Global expatriate tax guide

Expatriate tax - Japan

Japan 120x120.png

Employees on an international assignment to Japan will be subject to comprehensive tax rules, social security registration obligations and employment visa requirements. Grant Thornton Japan’s Global Mobility Services team helps international assignees and their employers to navigate Japanese tax, social security, and employment visa matters.

In particular, Grant Thornton Japan, can help international assignees and their employers to identify Japanese tax planning opportunities, review tax equalization policies; as well as provide compliance services for Japanese tax filing requirements.

Click on each of the areas below to expand for more information:

Facts and figures
Pre arrival procedures

It is important that the international assignee’s assignment letter and benefits package are structured in a tax-efficient manner before entering Japan.

Employment visas

To quicken the visa process, prior to submitting their visa application, the employer or sponsor should in advance obtain a certificate of eligibility to enter Japan from the Immigration Bureau.

Additionally, if an international assignee’s spouse and/or dependents relocate to Japan they will require dependent visas. If the international assignee’s spouse also intends to work in Japan, they must obtain the appropriate visa.

Tax year

The tax year in Japan for individual taxpayers is from 1 January to 31 December.

Tax returns and compliance

Tax returns must be filed and payments must be made by 15 March the following year (if 15 March falls on a weekend or a holiday, then the following business day). Extensions are not available.

Income tax rates

The following progressive income tax rates apply to the annual taxable income:

  • 1 – 1,950,000 : 5%
  • 1,950,000 and up to 3,300,000: 10%
  • 3,300,000 and up to 6,950,000: 20%
  • 6,950,000 and up to 9,000,000: 23%
  • 9,000,000 and up to 18,000,000: 33%
  • 18,000,000 and up to 40,000,000: 40%
  • above 40,000,000: 45%
Special income tax for reconstruction

In addition to the above National Income Tax, a surtax to fund the reconstruction of Japan’s northeast region which was devastated by the 11 March, 2011 earthquake and tsunami will be imposed at 2.1% on the National Income Tax amount calculated by the above table from 2013 to 2037. The per capita levy of Local Inhabitant Tax will be also increased by JPY 1,000 from 2013 to 2022.

Local inhabitant tax rate

In addition to National Income Tax, Japan’s Local Inhabitant Tax for a given tax year is levied on individuals who reside in Japan as of January 1 of the following year. The tax rate is a flat 10% of the taxable income amount as reported on the tax return. Per capita levy of JPY 5,000 is also imposed.

Sample income tax calculation

 

Income Year 2019 in ¥ Year 2020 in ¥
Employment earnings before 28,592,111 28,592,111
Deduction    
Standard deduction (2,200,000) (2,200,000)
Employment income 26,392,111 26,392,111
Total taxable income 26,392,111 26,392,111
Deductions    
Spouse deduction 0 0
Dependent deduction 380,000 380,000
Basic deduction 380,000 0
Total deduction from income 760,000 380,000
Net taxable income 25,632,000 26,012,000
National Income Tax due 7,456,800 7,608,800
Local Inhabitant Tax due 2,563,200 2,601,200
Reporting requirement for overseas assets

A permanent resident of Japan will be required to submit a report of overseas assets to the tax office by 15 March every year (or the next business day if 15 March falls on a weekend or a holiday) if such assets are worth over JPY50M on the last day of the previous year. Those who do not file or file a false report may face imprisonment of up to one year. Further, if reporting is not done and income generated from overseas assets is not reported on the tax return, a 5% penalty is assessed on the non-reported income.

Basis of taxation
Charge to tax

The international assignee’s tax residency status will determine how much of that individual’s income is subject to Japan’s income tax. A permanent resident, generally an individual who has lived in Japan for five or more of the past ten years, is subject to income tax at marginal rates on worldwide income. A non-permanent resident is subject to income tax at marginal rates on all Japanese source income, and on any foreign source income brought, paid, or remitted into Japan. A non-resident is taxed on Japanese source income and any income effectively connected with a permanent establishment in Japan.

Residence

In Japan, all individuals fall within one of the following three categories of taxpayers: non-resident, non-permanent resident, or permanent resident.

A resident is any individual who has a domicile in Japan, has maintained a residence continuously in Japan for one year or more, or intends to reside in Japan for one year or more as evidenced by an international assignment letter or the expected assignment duration in Japan based on the nature of the work. Otherwise, the individual is generally considered a non-resident.

A permanent resident taxpayer is a resident who is either (a) a Japanese national, or (b) a foreign national who has lived in Japan for more than five of the previous ten years. A resident foreign national who has not lived in Japan for more than five of the past ten years is considered a non-permanent resident.

Income from employment

Salary paid by an employer based on services performed in Japan is considered Japanese source income, even if the salary is paid abroad. Therefore, non-residents are also subject to Japanese income tax on this type of salary and will generally have an obligation to file a tax return.

Bonuses paid in cash should be declared as employment income as of the date received. Most fringe benefits are treated as compensation and included in taxable income. Fringe benefits paid by a Japanese corporation or a branch or office in Japan are subject to withholding income tax at the source. Fringe benefits paid by a foreign corporation or office are generally out of the scope of the withholding obligation and therefore must be declared on the tax return.

Source of employment

Japanese income tax arises on employment income derived from duties performed in Japan. Tax is assessed on all employment income, including all salaries and wages, bonuses, overtime pay, gratuities, stock awards, and benefits.

Employment income deduction cap

Currently employees earning over JPY 10 million are entitled to a capped deduction from income equal to JPY 2,200,000.

Benefits (in kind)

Generally, benefits in kind or allowances paid to the employee for tax, utility expenses, medical expenses, car expenses, etc., are treated the same as salary income. However, Japan’s income tax law specifies beneficial tax treatment, provided certain conditions are met, of the following benefits: residential accommodations, school fees, loans to employees or directors, language lessons, and insurance costs. With respect to these benefits, properly structured international assignment letters can result in significant tax savings.

Taxation of retirement income

Certain payments received upon leaving an employer are treated as ‘retirement income’ and are taxed separately from bonuses and normal employment income. The taxation of retirement income is as follows:

Taxable income = (retirement income received – retirement income deduction) x 50%

The retirement income deduction is JPY 400,000 for each year of service up to 20 years and JPY 700,000 for each year of service over 20 years. This income is then taxed at progressive rates separately from other income.

However, directors who have fewer than five years of service will not receive the 50% reduction and the income will be calculated as:

Taxable income = (retirement income received – retirement income deduction)

Expatriate concessions

There are no specific tax concessions for expatriates; however, the correct structuring of housing and other benefits as part of a compensation package can result in significant tax savings.

Relief for foreign taxes

Where the same income has been subject to tax in both Japan and a foreign jurisdiction, relief from double taxation may be available. In certain cases, Japan’s domestic law allows a foreign tax credit only if the taxpayer is a tax resident of Japan both when the foreign source income was earned and when the foreign tax on the income was paid.

Deductions from taxable income

In addition to a personal deduction amount of JPY 480,000 which will be phased out for individuals with a total income exceeding JPY 24M effective 1 January 2020, income deductions may be available to individuals for the following:

  • casualty loss (due to disasters or theft)
  • medical expenses exceeding JPY 100,000 in a calendar year (including those paid outside Japan) or self-medication expenses exceeding JPY 12,000 for preventive purposes
  • donations above JPY 2,000 to qualified charities in Japan
  • life insurance premiums paid in Japan
  • earthquake insurance premiums paid in Japan
  • Japan’s social security contributions
  • contributions towards defined contribution retirement plans and other mutual aid plans
  • suffering from disability
  • being a widow or a widower
  • being a working student
  • spousal deduction
  • dependent deduction (for dependents 16 years old).
Other taxes
Capital gains tax

Gains on sales of stocks and real property are taxed separately from other income. As noted below, taxpayers who are residents of Japan for tax purposes are subject to a slightly higher rate due to the Local Inhabitant Tax component.

Capital gains on real property held for more than five years as of 1 January of the year of the sale are taxed at the long term rate of 20% (15% National Income Tax, 5% Local Inhabitant Tax). Gains on real property held for a shorter period are taxed at 39% (30% National Income Tax, 9% Local Inhabitant Tax). Additional 2.1% surtax will be applied on the amount of National Income Tax.

Capital losses from the sale of real property can be deducted only from capital gains on real property. Capital losses on the taxpayer’s principal residence can be carried forward three years. Otherwise, there is generally no carry forward of capital losses on real property for individuals.

Taxation of capital gains from the sale of foreign listed shares

The tax rate on capital gains from the sale of shares is 20% (15% National Income Tax, 5% Local Income Tax). Additional 2.1% surtax will be applied on the amount of National Income Tax

Capital loss from the sale of listed shares

A capital loss from the sale of listed shares can be offset against capital gains from the sale of listed shares in the same calendar year. If after offsetting a capital loss still remains, it generally cannot be offset against any other types of income. For example, you are not allowed to offset a capital loss on the sale of listed shares from salary income. However, if the loss contains a capital loss from the sale of listed shares sold through a securities company registered in Japan, this portion can be deducted from dividend income paid by listed companies if the ‘Separate Taxation System’ on dividends has been selected.

Carry forward of capital loss from the sale of listed shares

If a capital loss from the sale of listed shares through a securities company registered in Japan remains after making the offset mentioned in the previous paragraph, this excess loss can be carried forward to the following three years by filing a tax return. The carried forward loss will be deducted from capital gains arising from the sale of shares and dividend income paid by listed companies for the next three years. Please note that you need to file a tax return every year in order to apply this carry forward, even if you have no obligation to do so.

Inheritance, estate and gift taxes

Japan’s inheritance tax (IHT) is based on the residence status of the beneficiary and/or the location of the assets inherited. Beneficiaries domiciled in Japan are subject to IHT on the property they receive, while beneficiaries not domiciled in Japan are only subject to IHT on assets inherited that are located in Japan. IHT is levied at progressive rates on the fair market value of the property inherited, less related expenses. Further deductions are allowed, depending on the status of the heir. Also, there are certain exemptions that are available to short term international assignees depending on their visa status. A specific spousal allowance is also available. The net value of the inheritance is taxed as follows:

Taxable amount after exemptions Tax rate Deduction ¥
10million or less 10%  -
30million or less 15% 500,000
50million or less 20% 2,000,000
100million or less 30% 7,000,000
200million or less 40% 17,000,000
300million or less 45$ 27,000,000
600million or less 50% 42,000,000
More than 600million 55% 72,000,000
Investment income

A person who receives investment income in the form of interest, dividends, or royalties, is subject to withholding income tax at the source if it is paid in Japan. Applicable tax rates differ depending on the tax residency status of the recipient, or the existence of a tax treaty between Japan and the investor’s home jurisdiction. Generally, a tax rate of 20% applies unless a more beneficial tax rate is available under an applicable tax treaty.

Real estate tax

Fixed asset tax and city planning tax are levied by municipalities on land, buildings, and other depreciable property located in the municipality. The annual tax rates are respectively 1.4 and 0.3% of the assessed value of fixed assets.

Social security taxes

An employer (either a corporate entity, Japanese branch of a foreign corporation or a sole proprietorship with five or more employees) with a Japanese payroll is required to join Japan’s social security plan, which is comprised of insurance components for health (and nursing care for employees who are age 40 and above), welfare pension, employment, and workers’ accident compensation. Both the employer and employee are required to contribute except for workers’ accident compensation insurance which is contributed fully by the employer. Withholding rates for employees (employers) are, approximately, as follows:

Health insurance = 4.45% (4.45%)
Welfare pension insurance = 9.15% (9.15%)
Nursing care insurance (aged 40~65) = 0.865% (0.865%)
Employment insurance = 0.30% (0.60%)
Workers’ accident compensation insurance = N/A (0.3%)

 

 

Stock options

If the period of an international assignee’s assignment to Japan falls between the grant and exercise dates of a stock option, this may create Japanese tax liabilities.

Non-qualified stock options are taxed as regular salary income at the date of exercise on the difference between the exercise price and the fair market value of the stock at exercise. Tax on capital gains from the sale of the stock will be levied on the difference between sales proceeds and the fair market value at exercise.

Qualified stock options (generally applicable to stock of Japanese companies) are taxable only upon sale, with capital gain tax being levied on the difference between sales proceed and exercise price.

Restricted stock units

Vested restricted stock units (RSUs) with a vesting period that coincides with an international assignment to Japan may give rise to Japanese tax liabilities.

RSUs are taxed as regular salary income based on the fair market value of the underlying stock at the date of vesting. Tax on capital gain made upon the sale of the stock will be levied on the difference between sales proceeds and the fair market value at the date of vesting.

Employee Stock Purchase Plans

The purchase of employer’s stock at a discount from market price under an Employee Stock Purchase Plan (ESPP) may be subject to tax in Japan at the time of purchase. Tax on capital gain made upon the sale of the stock will be levied on the difference between sales proceeds and the fair market price at the time of purchase.

Wealth tax

There is no wealth tax in Japan.

Other specific taxes

Permanent residents in Japan are taxed on their worldwide income. Non-permanent residents are taxed on their Japanese source income in addition to any foreign source income remitted (or brought or paid) into Japan. This means that for non-permanent resident taxpayers, cash remitted into Japan may be taxed at Japan’s marginal income tax rates if the taxpayer has any foreign source income in the same calendar year. Taxpayers with income from non-Japanese sources should be aware of the tax implications when remitting any funds into the country.

Tax planning opportunities

An offshore compensation package is an important tax planning tool for non-permanent resident taxpayers who spend part of the year on work assignments outside of Japan. Having a salary paid offshore allows the non-permanent taxpayer to exclude the income related to the periods spent abroad on business from Japanese tax.

However, Japan’s income tax law allows for beneficial tax treatment of certain benefits provided that certain conditions are met.

Thus, an employment agreement that is properly structured with respect to benefits in kind, such as residential accommodation or children’s school fees, can result in significant tax savings.

Other issues that should be considered are the tax implications of offshore or onshore compensation arrangements, the timing of compensation benefits and taxes, and special issues related to directors or senior officers, foreign entertainers, and athletes.

Grant Thornton Japan’s Global Mobility Services team can advise international assignees and their employers on these and related opportunities.

For further information on expatriate tax services in Japan please contact:

Tosh Kamii
E tosh.kamii@jp.gt.com

Takehiko Hara
E takehiko.hara@jp.gt.com

Nicole Baxter
E nicole.baxter@jp.gt.com