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Tax Treaty Considerations for Expats in Japan

Submitted: March 2014

Tax treaties exist to protect taxpayers from being taxed twice on certain money flows between two countries. Treaties are particularly important if you have investments outside Japan, and intend bring money earned from them into Japan during your stay. They also apply if you build up some investments in Japan during your stay, and intend to leave them there after you have left Japan. Japan has a network of tax treaties in force with over 60 countries worldwide.

Most tax treaties will conform to the OECD Model Treaty and typically will state how the various forms of income are taxed. It will state whether the specific income is only taxed in Japan; only taxed in your home country, or taxed in both countries. It may also state what rate of tax is applicable in different cases. The treaty will also contain a definition of residence only for the purposes of the treaty; this is not the same as the definition of tax-residence in tax law. The types of income covered by a treaty may include:

It is important to recognise that a tax treaty operates on money flows both into and out of the treaty countries.

The withholding tax rate in Japan on dividends sent to a country without a tax treaty is 15.315% for listed stock dividends, and 20.42% for all others (both rates include surtax); if sent to a country with a tax treaty the rate can generally be reduced to 10% in cases, but only in cases where the foreign receiver is a company owning a significant percentage of the Japanese company’s voting rights or capital.

The withholding tax rate in Japan on interest sent to a country without a tax treaty is 15.315% (including surtax), if sent to a country with a tax treaty the rate is generally reduced to 10%.

The withholding tax rate in Japan on royalties sent to a country without a tax treaty is 20.42% (including surtax), if sent to a country with a tax treaty they are generally reduced to 10%.

Japan’s tax treaties with other countries generally restrict the amount of withholding tax those countries can charge Japanese residents to 15% on dividends and 10% on interest and royalties.

For the complete rules and rates it is necessary to read the treaty itself. A list of Japanese treaties in force can be found here. You may need to search your own country’s government website to access the actual treaty in your own language. The sections dealing with dividends, interest and royalties can usually be found half way through the treaty document.

Prior to arriving in Japan you may be able to arrange your existing investments so that the maximum advantage is gained from the terms of any treaty. This may involve moving investments from one non-Japanese country to one with a more favourable tax treaty, or even to Japan itself, to reduce the tax rate paid.

If your home country has a generally higher rate of tax than Japan, you may benefit by becoming tax-resident in Japan as early as possible. At the end of your stay in Japan you can also rearrange your affairs to ensure that any ongoing income from Japanese employment or investments is also taxed at the lowest rate possible in the future.

 

 




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