tax convention between Japan and your country of residence
Japan and your country of residence may conclude a tax treaty to avoid double taxation, etc.
With this tax treaty, you may claim the benefits of reducing the tax rate or an exemption from the tax on income such as interest, dividends, royalties or salaries.
The provisions are different depending on each tax treaty, therefore, you need to refer to each tax treaty in each case.
For example, if you are a non-resident, you may need to consider the tax treaty if:
(1) You receive interest, dividends or royalties.
(2) You stay for 183 days or less in Japan and have earned income not paid by an employer in Japan and not borne by an employer’s PE in Japan. or
(3) You have earned income under the status of an overseas student.
If you want to claim the benefits of the tax treaty, you need to submit an “Application Form for Income Tax Convention” with certain attachments to the district director of the tax office which has jurisdiction over the payer’s place for tax payment through the payer before the date of payment.
If you fail to submit the forms in time, you can still claim the benefits of the tax treaty by submitting an “Application Form for Refund of the Overpaid Withholding Tax” with the application mentioned above to the district director of the tax office which has jurisdiction over the payer’s place for tax payment through the payer.