Tax in Japan

In Japan, the tax liability of individuals is determined by their residence status.

Permanent residents are subject to income tax on their worldwide income, regardless of source. Non-permanent residents are subject to tax on income earned in Japan plus any non-Japan source income that is paid in or remitted to Japan. Non-residents are subject to tax on their Japanese-source income only.

Individual taxpayers are classified into the following three categories:

• a permanent resident is an individual who is a Japanese national or has been present in Japan for at least 5 years within the past 10 years
• a non-permanent resident is an individual of non-Japanese nationality who has not resided or maintained their domicile in Japan for 5 years or more within the past 10 years
• a non-resident is an individual who does not meet the requirements for qualification as a permanent resident or a non-permanent resident

Foreign nationals arriving in Japan are considered to have established residence in Japan, unless employment contracts or other documents clearly indicate that they will stay in Japan for less than one year.

Employment income and deductions - Employment income includes salaries, wages, directors’ fees, bonuses and other compensation of a similar nature. Benefits in kind provided by the employer, including the private use of an employer-provided automobile, tuition for dependent children, private medical insurance premiums and private pension contributions, are included in employment income. However, certain employer-paid benefits, including moving expenses and home-leave expenses, are excluded from taxable income.

Taxable employment income equals gross receipts minus an employment income deduction, which is progressive. The maximum amount of such deduction is ¥1,950,000 for income exceeding ¥8.5 million.

Self-employment and business income - Taxable income consists of gross receipts, minus reasonable and necessary expenses incurred in connection with the business.

Certain advantages are available to individual taxpayers filing a ‘blue form’ tax return if they meet the necessary bookkeeping requirements.

Investment income - Dividends from unlisted shares and dividends received by shareholders who own 3% or more of listed shares are included in taxable income and taxed at progressive rates. Dividends from listed shares are taxed at a flat rate of 20% (15% national tax plus 5% local inhabitant tax). For dividends from listed shares that are received through a Japanese paying agent (securities company or trust company in Japan), a withholding tax is deducted by the Japanese paying agent. A taxpayer does not need to report the dividends as income on the tax return if the dividends are from listed shares and are received through a Japanese paying agent.

Interest on public bonds, corporate debentures and deposits paid in Japan is generally taxed separately from other income and is subject to a 15% withholding tax (plus a 5% local withholding tax) at source. Interest from ‘specified bonds’ is taxed separately from other income through a tax return if received through a paying agent outside Japan. ‘Specified bonds’ include, but are not limited to, Japan government bonds, local government bonds, foreign government bonds, listed or publicly offered corporate bonds, and bonds issued on or before 31 December 2015.

Interest from deposits and ‘general bonds’ is taxed at progressive rates through a tax return if received through a paying agent outside Japan. ‘General bonds’ are bonds that are not specified bonds, such as privately placed bonds.

Directors’ fees - Directors’ fees paid by a Japanese corporation to non-residents are considered Japanese-source income and are subject to tax in Japan, even if the services are performed outside Japan.

Capital gains derived from the sale of shares are generally taxed at 20% (15% national tax plus 5% local inhabitant tax).

Losses from the sale of listed shares and specified bonds can offset gains from the sale listed of shares and specified bonds. In addition, losses from the sale of listed shares and specified bonds through a securities company or bank in Japan may offset dividend income from listed shares and interest from specified bonds.

The net loss remaining after using all available losses to reduce dividend income from listed shares and interest from specified bonds may be carried forward for three years by a taxpayer filing a tax return. Losses from the sale of unlisted shares and general bonds can only offset gains from the sale of unlisted shares and general bonds.

Capital gains derived from the sale of land and buildings are taxed separately from other income and at different rates. Gains from the sale of land and buildings held for no longer than five years are considered short-term, and gains from the sale of similar assets held for longer than five years are treated as long-term gains. Long-term gains are defined as income from the transfer of land and buildings that have been owned for more than five years as of 1 January of the year of transfer.

Short-term gains are taxed at a rate of 30%, plus a 9% inhabitant tax on taxable gains. Long-term gains are taxed at a rate of 15%, plus a 5% inhabitant tax on taxable gains.

Inheritance tax is levied on heirs and legatees who acquire properties by inheritance or bequest. As the determination of taxability is a complicated issue, professional advice should be sought. Gifts made within three years before death are treated as inherited property and are included in taxable property for purposes of inheritance tax. Certain exemptions and allowances are permitted in the computation of total net taxable property.  A basic exemption of ¥30 million, plus ¥6 million multiplied by the number of statutory heirs, is deductible from taxable properties. The inheritance tax is calculated separately for each statutory heir. The aggregate of the calculated tax is then prorated to those who actually receive the property.

Inheritance tax rates range from 10% to 55%, with a 20% surtax on transfers to heirs, other than the spouse, parents and children of the decedent.

Japan has entered into an estate tax treaty with the United States.

Gift tax is levied on individuals receiving gifts from other individuals. As the determination of taxability is a complicated issue, professional advice should be sought.

Gift tax rates range from 10% to 55%.

Social security programmes in Japan include health insurance, nursing care insurance (for employees 40 to 64 years of age), welfare pension insurance, unemployment insurance and workers’ accident compensation insurance. The rates described below are the applicable rates as of 1 May 2020.

The premium for health insurance is 9.87% of monthly remuneration and bonus, up to a maximum premium of ¥139,193 (bonus ceiling of ¥565,551 per year). The premium for nursing care insurance is 1.79% of monthly remuneration and bonus, up to a maximum premium of ¥24,881 (bonus ceiling of ¥102,567 per year). For welfare pensions, the premium is 18.3% of monthly remuneration and bonus, up to a maximum premium of ¥113,460 (bonus ceiling of ¥274,500 per month). Costs are borne equally by employers and employees for the types of insurance mentioned in this paragraph.

The premium for unemployment insurance is 0.9%, of which 0.6% is borne by the employer and 0.3% by the employee. The premium for workers’ accident compensation insurance is borne entirely by the employer at a rate of 0.3% of total compensation paid to employees (for general office workers).

Individual income taxation in Japan is based on the principle of self-assessment. In general, taxpayers must file tax returns to declare income and deductions and to pay the tax due. However, national income tax liability of individuals compensated in yen at gross annual amounts not exceeding ¥20 million is settled through employer withholding if income other than employment income does not exceed ¥200,000. If tax is withheld from payments to non-residents and if the amount withheld satisfies the Japanese tax liability, the non-residents need not file income tax returns.

For those taxpayers who filed tax returns for the preceding year and who reported tax liabilities of ¥150,000 or more after the deduction of withholding tax, prepayments of income tax for the current year are due on 31 July and 30 November.

A foreign tax credit is allowed, with limitations, for foreign income taxes paid by a resident taxpayer if the income is taxed by both Japan and another country. The credit is generally limited to the lesser of foreign income tax paid or the Japanese tax payable on the foreign-source income. If the foreign tax paid exceeds the limit, the excess may be carried forward for three years. A taxpayer may elect to deduct foreign tax from taxable income under certain conditions.

If a non-resident is resident in a country with which Japan has entered into a tax treaty, income may be either exempt from tax or subject to a lower tax rate. Japan has entered into double tax treaties with 86 countries.