Japanese tax reform impacts expats and allowable deductions

On 12 December 2019, the Japanese government announced tax changes for 2020 including a provision that will affect internationally mobile employees.

While not coming into effect for a number years until 1 January 2024, overseas family members will not be eligible to claim as tax dependents for the purposes of an income tax deduction.

Key changes

Effective 1 January 2024, family members aged between 30 and 69 living outside Japan who are tax non-resident in Japan cannot be claimed as tax dependents for income deduction purposes unless they meet one of the following conditions:

1. Have become a tax non-resident of Japan to pursue studies outside Japan
2. Suffers from a disability
3. Receive JPY 380,000 or more of financial support per year from the taxpayer towards their living and education expenses.

In addition, in order to substantiate a claim for the above, the tax authorities have advised following documents must be attached to an individual’s tax return substantiate the requirements.

• A copy of student visa issued by the foreign government to evidence condition 1 above.
• A copy of international wiring documents to evidence condition 3 above.

The changes will mean a loss of a deduction currently worth JPY380,000 per year (approximately USD3,465). No details have been released yet as to how to evidence the second point as being met, or circumstances where a foreign visa may not be required. Further guidance on this change is expected in due course.

For businesses with internationally mobile employees working in Japan or overseas who may be impacted, certain employees may see their tax burden increase in addition to further compliance administration to be compliant. For larger tax equalised assignee populations, the tax cost borne by the company may similarly see costs increase though there is plenty of time to plan and identify which employees may be affected.

Get in touch

If you would like to discuss the full implications of these changes, please contact Tosh Kamii, Grant Thornton Japan or your local Grant Thornton office.

Read more insights on tax changes affecting internationally mobile employees.