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Overview of Tax Issues for Expats in Japan

Submitted: March 2014

The Japanese tax year runs from 1 April to 31 March.

Tax Residence

Generally you will be considered resident (non-permanent) in Japan if you stay for longer than one year. However you can become resident on arrival if the nature of your proposed employment means that you will be present in Japan for longer than a year. As a resident you will be liable for tax on your worldwide earnings. For more details, see: Taxation - Employment Taxation for Expats in Japan. Tax treaties also have a definition of residence; this can override the definition above with regard to certain kinds of income, and mean that you can achieve residency after 183 days. To become a permanent resident, you must stay in Japan for more than five years.

Employment/Business Taxes

Withholding tax on employment income is generally deducted by your employer each time you are paid. For residents, this should be the actual amount of tax due, For non-residents a withholding tax is generally deducted at a rate of 20.42%. These withholding taxes act as a tax credit against your final tax bill for the year. Income tax is charged at progressive rates, with a maximum rate of 40.84%.

You may have to complete a tax return after the end of the year to calculate the final amount of tax payable. If you are self-employed, you will pay income tax based on the profits of your business after deduction of costs. For more details, see: Taxation - Employment Taxation for Expats in Japan.

If you come to Japan to set up in business and start a company, you will be liable to corporate income tax on the profits from your trade or business. The general rate of corporate income tax is 28.05%. There is a lower tax rate of 16.5% for qualifying small business corporations. Corporate capital gains, other than gains on certain types of property, are also taxed as ordinary income. Companies must complete a complex company registration process. Companies must generally pay provisional corporate tax once a year. After the end of the year, a final tax return must be filed within 2 months, together with the tax due. For more details, see: Taxation - Business Taxation for Expats in Japan.

Other taxes

For residents in Japan, investment income, in the form of rental income, is taxed as ordinary income. Dividend and interest income is subject to a withholding tax of 20.315%. Capital gains on real property and other assets are taxed at a rate of 39.63% for short term taxable gains, and 20.315% for long term gains.

For non-residents, interest income is subject to a withholding tax of 20.315% or 15.315% depending on the source. Dividend and rental income is generally subject to a withholding tax of 20.315%. For more details, see: Taxation - Investment Taxation for Expats in Japan.

Tax treaties

Japan has signed tax treaties with more than 60 countries worldwide. Any withholding taxes payable in Japan on interest, dividends or royalties, paid to persons in other countries with tax treaties in place, can be reduced. The treaties also mean that the amount of withholding tax charged by the originating country on money flowing into Japan is reduced. The amount that can be charged under a treaty is generally reduced to 10%. For more details, see: Taxation – Tax Treaty Considerations for Expats in Japan.

 

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