Taxation of international executives
15 March of the following year. Extensions of the filing deadline are generally not allowed.
31 December.
Spouses are not taxed jointly; each individual is treated as a separate taxpayer. All taxpayers (including spouses and children) file tax returns separately. Income of children is filed on separate returns.
An individual tax return must be filed if income exceeds a specified amount. A resident taxpayer who receives employment income from outside of Japan is required to file a tax return.
A resident taxpayer is required to file a final return for each calendar year by 15 March of the following year and pay income tax. If a resident taxpayer leaves Japan, the individual must file a tax return before the departure date or by 15 March of the following year if a tax agent is appointed before the departure date. An exception applies for a person whose total salary has been subjected to year-end adjustment of withholding tax.
A non-resident taxpayer, whose employment income has not been subject to a 20.42 percent withholding tax, must file a return by the day of their departure from Japan, or by 15 March of the following year if a tax agent is appointed, and pay the 20.42 percent tax.
What are the current income tax rates for residents and non-residents in Japan?
The following tax rates are applied to total taxable income, which is total income minus allowable deductions. These apply to both permanent and non-permanent resident taxpayers:
National income tax table for 2020 in Japanese yen (JPY)
Taxable income bracket |
|
Tax rate on income in bracket |
Deductions after applying the tax rate on taxable income. |
From JPY |
To JPY |
Percent |
JPY |
0 |
1,950,000 |
5 |
0 |
1,950,001 |
3,300,000 |
10 |
97,500 |
3,300,001 |
6,950,000 |
20 |
427,500 |
6,950,001 |
9,000,000 |
23 |
636,000 |
9,000,001 |
18,000,000 |
33 |
1,536,000 |
18,000,001 |
40,000,000 |
40 |
2,796,000 |
40,000,001 |
and above |
45 |
4,796,000 |
To increase tax revenue to finance post-earthquake reconstruction, 2.1 percent temporary surtax on National income tax is in effect for 25 years (from 2013 to 2037) in addition to the above tax rates.
Taxable income bracket |
Total tax on income below bracket |
Tax rate on income in bracket |
|
From JPY |
To JPY |
JPY |
Percent |
Prefectural |
|
|
|
0 |
No limit |
0 |
4* |
Municipal |
|
|
|
0 |
No limit |
0 |
6* |
*This is the case the taxpayer registers their residence in Tokyo. The tax rate varies depends on local tax laws.
A non-resident is taxed at a flat rate of 20 (20.42 including surtax) percent on the gross salary and allowances attributable to sources in Japan without deductions.
For the purposes of taxation, how is an individual defined as a resident of Japan?
According to the Income Tax Law of Japan, there are two categories of individual taxpayers, a resident and a non-resident.
A resident is an individual who has a living base in Japan or has resided in Japan for a continuous period of 1 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 a living base in Japan or has 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 income other than foreign-source income under the Japan tax law, regardless of where it is paid, and the foreign source income paid in, or remittance into Japan.
Income other than foreign source income includes capital gain from securities transaction outside Japan which was acquired after 1 April 2017 when tax resident in Japan and sold during resident period. This will be considered as Japanese taxable income even though the income from gain is not remitted into Japan.
A permanent resident is a resident who is a Japanese national or who has a living base in Japan or 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, without deductions or exemptions.
If a non-resident is a resident of a country/jurisdiction with which Japan has concluded a tax treaty, income may be either exempt or subject to a lower rate of tax.
Is there, a de minimis number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to Japan for more than 10 days after their assignment is over and they repatriate.
No.
What if the assignee enters Japan before their assignment begins?
This will depend on the individual circumstances of the assignee and the treaty provisions in place. Resident period in Japan generally commences from the day following the date the assignee arrives in Japan to start the assignment.
Are there any tax compliance requirements when leaving Japan?
The tax office notes a taxpayer’s entry in Japan from the residency management system with a municipality. Tax return must be filed before departure or alternatively, the taxpayer must appoint a tax agent by notice to the tax office before departure.
If a taxpayer did not declare the departure from Japan and failed to remove their residency status from the management system at the local ward office, local inhabitant tax will be assessed.
What if the assignee comes back for a trip after residency has terminated?
As above, this will depend on the individual circumstances of the assignee and the treaty provisions in place.
Do the immigration authorities in Japan provide information to the local taxation authorities regarding when a person enters or leaves Japan?
In general, no. However, tax authorities can obtain the information from immigration authorities.
Will an assignee have a filing requirement in Japan after they leave Japan and repatriate?
Depending on the timing of departure and whether or not they receive any income post departure which relates to their Japan assignment. In this case, non-resident tax return/withholding is required.
The taxation authorities in Japan currently do not adopt the economic employer approach. However, the authority would look for facts and circumstances whether the individual concerned would provide services for the Japan entity in question.
Not applicable.
There are two types of individual taxes in Japan, a National Income Tax (NIT) and a Local Inhabitant Tax (LIT).
Both types of taxes are based on the same income items.
However, the types of deductions allowed against income differ for the two taxes. Below is a table showing the general income and deduction items for both taxes:
Income items |
Subject to: |
|
|
NIT |
LIT* |
Employment income |
x |
x |
Business income |
x |
x |
Rental income |
x |
x |
Dividend income |
x |
x |
Capital gains |
x |
x |
Occasional income |
x |
x |
Miscellaneous income |
x |
x |
Interest income |
x |
x |
Retirement income |
x |
x |
Income from forestry |
x |
x |
* Non-residents are not subject to LIT.
Deductible items |
Deductible for: |
|||
|
NIT |
LIT |
||
Personal deduction (exemption) |
x |
x |
||
Employment income deduction |
x |
x |
||
Capital gains deduction |
x |
x |
||
Occasional income deduction |
x |
x |
||
Casualty losses |
x |
x |
||
Medical expenses |
x |
x |
||
Social insurance premiums |
x |
x |
||
Life insurance premiums |
x |
x |
||
Nursing medical insurance |
x |
x |
|
|
Individual pension plan premiums |
x |
x |
|
|
Earthquake insurance premiums |
x |
x |
|
|
Contributions on or donations to national or local government bodies, and so on in Japan, or certain specified political donations |
x |
x** |
|
** Not deductible but tax credit is available for the Local Inhabitant Tax under some conditions.
Income items subject to tax:
Income Item |
General taxable amount |
Is a loss in this category deductible? |
Employment income3 |
Gross compensation |
N/A |
Business income |
Gross receipts less necessary expenses |
Yes |
Rental income from real estate4 |
Gross receipts less necessary expenses |
Yes |
Dividend income |
Gross receipts less interest on borrowings to acquire principal |
No |
Capital gains5(except from securities, land and buildings) |
100 percent of short-term gains and 50 percent of long-term gains (after special deduction) |
Yes |
Occasional income |
50 percent of gross receipts less necessary expenses and special deduction |
|
Miscellaneous income (e.g. pension) |
Gross receipts less necessary expenses |
No |
Interest income |
Gross receipts |
No |
Retirement income |
Gross receipts |
N/A |
Income from forestry |
Gross receipts less necessary expenses |
No |
Will a non-resident of Japan who, as part of their employment within a group company, is also appointed as a statutory director (i.e. member of the Board of Directors in a group company situated in Japan) trigger a personal tax liability in Japan, even though no separate director's fee/remuneration is paid for their duties as a board member?
If they are a registered director of a Japanese company, all compensation received as a director will be considered as Japan source and subject to Japan income taxes at 20.42 percent. The Japanese company has withholding obligations if it is paid via Japanese payroll.
a) Will the taxation be triggered irrespective of whether or not the board member is physically present at the board meetings in Japan?
Yes.
b) Will the answer be different if the cost directly or indirectly is charged to/allocated to the company situated in Japan (i.e. as a general management fee where the duties rendered as a board member is included)?
Yes.
c) In the case that a tax liability is triggered, how will the taxable income be determined?
All compensation paid as a director will be taxable in Japan.
Are there any areas of income that are exempt from taxation in Japan? If so, please provide a general definition of these areas.
Taxable. However, if below conditions are met, the housing allowance paid by the employer is not taxable.
Above exception may apply to board members/directors, however the formula to calculate the assessed rent differs from the employee calculation method depends on the nature of the house (luxury, size, owner of the house).
Taxable.
Taxable.
Taxable. Any tax reimbursements or settlements made by an employer for an expatriate should be included in taxable income.
Non-taxable. Reimbursements of actual moving cost in connection to the assignee's relocation to/from Japan are generally non-taxable.
Taxable. Subject to certain conditions, non-taxable. Cash or an in-kind benefit provided by an employer to an expatriate in Japan to facilitate a home leave trip to that expatriate’s and/or spouse's country/jurisdiction of origin can generally not be treated as taxable income. The home leave expenses can also cover the costs of the expatriate’s co-habiting family members.
Such home leave should, generally, be limited to a single trip per year and should be in accordance with the employer’s working rules, terms of the expatriate’s contract and so on. Further, the expenses should be reasonable based upon the relevant facts, such as available routes, distances, fares, and so on.
Taxable. Tuition fees for children paid by an employer are taxable to the employee. However, an exception to such taxable treatment has been established by special tax rulings with respect to the contribution plan of certain international schools in Japan. Under such plans, an employer company can effectively make a donation to the school and in recognition of this children of employees are exempt from tuition fees for attending the school. The employees are not required to report any benefit arising from this arrangement as taxable income.
However, employer companies are required to treat the contribution payments as donations for corporate income tax purposes. Donations have only limited deductibility for corporate tax purposes. Certain international schools have now been granted status as Specified Public Interest Facilitating Corporations (SPIFC). As a result, it may be possible for companies to enjoy a tax deduction for a greater portion of donations to such qualifying schools.
Taxable.
Taxable.
Taxable. However, a company car used purely for the employer’s business purposes can be treated as a non-taxable economic benefit.
Taxable.
Non-taxable. A commutation (transportation) allowance may be paid tax free up to lesser of JPY150,000 or the actual monthly transportation costs.
Are there any concessions made for expatriates in Japan?
See residency rule section.
The salary earned from working abroad is not taxed in Japan.
Non-permanent resident status taxpayer
Since employment income is considered to arise at the location at which employment services are rendered, income corresponding to employment services while expatriates are traveling outside Japan is treated as foreign-sourced income. The income allocation is based on the number of days spent on business outside Japan. The day of departure from Japan is not counted as a day of absence from Japan but the day of return to Japan is counted as an absent day. Where expatriates take home leave, the number of such days spent outside Japan is eliminated from the computation used to allocate employment income. Generally speaking, a non-permanent resident would not be taxed on the portion of income that relates to services performed abroad. Please note that the income allocation is not applied for a registered director of Japanese company.
However, Japan applies a remittance exception whereby an expatriate is taxable on compensation paid in Japan and/or remitted to Japan, if such amount exceeds the amount of income attributed to services in Japan.
Therefore, it is necessary for a non-permanent resident taxpayer to keep record of remittances to Japan in cases where of their compensation is paid outside Japan.
Capital gains representing income derived from the sale or transfer of land or buildings (including the right to use land) are divided into two categories: short-term gains from land and buildings held for no longer than 5 years as of 1 January of the transaction year, and long-term gains from those held over 5 years as of 1 January of the transaction year.
Long-term gains are taxed at a flat rate of 15.315 percent (including surtax) of national income tax plus 5 percent of local inhabitant tax.
Short-term gains are taxed at a flat rate of 30.63 percent (including surtax) of national income tax plus 9 percent of local inhabitant tax.
The sale of land or buildings held by non-residents is calculated same as resident taxpayers and subject to 10.21 percent (including surtax) withholding tax except if the property has been purchased by individuals for residential use and the sales value is no more than JPY100 million.
The rate of the separate assessment tax of capital gain of stocks is 20.315 percent (15.315 percent national (including surtax) and 5 percent local).
In principle, these should be reported on an individual income tax return unless the tax is withheld when it’s paid.
In general, stock options are taxed in Japan at the time of exercise. Gains from stock option exercises are taxable as an employment income.
Residency status | Taxable at: | ||
---|---|---|---|
Grant | Vest | Exercise | |
Resident | N | N | Y |
Non-resident | N | N | Y |
Other (if applicable) | N/A | N/A | N/A |
Technically, gains and losses on foreign exchange should be included as miscellaneous income on the individual tax return.
If following conditions are met, the special tax assessment of principal residence gain may apply.
Gains on the sale of residential property is taxed at 10.21 percent (including surtax, plus 4 percent local inhabitant tax) of taxable gains up to JPY60 million and 15.315 percent (including surtax, plus 5 percent local inhabitant tax) on the excess over JPY60 million. A special deduction of JPY30 million is available on gains from the sale of residential property if specified conditions are met.
Under some conditions, the carryover of the capital loss is applicable for up to 3 years.
Generally, capital loss carryover / carryback is not applicable in Japan except under some conditions. Capital loss from listed stock transaction can be offset with listed stock dividend and interest income.
The carryover of capital loss of listed stocks through a broker registered in Japan is applicable for up to 3 years.
Not applicable in Japan.
See Gift, Wealth, Estate, and/or Inheritance Tax Section.
Are there additional capital gains tax (CGT) issues in Japan? If so, please discuss?
Retirement income is taxed separately from other income, and the payer of retirement income in Japan is required to withhold both national income and local inhabitant taxes at source.
The taxable retirement income is 50 percent of the net of the gross receipts less the retirement deduction based on the length of service:
Length of service |
Retirement deduction (JPY) |
Up to 20 years of service |
400,000 per year of service or 800,000 (whichever is greater) |
Over 20 years of service |
8000,000 + 700,000 per year of service after 20 years |
However, for directors defined under the Corporation tax law whose years of service are 5 years or less, the taxable retirement income is the net of the gross receipts less the retirement income deduction.
Not applicable.
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 1 July 2015.
Covered individuals:
A resident individual who meets both of the following conditions;
a. Has a total value of “financial assets” of JPY100 million or more at the time of departure; and
b. Has lived in Japan for more than 5 years* in the previous 10 years before departure
*The period during staying in Japan with a status of residence under Table 1 of the Immigration Control and Refugee Recognition Act can be excluded.
As a consequence, the exit tax will not apply to foreign expatriate employees staying in Japan unless the individual holds the status of residence under Table 2 of the Immigration Control and Refugee Recognition Act.
What are the general deductions from income allowed in Japan?
The following deductions and allowances are available to permanent and non-permanent residents:
Employment income deduction: The deduction is taken against employment income only. The deduction amount is calculated as the higher of specific employment-related expenditure and the standard employment income deduction. The standard income deduction is found from the following table:
From JPY |
To JPY |
Employment deduction JPY |
0 |
1,800,000 |
The greater of (Gross income x 40%-100,000) or 550,000 |
1,800,001 |
3,600,000 |
(Gross income x 30%) + 80,000 |
3,600,001 |
6,600,000 |
(Gross income x 20%) + 440,000 |
6,600,001 |
8,500,000 |
(Gross income x 10%) + 1,100,000 |
8,500,001 |
|
1,950,000(cap) |
|
10,000,000 |
(Gross income x 10%) + 1,100,000 (Note*) |
10,000,001 |
|
2,100,000(cap) |
(Note*) For a taxpayer who falls under any of the following:
If the aggregate amount of specific employment-related expenditures incurred but not reimbursed by the employer during a year which exceeds 50 percent of the employment income deduction, the excess may be deducted in addition to the employment income deduction. Specific expenditures include the following:
The expenditures must be documented and certified by the employer. The deduction of specific expenditures may only be claimed by filing a tax return as follows.
· Resident’s total income after standard employment income deduction (JPY) |
· Deductible amount (NIT) |
· Deductible amount (LIT) |
· 24,000,000 or less |
· 480,000 |
· 430,000 |
· More than 24,000,000 but 24,500,000 or less |
· 320,000 |
· 290,000 |
· More than 24,500,000 but 25,000,000 or less |
· 160,000 |
· 150,000 |
· More than 25,000,000 |
· 0 |
· 0 |
Resident’s total income after standard employment income deduction (JPY) |
Deductible amount (NIT) |
|
For Spouse |
For Elderly spouse |
|
9,000,000 or less |
380,000 |
480,000 |
more than 9,000,000 but 9,500,000 or less |
260.000 |
320,000 |
More than 9,500,000 but 10,000,000 or less |
130,000 |
160,000 |
More than 10,000,000 |
0 |
0 |
Resident’s total income after standard employment income deduction (JPY) |
Deductible amount LIT) |
|
For Spouse |
For Elderly spouse |
|
9,000,000 or less |
330,000 |
380,000 |
more than 9,000,000 but 9,500,000 or less |
220,000 |
260,000 |
More than 9,500,000 but 10,000,000 or less |
110,000 |
130,000 |
More than 10,000,000 |
0 |
0 |
Overseas Dependent Deduction: If a taxpayer would claim deduction for spouse/dependents residing in overseas, submission of following documents would be required. Both documents need to be submitted along with Japanese translations.
1. Documents proving family members are relatives of the taxpayer
2. Documents for money transfers
Current year gross-up, current year reimbursement, and 1-year rollover (under certain conditions) are allowed. If compensation is paid in Japan, it is subject to withholding tax and a gross up would be required.
How are estimates/prepayments/withholding of tax handled in Japan? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.
If compensation is paid to a resident or Japanese-sourced compensation is paid to a non- resident through 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 of Japan, the office or place of business in Japan is required to withhold income tax on the payments.
Not applicable.
Provisional national tax payments are determined based on the prior year's tax liability. In general, provisional tax is calculated as two-thirds of the preceding year's tax liability and is payable in two equal installments; 31 July and 30 November following Monday if these payment dates fall on Saturday, Sunday and National holiday. In mid-June, the tax office will send taxpayers a notice with the relevant provisional tax amounts and due date.
Under certain circumstances, the application of reduction of provisional tax payment is applicable.
A tax credit can be applicable to resident taxpayers who have foreign-source income on which both foreign and Japanese taxes have been paid. The credit limitation is calculated by the following formula:
Type | Credit calculation |
---|---|
Japanese income tax | (A) |
Foreign-sourced income | (B) |
Entire income taxable in Japan | (C) |
Credit limitation: | (A) x {(B) / (C)} |
The excess of the foreign tax over the credit limitation calculated as above can be carried forward for 3 successive years.
There is a host of credits that may be claimed against the taxpayer's regular tax liability, such as:
This calculation assumes a married taxpayer resident in Japan with two children whose 3- year assignment begins 1 January 2019 and ends 31 December 2021. The taxpayer’s base salary is 100,000 US dollars (USD) and the calculation covers 3 years.
|
2019 USD |
2020 USD |
2021 USD |
Salary |
100,000 |
100,000 |
100,000 |
Bonus |
20,000 |
20,000 |
20,000 |
Cost-of-living allowance |
10,000 |
10,000 |
10,000 |
Housing allowance |
12,000 |
12,000 |
12,000 |
Company car |
6,000 |
6,000 |
6,000 |
Moving allowance |
20,000 |
0 |
0 |
Home leave |
0 |
5,000 |
0 |
Education allowance |
3,000 |
3,000 |
3,000 |
Interest income from non-local sources |
6,000 |
6,000 |
6,000 |
Exchange rate used for calculation: USD1.00 = JPY100.00.
Calculation of taxable income
Year-ended |
2019 JPY |
2020 JPY |
2021 JPY |
Days in Japan during year |
365 |
366 |
365 |
Earned income subject to income tax |
|
|
|
Salary |
10,000,000 |
10,000,000 |
10,000,000 |
Bonus |
2,000,000 |
2,000,000 |
2,000,000 |
Cost-of-living allowance |
1,000,000 |
1,000,000 |
1,000,000 |
Net housing allowance |
1,200,000 |
1,200,000 |
1,200,000 |
Company car |
600,000 |
600,000 |
600,000 |
Moving allowance |
2,000,000 |
0 |
0 |
Home leave |
0 |
500,000 |
0 |
Education allowance |
300,000 |
300,000 |
300,000 |
Tax reimbursement (national tax) |
0 |
4,416,700 |
6,201,100 |
Tax reimbursement (inhabitant tax) |
0 |
1,259,500 |
1,877,000 |
Total earned income |
15,100,000 |
21,276,200 |
23,178,100 |
Other income |
0 |
0 |
0 |
Total income |
15,100,000 |
21,276,200 |
23,178,100 |
Employment Income Deduction |
2,200,000 |
2,100,000 |
2,100,000 |
Deductions: |
380,000 |
480,000 |
480,000 |
Total taxable income |
12,520,000 |
18,696,000 |
20,598,000 |
Calculation of tax liability
|
2019 JPY |
2020 JPY |
2021 JPY |
Taxable income as above |
12,520,000 |
18,696,000 |
20,598,000 |
Japanese tax thereon |
2,650,100 |
4,780,700 |
5,557,500 |
Less: |
|
|
|
Domestic tax rebates (dependent spouse rebate) |
|
|
|
Foreign tax credits |
|
|
|
Provisional tax |
0 |
(1,766,600) |
(3,187,000) |
Final tax due (national) |
2,650,100 |
3,014,100 |
2,370,500 |
Inhabitant tax |
1,259,500 |
1,877,000 |
0 |
Total Japanese tax |
3,909,600 |
6,657,700 |
5,557,500 |
1. Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country/jurisdiction for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country/jurisdiction employer but the employee's salary and costs are recharged to the host entity, then the host country/jurisdiction tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied, and the employee would be subject to tax in the host country/jurisdiction.
2. For example, an employee can be physically present in the country/jurisdiction for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.
Gross compensation includes salaries, wages, bonuses, and other allowances of a similar nature. Benefits-in-kind provided by the employer are also included in employment income. Compensation earned outside Japan is treated differently depending on an employee’s residency: Non-permanent resident: Since employment income accrues from the place where employment services are rendered, income corresponding to services rendered while a non-permanent resident employee is traveling outside Japan is treated as income from sources abroad. The amount of such income is required to be calculated based on the number of days spent on business outside Japan, and in connection therewith, the day of departure from Japan is not counted as absence from Japan while the day of return to Japan is counted as absence from Japan. Moreover, when an expatriate takes home leave, the number of such days spent outside Japan is required to be completely eliminated from the computation of allocation of employment income to sources abroad and in Japan. Non-resident: A non- resident is not taxed on any earnings from non-Japanese sources, regardless of where paid or remitted.
3. Interest expenses on the acquisition of land included in a loss in connection with calculation of rental income from real estate cannot be deducted from other income.
4. Property held 5 years or less is considered short-term; all other property is long-term.
Disclaimer
All information contained in this publication is summarized by KPMG Tax Corporation, the Japan member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on the Japanese Individual Income Tax Law, the Enforcement Cabinet Order of the Individual Income Tax Law, and the Basic Administrative Ruling of the Individual Income Tax Law as of 31 July 2020.
Copyright
© 2020 KPMG Tax Corporation, a tax corporation incorporated under the Japanese CPTA Law and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.