Information about Income TaxInformation about Income Tax>No.12006 Tax on the income of an individual as a non-resident in Japan for tax purposes

No.12006 Tax on the income of an individual as a non-resident in Japan for tax purposes

1 Non-resident in Japan

 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 GUIDE FOR FOREIGNERS” for more information about resident status.).

2 Scope of taxable income

 If you are a non-resident, the scope of income subject to income tax 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.

  1. (1) Income from business conducted in Japan, income from the management, holding or transfer of assets located in Japan, etc.
  2. (2) Profit from business conducted in Japan under a partnership contract prescribed in Article 667 of the Civil Code, etc., which is distributed under the said partnership contract.
  3. (3) Income from the transfer of land, any right on land, building, etc. located in Japan.
  4. (4) Income from certain types of personal services such as entertainers, professional athletes, lawyers, certified public accountants, architects, which is paid to a person who conducts business that is mainly for providing any of the said personal services in Japan.
  5. (5) Rent of real estate, any right on real estate, etc. located in Japan.
  6. (6) Interest on Japanese government bonds, Japanese local government bonds, or bonds issued by domestic corporations, interest on bonds issued by foreign corporations which is attributed to business conducted in Japan by the foreign corporations, interest on savings deposited at business offices located in Japan, etc.
  7. (7) Dividends of surplus, dividends of profits, distribution of surplus received from domestic corporations, etc.
  8. (8) Interest on loans to a person who performs operations in Japan, which pertain to the said operations.
  9. (9) Royalties for industrial property rights, copyrights, etc., proceeds from the transfer of these rights, or rent of machinery, equipment, etc., which are received from a person who performs operations in Japan and pertain to the said operations.
  10. (10) Salaries, wages or other remuneration received for work or the provision of other personal services carried out in Japan (including work carried out outside Japan by a person acting as a director of a domestic corporation), public pensions, or retirement allowances, etc. derived from work carried out during the resident taxpayer period.
  11. (11) Monetary award for the advertisement of business conducted in Japan.
  12. (12) Pensions received under life insurance contracts, casualty insurance contracts, etc. concluded through business offices, etc. located in Japan.
  13. (13) Compensation money for benefit pertains to installment deposits accepted by a business office located in Japan, etc.
  14. (14) Distribution of profit received under a silent partnership contract, etc. with respect to investment in a person who conducts business in Japan.

3 Outline of taxation methods

 The outline of fundamental taxation methods for a non-resident is as follows.

 Note. Certain incomes are differently treated by the Special Taxation Measures Law.

(1) Withholding tax system

 In principle, when a payer of incomes mentioned in 2(2) to (14) above makes payment to a non-resident within Japan, the payer must withhold income tax 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 because the payment is deemed to be made within Japan.

(2) Aggregate taxation

 Aggregate taxation is a method to calculate the taxable income and the tax amount on the taxable income by aggregating all kinds of income for the year into a single taxable income and applying progressive tax rates on the taxable income. In this case, the non-resident must file a final tax return and pay the tax.
 If the non-resident has a Permanent Establishment (PE) in Japan, 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.

(3) Separate withholding taxation at source

 Separate withholding taxation at source is a method to complete the taxation on each income only by applying withholding tax system mentioned above (1).
 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% (15% for incomes mentioned in 2(6) and (13) above) is applied on the amount to be paid for each income.

Note.1 Special income tax for reconstruction shall be collected together during the period from January 1,2013 through December 31, 2037. In this case , “20%” shall be 20.42% and “15%” shall be 15.315%.

Note.2 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 return and pay the tax.

(4) Special provision for retirement income

 When retirement allowances, etc. mentioned in 2(10) above are paid to a non-resident within Japan, a tax rate of 20% 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 for retirement allowances, etc. by deeming that you received them as a resident taxpayer and file a tax return. Income tax 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.

Note. Special income tax for reconstruction shall be collected together during the period from January 1,2013 through December 31, 2037.
In this case , “20%” shall be 20.42%

4 Tax convention between Japan and your country of residence

 Japan and your country of residence may conclude a tax treaty to avoid double taxation, etc.
With this tax treaty, you may claim the benefits of reducing the tax rate or an exemption from the tax on income such as interest, dividends, royalties or salaries.
 The provisions are different depending on each tax treaty, therefore, you need to refer to each tax treaty in each case.
For example, if you are a non-resident, you may need to consider the tax treaty if:

  1. (1) You receive interest, dividends or royalties.
  2. (2) You stay for 183 days or less in Japan and have earned income not paid by an employer in Japan and not borne by an employer’s PE in Japan. or
  3. (3) You have earned income under the status of an overseas student.

 If you want to claim the benefits of the tax treaty, you need to submit an “Application Form for Income Tax Convention” with certain attachments to the district director of the tax office which has jurisdiction over the payer's place for tax payment through the payer before the date of payment.
 If you fail to submit the forms in time, you can still claim the benefits of the tax treaty by submitting an “Application Form for Refund of the Overpaid Withholding Tax” with the application mentioned above to the district director of the tax office which has jurisdiction over the payer’s place for tax payment through the payer.