close
Share with your friends

Japan - Income Tax

Japan - Income Tax

Taxation of international executives

1000

Related content

Tax returns and compliance

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

15 March of the following year. 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?

Residents

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.

Non-residents

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.

Tax rates

What are the current income tax rates for residents and non-residents in Japan?

Residents

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:

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.

Local inhabitants tax table for 2020

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.

Non-residents

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.

Residence rules

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.

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.

Permanent and non-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.

Non-resident

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.

Termination of residence

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.

Communication between immigration and taxation authorities

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.

Filing requirements

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.

Economic employer approach

Do the taxation authorities in Japan adopt the economic employer approach1 to interpreting Article 15 of the Organisation for Economic Co-operation and Development (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. However, the authority would look for facts and circumstances whether the individual concerned would provide services for the Japan entity in question.

De minimus number of days

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

Not applicable.

Types of taxable compensation

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).

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.

National income tax

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

Intra-group statutory directors
 

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.

Tax-exempt income

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

Certain employer provided housing allowances (employer’s contribution to rent)

Taxable. However, if below conditions are met, the housing allowance paid by the employer is not taxable.

  • the contractor of the house is the company and rent is paid by the company to the owner directly
  • the assessed rent at least 50 percent of assessed rent (which is usually close to 5-10 percent of actual rent) is deducted/paid by the employee.

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).

Certain employer provided housing allowances (cost of utilities)

Taxable.

Living away from home allowance (LAFHA)

Taxable.

Certain employer provided tax reimbursements

Taxable. Any tax reimbursements or settlements made by an employer for an expatriate should be included in taxable income.

Certain employer provided relocation reimbursements

Non-taxable. Reimbursements of actual moving cost in connection to the assignees relocation to/from Japan are generally non-taxable.

Home leave

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.

Certain employer provided education costs

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.

Certain bonus payments

Taxable.

Certain interest subsidies

Taxable.

Certain auto allowances

Taxable. However, a company car used purely for the employer’s business purposes can be treated as a non-taxable economic benefit.

Health insurance

Taxable.

Commutation allowance

Non-taxable. A commutation (transportation) allowance may be paid tax free up to lesser of JPY150,000 or the actual monthly transportation costs.

Expatriate concessions

Are there any concessions made for expatriates in Japan?

See residency rule section.

Non-resident salary earned from working abroad

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

Non-resident status taxpayer

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.

Taxation of investment income and capital gains

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 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).

Dividends, interests, and rental incomes

In principle, these should be reported on an individual income tax return.

Gains from stock option exercises

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

Foreign exchange gains and losses

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

Principal residence gains and losses

If following conditions are met, the special tax assessment of principal residence gain may apply.

  • The principal residence is in Japan.
  • The ownership period exceeds 10 years as of 1 January of the sale year.
  • The taxpayer did not apply this special tax treatment in past 2 years.
  • Another tax treatment is not applied upon the sale of residential property.
  • The sale is not made to the close relatives.

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.

Capital losses

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.

Personal use items

Not applicable in Japan.

Gifts

See Gift, Wealth, Estate, and/or Inheritance Tax Section.

Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Japan? If so, please discuss?

Retirement income

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.

Pre-CGT assets

Not applicable.

Deemed disposal and acquisition

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.

General deductions from income

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:

  • A special handicapped person
  • A person having dependents aged less than 23 in the same household
  • A person having special handicapped dependents or special handicapped spouse in the same household

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:

  • 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 JPY88,000 for portion exceeding JPY12,000 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 insurance 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 tax qualified organizations such as 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: The taxpayer is eligible for basic deduction as below.

·        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

  • Dependent deduction: Dependent deduction of JPY380,000 for NIT/JPY330,000 for LIT would be applicable for all dependents (whose net annual income is below JPY380,000) 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 JPY630,000 for NIT/JPY450,000 for LIT and for dependents aged over 70, JPY480,000 for NIT/JPY380,000 for LIT (if living separately) or 580,000 for NIT/JPY450,000 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 JPY380,000), taxpayer would be allowed for deduction based on the following table. If taxpayer’s income after standard employment income deduction is more than JPY10,000,000 this deduction would not be applicable.

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

Tax reimbursement methods

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

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.

Calculation of estimates/ prepayments/ withholding

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.

Pay-as-you-go (PAYG) withholding

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.

PAYG installments

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 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.

Relief for foreign taxes

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:

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.

General tax credits

What are the general tax credits that may be claimed in your country/jurisdiction? 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.

Sample tax calculation

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.

Other assumptions

  • 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.

Additional Assumptions

  • 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 1 year and less than 5 years in the last 10 years
  • taxpayer leaves Japan on 31 December 2021
  • taxpayer lives in Tokyo during Japan assignment.

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

Footnotes

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.

© 2020 KPMG Tax Corporation, a tax corporation incorporated under the Japanese CPTA Law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal