1 What is foreign tax credit for residents?

If you are a resident and have the amount of foreign tax which is equivalent to Japanese income tax (hereinafter referred to as “foreign income tax”) in accordance with the law of foreign countries, you may deduct the foreign income tax up to the amount calculated by the formula (1) below (hereinafter referred to as "credit limit for income tax") from your Japanese income tax for the year.

  1. (1) Credit limit for income tax = Amount of income tax for the year × (Adjusted amount of foreign income for the year / Total amount of income for the year)
  2. Furthermore, if the amount of foreign income tax for the year exceeds the credit limit for income tax, as long as the excess is within the amount calculated by the formula (2) below (hereinafter referred to as "credit limit for special income tax for reconstruction"), it can be credited against the special income tax for reconstruction for the year.
  3. (2) Credit limit for special income tax for reconstruction = Amount of special income tax for reconstruction for the year × (Adjusted amount of foreign income for the year / Total amount of income for the year)
(Note 1) The term "Amount of income tax for the year" means the income tax amount after applying tax credits such as credit for dividends, special credit for loans relating to a dwelling and reduction and exemption for victims of disasters.
(Note 2) The term "Total amount of income for the year" means the sum of the total income for the year, including each income subject to separate taxation in relation with capital gain (before special deductions), listed or unlisted shares sold, dividends from listed shares, miscellaneous income from forward transactions, retirement income and timber income, but not applying various types of carry-over for losses such as net loss, casualty loss, loss on listed shares sold, etc.
(Note 3) The term "Adjusted amount of foreign income for the year" means the amount of foreign income for the year (or the foreign source income which is paid in Japan or remitted to Japan from abroad, in the case of non-permanent residents), not applying various types of carry-over for losses such as net loss, casualty loss, loss on listed shares sold, etc., as long as the amount of foreign source income for the year does not exceed the amount equivalent to “Total amount of income for the year” (if it does, the amount should be equivalent to “ Total amount of income for the year”.).
(Note 4) The term "Amount of special income tax for reconstruction for the year" means the amount obtained by multiplying the base income tax (equals to the “amount of income tax for the year”) by the rate of 2.1%.

It should be noted that if you will be liable for foreign income tax, as a resident or similar status of the foreign country where you will reside in, imposed on the income derived from your transfers as regards assets to which the special provision of capital gain tax when leaving Japan has been applied, you may calculate foreign tax credit as if you already paid that foreign tax in the year which includes the exit day as long as the case qualifies for prescribed conditions.

2 Scope of deductible foreign income tax for residents

Taxes corresponding to foreign income tax

Foreign income tax means tax imposed on income of individuals as a tax base in accordance with laws of foreign countries of which the government or the local government impose that tax, including the following kinds of taxes:

  1. (1) Excess income tax or similar taxes imposed on a specific part of income of individuals as a tax base.
  2. (2) Surtax imposed on the whole or specific part of income of individuals as a tax base.
  3. (3) With regard to the specific type of income of individuals, tax imposed on the amount of earnings or its equivalent as a tax base for the convenience of tax collection instead of the amount of income, which is categorized in the same kind of tax imposed on income of individuals as a tax base.
  4. (4) With regard to the specific type of income of individuals, tax imposed on the amount of earnings of individuals or its equivalent as a tax base, which is substituted for the tax on income of its tax base.

Taxes excluded from foreign income tax

Even if taxes are imposed by the government or the local government of foreign countries, the followings are excluded from foreign income tax:

  1. (1) Tax of which the whole or part of the amount is refundable after the payment thereof upon voluntary request by taxpayers.
  2. (2) Tax for which a grace period for payment can be decided voluntarily by taxpayers.
  3. (3) Tax based on the tax rate which is set by the agreement with the foreign government, the foreign local government, or those are authorized to make that agreement, to the extent of the excess of possibly minimum rate from a variety of tax rates.
  4. (4) Tax imposed on foreign income taxes, which is equivalent to Incidental Taxes and similar to those.

Foreign income tax amount for which you cannot take a credit

The following amounts of foreign income tax are not deductible for foreign tax credit.

(1) The amount of foreign income tax imposed on income derived from prescribed transactions as not to be considered as arm’s-length.
(2) The amount of foreign income tax imposed on money or assets to be delivered due to the contribution refund or prescribed events as listed in Article 25, paragraph 1 of the Income Tax Act (excluding the portion imposed on the money in excess of the acquisition price of the shares or contributions that bring about the delivery).
(3) In case where the head or main office of a foreign corporation, issuing shares or capital under residents’ possession, is subject to similar measures to correction or determination about tax base or amounts of tax in accordance with the laws of the country in where that office located, the amount of foreign income tax which is imposed on the corresponding amount of the increased income of the foreign corporation since the amount of increase is considered to payments equivalent to dividends of surplus and similar income listed in Article 24, paragraph 1 of the Income Tax Law.
(4) The amount of foreign income tax on the money paid to a permanent establishment of a resident, from the overseas business establishment which the resident carries out business through, which the country in where that overseas business establishment is located imposes.
(5) The amount of foreign income tax imposed on dividends of listed shares and similar investments held in the security account exempted from taxation under Article 9-8 (“NISA”) and Article 9-9 (“Junior NISA”) of the Act on Special Measures Concerning Taxation.
(6) The amount of foreign income tax imposed on income which have accrued during the period when the person was a non-resident at any time before the relevant year.
(7) A prescribed amount of foreign income tax imposed on the tax base as the amount of dividends of surplus and similar income received from the Specified Foreign Subsidiary Company, to the extent of the amount which is applicable to Article 40-5, paragraph 1 or 2 of the Act on Special Measures Concerning Taxation.
(8) A prescribed amount of foreign income tax imposed on the tax base as the amount of dividends of surplus and similar income received from the Specified Foreign Corporation, to the extent of the amount which is applicable to Article 40-8, paragraph 1 or 2 of the Act on Special Measures Concerning Taxation.
(9) In case where foreign income taxes imposed in the country which has concluded a tax treaty with Japan, the amount equivalent to the portion exceeding the prescribed amount as the limit that can be imposed by the contracting country, or the amount equivalent to the exempted amount, according to the provision of the tax treaty.
(10) In case where foreign taxes imposed in the foreign country, the amount equivalent to the portion to be reduced or to be exempt from taxation, under the same conditions with regard to reduction or exemption of income tax on the applicable domestic source income according to the provision of the “Mutual Exemption Law for Income of Foreign Resident, etc.”
(11) The amount of foreign income tax imposed on the income of residents, which should not be taken into consideration when in calculation of the amount of foreign tax credit according to the provision of the tax treaty.

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3 What is the amount of foreign income?

The term “Amount of foreign income” which is the basis of credit limit for foreign taxes for residents means the sum of the following types of foreign income (it should be 0 if the sum is negative number). The “amount of foreign income” is an element of “credit limit for income taxes” since the amount of “Adjusted amount of foreign income for the year” is calculated based on this amount without applying various types of carry-over for losses such as net loss, casualty loss, loss on listed shares sold, etc.
It should be noted that if a tax treaty contains provisions on foreign source income which differ from the followings, with regard to a resident who is applicable to the tax treaty, the foreign source income is governed by the treaty to the extent of the differing provisions.

(1) Income attributable to an overseas business establishment

This term means the income which might be attributed to the overseas business establishment if it were an entity engaged in business independently with the resident who actually carries out business through that establishment. In principle, the amount of income attributable to the overseas business establishment becomes the sum of the total income for the year, including each income subject to separate taxation in relation with capital gain (before special deductions), listed or unlisted shares sold, dividends from listed shares, miscellaneous income from forward transactions, retirement income and timber income, which are estimated along the provisions applied to the calculation of residents’ income amount for each year.

(Note) The term "overseas business establishment" basically means the equivalent of a permanent establishment prescribed in tax treaties which has been concluded with Japan.

(2) Other foreign source income

This term applies to the following kinds of foreign source income (except for the income which falls under (1) above). The amount of other foreign source income becomes the same as the total income for the year, as well as each income subject to separate taxation in relation with capital gain(before special deductions), listed or unlisted shares sold, dividends from listed shares, miscellaneous income from forward transactions, retirement income and timber income, which are estimated as if those foreign source income were solely taxable income.

(1) Income from the earner’s investments or holdings as regards assets located in a foreign country.
(2) Income from the earner’s transfers as regards assets located in a foreign country.
(3) Compensations that a person conducting prescribed business whose main content is providing personal services abroad receives for providing those personal services.
(4) Consideration for renting out real property located in a foreign country, a right on real property located in a foreign country, for establishing a mining lease in a foreign country, or for renting out a vessel or aircraft, to a non-resident or foreign corporation.
(5) Interest and similar income as prescribed in Article 23, paragraph 1 of the Income Tax Act, which is as follows:
  

(a) Interest on foreign government bonds, foreign municipal bonds, or bonds issued by a foreign corporation;

  

(b) Interest on deposits or savings deposited with a foreign business office;

  

(c) A distribution of proceeds from a jointly managed money trust or its equivalent trust, bond investment trust, or bond-based investment trust under public offering or its equivalent, which has been established as a trust at a foreign business office.

(6) Dividends and similar income prescribed in Article 24, paragraph 1 of the Income Tax Act, which are as follows:
  

(a) Dividends of surplus, dividends of profits, distributions of surplus or interest on funds and its equivalent that the earner receives from a foreign corporation;

  

(b) A distribution of proceeds from an investment trust (other than a bond investment trust or bond-based investment trust under public offering or its equivalent) or a specified trust that issues beneficiary certificates or its equivalent, that has been established as a trust at a foreign business office;

(7) Interest from a loan that the earner has provided to a person doing business abroad in connection with that business (this includes a prescribed amount as margin arising from purchase and sale transactions involving bonds with buyback or resale agreements);
(8) Any of the following royalties or consideration that the earner receives from a person doing business abroad in connection with that business:
  

(a) Royalties for an industrial property right or any other right to the use of technology, a production method based on special technology, or any equivalent right or method; or consideration for the transfer thereof;

  

(b) Royalties for a copyright (including print rights, neighboring rights, and any equivalent rights), or consideration for the transfer thereof;

  

(c) Royalties for machinery, equipment or other prescribed tools.

(9) A salary, remuneration, or pension as follows:
  

(a) Pay, compensation, wages, annual allowances, bonuses; salary in the nature thereof; or remuneration in the nature thereof for providing personal services; which arises from the earner’s working or providing personal services abroad (excluding work done outside Japan by a person acting as the officer of a domestic corporation, and work carried out on a vessel or aircraft operated by a resident or a domestic corporation);

  

(b) A pension or similar payments based on a system similar to the social insurance or mutual aid systems in accordance with the law of foreign countries, that are equivalent system under the provisions of “National Pension Act”, “Employee Pension Insurance Act”, “National Public Service Personnel Mutual Aid Associations Act”, “Local Public Service Personnel Mutual Aid Associations Act”, “Private School Personnel Mutual Aid Association Act”, “Act on the Farmers’ Pension Fund”, or “Coal Mining Pension Fund Act”;

  

(c) Severance pay and other such compensation based on work or personal services provided by the recipient of the severance pay and other such compensation during a period that the recipient was a non-resident (excluding work done by a person acting as the officer of a domestic corporation during the period when the person was a non-resident, and work carried out on a vessel or aircraft operated by a resident or a domestic corporation).

(10) Prescribed income as a monetary award for doing advertising for business conducted abroad.
(101) Pension that the earner is paid based on an insurance contract and similar contracts, which is concluded with a foreign insurer, a life insurance company or non-life insurance company through a foreign business office or through a person acting as an agent for the conclusion of such contracts abroad (including a surplus distributed or a refund paid based on such a contract for a pension on or after the start date for the payment of the pension, and a lump-sum payment made in lieu of paying a pension based on such a contract).
(102) Compensation for periodic deposits, finance charges, profits, or margin profits as follows:
  

(a) Compensation for periodic deposits linked to installment deposits accepted by a foreign business office;

  

(b) Compensation for periodic deposits based on a contract as referred to in Article 2, paragraph (4) of the Bank Act, linked to installment deposits as prescribed in that item which are accepted by a foreign business office;

  

(c) Finance charges that based on mortgage securities, linked to a contract which is concluded through a foreign business office;

  

(d) Profits based on a contract for the purchase and sale of a precious metal such as gold or anything equivalent thereto, linked to a contract which is concluded through a foreign business office;

  

(e) Margin profits arising from deposits or savings in a foreign currency the principal and interest of which are to be paid after conversion into Japanese yen or into a different foreign currency at the rate agreed upon in advance, linked to deposits and savings that are accepted by a foreign business office;

  

(f) Margin profits based on a life insurance contract or non-life insurance contract or based on a mutual aid contract similar thereto, which provides that premiums or installment deposits are to be paid in a lump-sum, or which has a coverage, linked to a contract which is concluded through a foreign business office or through a person acting as an agent for conclusion of contracts abroad.

(103) A distribution of proceeds based on a silent partnership agreement and similar agreements for capital contributions made to a person doing business abroad.
(104) Prescribed income derived from the transport consisting of operations both in and outside Japan by using a vessel or aircraft, linked to the operation which is carried on outside Japan.
(105) Prescribed income on which income tax can be imposed in the contracting country of a tax treaty pursuant to the provision of the tax treaty.
(106) Foreign source income other than that from (1) to (105) above, as follows:
  

(a) Income pertaining to insurance proceeds, compensation or monetary damages (including income similar thereto) that is to be received for operations performed abroad or foreign assets;

  

(b) Income arising from receiving, from a corporation, a gift of foreign assets;

  

(c) Income pertaining to items that were hidden in the ground and that were discovered abroad or lost property that was found abroad;

  

(d) Income pertaining to money and goods or other economic benefits that is received as a prize based on a prize competition held abroad;

  

(e) Occasional Income acquired upon carrying out any act abroad;

  

(f) Beyond what is listed in the preceding items, income pertaining to economic benefit that is given with regard to operations performed abroad or foreign assets.

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4 Calculation of foreign tax credit for residents

Foreign tax credit for residents applies as follows, to the income tax and special income tax for reconstruction for the year in which the foreign income tax should be payable :

(1) If the amount of foreign income tax does not exceed the credit limit for income tax, the amount of foreign tax credit becomes the same as the amount of foreign income tax.

(2) If the amount of foreign income tax exceeds the credit limit for income tax, the amount of foreign tax credit becomes the sum of the credit limit for income tax and the following (a) or (b) whichever is lower:

(a) The amount of foreign income tax minus the credit limit for income tax,

(b) Credit limit for special income tax for reconstruction.

It is also acceptable to take a deduction in the year which includes the day of payment completed with regard to the fixed foreign income tax as long as the way is taken continuously.

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5 Carry-over of foreign tax credit for residents

In the following cases, you can additionally deduct prescribed amount as being calculated from the amount of foreign income tax or the credit limit for income tax which has been accrued in any of the last three years against income tax for the year.

(1) If the amount of foreign income tax exceeds the credit limit for income tax

If the foreign income tax to be paid for the year exceeds the sum of the credit limit for income tax, the credit limit for special income tax for reconstruction and the credit limit for local tax (equals to the amount multiplying the credit limit for income tax for the year by 30%) for the year, to the extent that prescribed amount of credit limit for income tax in any of three years prior to the relevant year, which has been carried over (hereinafter referred to as "credit limit carried over"), the excess amount can be credited against income tax, up to the amount of credit limit carried over.

(2) If the amount of foreign income tax is less than the credit limit for income tax

If the foreign income tax to be paid for the year is less than the credit limit for income tax for the year, to the extent that prescribed amount of foreign income tax to be paid in any of three years prior to the relevant year and those carried over (hereinafter referred to as "foreign income tax carried over"), the foreign income tax carried over can be credited against income tax, up to the amount of the remaining credit limit for income tax for the year.

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6 Adjustment for changes in foreign income tax

(1) When foreign income tax is reduced

If the amount of foreign income tax is reduced in any of seven years later than the relevant year of which income foreign tax credit has been applied to, the calculation is as follows when applying the foreign tax credit and other items in the year which include the day of foreign income tax reduction:

(1) The amount corresponding to the reduced foreign income tax should be deducted from the amount of foreign income tax to be paid for the relevant year which includes the day of tax reduction, and the foreign tax credit is applied to the deducted amount.
(2) If you do not have foreign income tax to be paid for the relevant year that includes the day of tax reduction, or the foreign income tax to be paid in the relevant year is less than the amount of reduced foreign income tax, carry-over of foreign tax credit should be applied based on the amount which is the remaining amount of the excess over credit limits of the last three years after deduction for the whole or a part of reduced foreign income tax exceeding the amount of foreign income tax for the relevant year.
(3) If a part of the reduced amount of foreign income tax which still remains even after the adjustment as (i) and (ii) above, that should be included in the gross income of miscellaneous income for the year of tax reduction.

(2) When foreign income tax is increased

In case where foreign tax credit has been applied to the foreign income tax for the relevant year and the amount of that foreign income tax is increased after that year, for applying foreign tax credit, the amount of increased foreign income tax is considered as another foreign income tax to be paid in the relevant year of increasing.

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7 Procedure for applying foreign tax credit for residents

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When you take foreign tax credit for residents, it is necessary to attach the following documents to the final tax return, amended return or request for correction (hereinafter referred to as "filing forms"). Moreover, deductible amount as the foreign tax credit is generally limited to the amount entered in the statement of (1) below:

(1) “Detailed Statement for Foreign Tax Credit (for Residents)[外国税額控除に関する明細書(居住者用)(PDF/331KB)]”
(2) Documents to certify the amount of foreign income tax to be imposed
(3) A statement with a description of the following items: the name and the amount of tax imposed by foreign laws, the date on which the tax is to be fixed and the date or scheduled date of payment, the name of the foreign (local) government which impose the foreign income tax, and an explanation that the foreign income tax qualifies for foreign tax credit.
(4)

In case where the foreign income tax is reduced and 6(1) above is applied to, a statement with a description of the following items: the amount of reduction of the foreign income tax, the date of reduction, and an explanation that the reduced income tax has been the basis of the calculation of the amount of tax credit prior to the year of reduction.

(5)

A copy of the tax return which proves that the tax of (3) above is imposed, or alternative documents of taxation, and documents to certify the payment of tax if it has already been paid (such as certificate of tax payment, notice of determination of correction, notice of determination of assessment, notification of tax payment and withholding record).

(6)

Documents with a detailed description with regard to the calculation of the amount of foreign source income.

In addition, if you carry over foreign tax credit when you have credit limit carried over or foreign income tax carried over as mentioned in 5 above, it is required to file "Detailed Statement for Foreign Tax Credit (for Residents)[外国税額控除に関する明細書(居住者用)(PDF/331KB)]" continuously, for every year from the oldest year of carry-over, with a description of the credit limit and foreign income tax to be paid for each year, along with filing forms. It is also required to state the amount to be credited by the carry-over in the filing forms for the year in which the foreign tax credit for residents is carried over, and attach "Detailed Statement for Foreign Tax Credit (for Residents) [外国税額控除に関する明細書(居住者用)(PDF/331KB)]".

The amount of foreign tax credit is generally limited to the amount calculated based on the foreign tax credit and foreign income tax to be paid for each year, which has been entered in "Detailed Statement for Foreign Tax Credit (for Residents)[外国税額控除に関する明細書(居住者用)(PDF/331KB)]" attached to the filing forms for each year.

(Articles 44-3, 95 and 95-2 of the Income Tax Act, Articles 93-2 and 221 through 226-2 of the Order for Enforcement of the Income Tax Act, Articles 41 through 43 of the Ordinance for Enforcement of the Income Tax Act, Articles 95-1 through 95-30, 95-2-1 and 95-2-2 of the Fundamental Directives of Income Tax, Articles 13 and 14 of the Act on Special Measures for Securing Financial Resources Necessary for Reconstruction from the Great East Japan Earthquake, and Article 3 of the Ministerial Ordinance concerning Special Income Tax for Reconstruction)

  1. Consultation service for national tax is available at the Phone Consultation Center, etc. of the Regional Taxation Bureaus. Please take a look at “IF YOU NEED FURTHER INFORMATION, PLEASE CONTACT” and try the phone consultation service.