Tax returns and compliance

Tax rates

Residence rules

Termination of residence

Economic employer approach

Types of taxable compensation

Tax-exempt income

Expatriate concessions

Non-resident salary earned from working abroad

Taxation of investment income and capital gains

Additional capital gains tax (CGT) issues and exceptions

General deductions from income

Tax reimbursement methods

Calculation of estimates/prepayments/withholding

Relief for foreign taxes

General tax credits

Sample tax calculation

All income tax information is summarized by KPMG Tax Corporation.

When are tax returns due? That is, what is the tax return due date?

15 March. Extensions of the filing deadline are generally not allowed.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in Japan?

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 percent withholding tax, must file a return by the day of his/her departure from Japan, or by 15 March of the following year if a tax agent is appointed, and pay the 20 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 2018

Surtax for Reconstruction Funding in relation to March 11, 2011 earthquake.

To increase tax revenue to finance post-earthquake reconstruction, 2.1% temporary surtax on National income tax is in effect for 25 years (from 2013 to 2037).

Local inhabitants tax table for 2018

A non-resident is taxed at a flat rate of 20.42 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 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 a living base in Japan or has resided in Japan for more than one year and five years or less in the last 10 years.

A non-permanent resident is taxed on the greater of income other than foreign-source income under the Japan tax law regardless of where it is paid, or remittance into Japan plus income paid in Japan.

Income other than foreign source income includes capital gain from sales of securities which was acquired after 1 April 2017 when tax resident in Japan and sold during resident period.

A permanent resident is a resident other than a non-permanent resident. Therefore, an individual who is a Japanese national or who has a living base in Japan or resided in Japan for more than five 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 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 minimus 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. Residence 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.

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.

Do the taxation authorities in Japan adopt the economic employer approach¹ to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Japan considering the adoption of this interpretation of economic employer in the future?

The taxation authorities in Japan currently do not adopt the economic employer approach.

Are there a de minimus number of days² before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?

Not applicable.

What categories are subject to income tax in general situations?

There are two types of individual taxes in Japan, a National Income Tax (NIT) and a Local Inhabitant Tax (LIT).

Permanent and non-permanent residents are subject to both taxes, while non-residents are only subject to the National Income Tax. 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:

* Non-residents are not subject to LIT.

* Not deduction but tax credit is available for the Local Inhabitant Tax under some conditions.

Income items subject to tax:

Are there any areas of income that are exempt from taxation in Japan? If so, please provide a general definition of these areas.

Taxable. Subject to certain conditions, if the assessed rental (that is, the value of the taxable economic benefit) is included in taxable income, rent paid by an employer is non-taxable. Assessed rental is determined using a formula which considers the type and value of the premises. Generally, the taxable amount is in the range of 5 percent to 10 percent of the actual rent for an employee or 50 percent for a registered director of Japanese company.

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 assignees 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 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.

Is salary earned from working abroad taxed in Japan? If so, how?

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 permanent resident and 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 his/her compensation is paid outside Japan.

Are investment income and capital gains taxed in Japan? If so, how?

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 five years as of 1 January of the transaction year, and long-term gains from those held over five 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 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.

In general, stock options are taxed in Japan at the time of exercise. Gains from stock option exercises are taxable as an employment income.

Technically, gains and losses on foreign exchange should be included as miscellaneous income on the individual tax return.

Gains on the sale of residential property held for more than 10 years are 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 carry over of the capital loss is applicable for up to 3 years.

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:

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.

Are there capital gains tax exceptions in Japan? If so, please discuss?

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 July 1, 2015.

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:

If the aggregate amount of specific employment-related expenditures incurred but not reimbursed by the employer during a year exceeds 50% of the employment income deduction, the excess may be deducted in addition to the employment income deduction. Specific expenditures include the following:

• commuting expenses
• moving expenses on transfer
• training expenses incurred in gaining technology or knowledge directly required for performing duties.

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.

• Capital gains deduction: A special deduction of JPY500,000 is allowed against capital gains, which is subject to aggregate taxation. The deduction is applied first against short-term gains and then the remainder is applied against long-term gains.
• Occasional income deduction: A special deduction of JPY500,000 is allowed against net occasional income.Casualty losses: The amount deductible against ordinary income is equivalent to the excess of the loss not covered by insurance proceeds over the smaller of JPY50,000 or 10 percent of adjusted total income.
• Medical expenses: The deductible amount is equivalent to the excess of medical expenses not covered by insurance proceeds over the smaller of JPY100,000 or 5 percent of adjusted total income. The maximum deductible amount is JPY2 million.
• Medical Expenses (self medication): The deductible amount is up to JPY 88,000 for portion exceeding JPY 12,000 for the total expenses used for medical care costs certified for deduction. The proof of continuous effort in keeping health (e.g. periodic health check, vaccination, examination for cancer) would be required. If a taxpayer decides to apply Medical expense deduction from self medication, normal medical expense deduction above would not be applied. This self medication is currently applicable from 2017 to 2021.
  
• Social insurance premiums: The full amount of premiums paid by the employee under Japanese plans is deductible. In general, foreign social insurance premiums are not deductible.
• Life insurance premiums: For policies entered into after 31 December 2011 (new policies), the maximum deductible amount is JPY40,000 and JPY28,000 for national tax and local inhabitant tax respectively. An additional JPY40,000 (maximum for national tax) and JPY28,000 (maximum for local inhabitant tax) deductions are available if the premiums are paid under an individual pension plan / nursing incurance respectively. Foreign (non-Japanese) policies are not deductible. For policies entered into on or before 31 December 2011, the maximum deductible amount is JPY50,000 and JPY35,000 for national tax and local inhabitant tax respectively. If an individual applies for both old and new policies, the maximum deductible amount in total is JPY120,000 for income tax purpose and JPY70,000 for local inhabitant tax purpose.
• Earthquake insurance and/or long-term casualty insurance premiums: Earthquake insurance premiums up to the value of JPY50,000 can be deducted from income for income tax purposes, and a half of the premiums for local inhabitant tax purposes (up to JPY25,000). Although the income deduction for casualty insurance premiums is basically abolished from 2007, the deduction for long-term casualty insurance premiums will remain available provided that the policies are entered into before 31 December 2006. The maximum deduction for long-term casualty insurance premiums is JPY15,000 and JPY10,000 for income tax purposes and for inhabitant tax purposes respectively. If an individual applies for both a deduction for earthquake insurance premiums and a deduction for long-term casualty premiums, the maximum deductible amount in total is JPY50,000 for income tax purposes and JPY25,000 for inhabitant tax purposes.
• Contributions and donations: Contributions or donations made to qualified government or local authorities, institutions for education, scientific, or other public purposes as designated by the Minister of Finance, and institutions for scientific study or research specifically provided for in the regulations are deductible. The deductible amount is equivalent to all qualified contributions exceeding JPY2,000 with some limitations based on income level. As for local inhabitant tax, not deduction but tax credit is available for contributions or donations qualified under local tax law.
• Basic deduction: every resident taxpayer is eligible for JPY380,000 deduction for NIT and JPY 330,000 for LIT.
• Dependent deduction: Dependent deduction of JPY 380,000 for NIT/JPY330,000 for LIT would be applicable for all dependents (whose net annual income is below JPY 380,000) living in Japan whose age is 16 or above at year end. For dependents whose age is in between 19-22, this deduction would be JPY 630,000 for NIT/JPY 450,000 for LIT and for dependents aged over 70, JPY 480,000 for NIT/JPY 380,000 for LIT (if living separately) or 580,000 for NIT/JPY 450,000 for LIT (if living together) would be applied.
• Spousal deduction: If a taxpayer’s spouse is eligible for spousal deduction (ex. net annual income is below JPY 380,000), taxpayer would be allowed for deduction based on the following table. If taxpayer’s income after standard employment income deduction is more than JPY 10,000,000 this deduction would not be applicable.
  

*Applicable from January 2018

*Applicable from 2019 LIT

Overseas Dependent Deduction: If a taxpayer would claim deduction for spouse/dependents residing in overseas, submission of following documents would be required. Both documents needs to be with Japanese translations.

1. Documents proving family members are relatives of the taxpayer
2. Documents for money transfers

What are the tax reimbursement methods generally used by employers in Japan?

Current year gross-up, current year reimbursement, and one-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.

When are estimates/prepayments/withholding of tax due in Japan? For example: monthly, annually, both, and so on.

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. In early July, the tax office will send taxpayers a notice with the relevant provisional tax amounts and due date.

Is there any Relief for Foreign Taxes in Japan? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

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: 

The excess of the foreign tax over the credit limitation calculated as above can be carried forward for three successive years.

What are the general tax credits that may be claimed in your country? Please list below.

There is a host of credits that may be claimed against the taxpayer's regular tax liability, such as:

• tax credit for dividends from Japanese companies
• special tax credit for mortgage loan interest
• special tax credit for contributions to political parties
• special tax credit for anti-earthquake improvement
• foreign tax credit
• special tax credit for contributions to tax qualified non-profit organization.

This calculation assumes a married taxpayer resident in Japan with two children whose three-year assignment begins 1 January 2018 and ends 31 December 2020. The taxpayer’s base salary is USD100,000 and the calculation covers three years.

Exchange rate used for calculation: USD1.00 = JPY100.00.

• All earned income is attributable to local sources.
• Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
• Interest income is not remitted to Japan.
• The company car is used for private purposes.
• The employee is deemed resident throughout the assignment.
• Tax treaties and totalization agreements are ignored for the purpose of this calculation.

• spouse: no income
• children: age 10 years old/age 8 years old
• taxpayer is not a Japanese national and resided in Japan for more than one year and less than five years in the last 10 years
• taxpayer leaves Japan on 31 December 2020
• taxpayer lives in Tokyo during Japan assignment.

Calculation of taxable income

Calculation of tax liability

Rules among standard employment income deduction and basic deduction projected to be amended in 2020. The upper limit for standard employment deduction will be JPY 1,950,000 for gross employment income exceeding JPY 8,500,000. Basic deduction to be JPY 480,000 for NIT and 430,000 for LIT unless exceeding annual income (after standard employment income deduction) of JPY 24,000,000.

1. Overseas Assets Reporting:  Permanent resident for Japanese tax purposes as of the end of the calendar year who own overseas assets over 50M yen as of the end of the calander year has a reporting requirement of Overseas Assets to the Tax Authority.
2. Assets & Liabilities: Taxpayer filing tax return whose total income exceeds 20M yen for a calendar year AND a) total value of assets as of the end of the calendar year is 300M yen or more OR b) total value of financial assets as of the end of the calendar year is 100M yen or more has a reporting requirement of Assets and Liabilites (world-wide basis) to the Tax Authority.