You are considered a non-resident in Japan for tax purposes unless you have a domicile in Japan or have a residence in Japan continuously for one year or more (See the “INCOME TAX AND SPECIAL INCOME TAX FOR RECONSTRUCTION GUIDE FOR FOREIGNERS” for more information about resident status.).
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 income from sources in Japan provided in the Income Tax Law.
The following incomes are examples which are treated as income from sources in Japan.
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.
In principle, when a payer of incomes mentioned in 2(2) to (14) 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.
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, most of the income derived through this PE is subject to aggregate taxation. This 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 Law.
However, even if the non-resident doesn’t have a PE, income from the management or holding of assets in Japan, income from the transfer of real estate in Japan, etc. and incomes mentioned in 2(4) and (5) above are subject to aggregate taxation.
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(6) to (14) 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(6) and (13) 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(10) above are paid outside Japan and aren’t subject to this withholding taxation, the non-resident must file a quasi-final tax returnand pay the tax.
When retirement allowances, etc. mentioned in 2(10) 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 Law, 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 (a sum of 1/2 of the amount after a certain deduction).
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.
Japan and your country of residence may conclude a tax treaty to avoid double
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:
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” “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.