JITACS - TIPS - Taxes in Japan - Overview of National Individual (Personal) Income Tax (Shotoku Zei) in Japan

Overview of National Individual (Personal) Income Tax (Shotoku Zei) in Japan

Last Update 2012/4/9




Resident:	Resident is an individual who has a Main Residence ( “Jusho” in Japanese, often translated as an Address) in Japan, or an individual who is having a Living Place (“Kyosho”) in Japan for more than 1 year.
		Permanent Resident:	Worldwide Income
		(Other than a Non-Permanent Resident)	Worldwide Income
		Non-Permanent Resident:	Japan Source Income, and Foreign Source income that was paid in Japan or remitted to Japan from abroad
		(a Resident who does not have Japanese Nationality, and the total of years that s/he has a Main Residence or Living Place in Japan is equal to or less than 5 years within the last 10 years. )

Non-Resident:	Other than a Resident		Japan Source Income

As for “Main Residence”, there a lot of disputes including a law case judged by the Supreme Court. Although it was the case of Inheritance / Gift Tax, the Supreme Court judged that a Japanese person did not have the Main Residence in Japan because he had the Main Residence in Hong Kong with the fact the he stayed 2/3 in Hong Kong during his 3.5 years assignment period.

Tax Codes
	Individual Income Tax Law (IITL, sometimes referred to as Income Tax Act, in Japanese Shotoku Zei Ho) and Special Measure Tax Law (SMTL, sometimes referred to as Act on Special Measures Concerning Taxation, in Japanese Sozei Tokubetsu Sochi Ho)
		•A portion of unofficial translations can be found on http://www.japaneselawtranslation.go.jp/law/detail/?id=52&vm=04&re=01.

Filing Due Date
	Tax Return has to be filed by March 15 in the following year. Generally, NO EXTENSIONS are allowed !!

Tax Rate

Resident:

The following Standard Progressive Tax Rate is applied to General Income Pool and some
other pools.

Taxable Income	Tax Rate (2012)	Additional Tax to help Recovery (2013-2037)
Up to JPY 1,950,000	5%	2.1% of Tax Amount calculated will be added additionally
Up to JPY 3,300,000	10%
Up to JPY 6,950,000	20%
Up to JPY 9,000,000	23%
Up to JPY 18,000,000	33%
More than JPY 18,000,000	40%

Non-Resident:

Depends on whether the individual has a PE in Japan or not. If there is a PE in Japan, taxed similarly to Residents. If there is no PE, mostly Flat Tax Rate 20% (2012) or 20.42% (2013 – 2037), or other specific rate is applied. If Tax Rate in the Tax Treaty is different, Tax Treaty overwrites.

Income

All of increases in economic benefits are taxed in Japan, including capital gains and contingent gains under National Individual Income Tax Law. The only exceptions are Inheritance and gift, but they are taxed by National Inheritance Tax and Gift Tax.

There are 3 pools (General Pool, Retirement Pool and Timber Pool) in which above progressive tax rate is applied separately. Additionally, there are some types of income where tax calculations are made separately with the tax rate of 15%, 20% or other rate. Usually, income taxes of separately taxed items are withheld. Additional Tax to help recovery (2.1% of the tax) will be added from 2013 to 2037.


All of economic benefits (=income) are classified into the following 10 types.
1.	Interest Income:	Interest Income and equivalent from certain Financial Institutions. If received from Japanese Financial Institutions, in 2012, 20 % tax (15% National, 5% Local) is withheld, and no more filing is required (separate taxation). Other interests need to be included in the General Income Pool.
2.	Dividend Income:	Income received from Corporations as dividends. If the dividends are from listed corporations and received via Japanese Financial Institutions or under certain cases, in 2012, 10 % tax (7% National, 3% Local) is withheld. In some cases, the taxpayer can select “not to Include in the tax return”, “to include the income in the tax return as the General Pool Income and claim Dividend Credit” or “to be taxed separately with sales gain or loss (certain listed stocks only)”. It is planned that the withholding tax rate will be increased to 20% (15% National, 5% Local) + Recovery Tax in the future.
3.	Real Estate Rent Income:	Income from renting house, land or ship/airplane. Rent income is calculated by deducting expenses from revenue as other business. If there is a loss, the loss might be offset with other income types depending on a situation. Tax Return in blue color can be filed if approved by Tax Office. There are several different tax treatments including Loss Carryover amount depending on the size of the business. The income is included in the General Income Pool.
4.	Business Income:	Income from business other than #3 or #7. Side business is not included in this category but included in #10. If there is a loss, the loss can be offset with other income types. Tax Return in blue color can be filed if approved by Tax Office. The income is included in the General Income Pool.
5.	Salary Income:	Monthly Salary, taxable fringe benefits and bonus are included. Standard Salary Deduction, which is calculated based on the amount received is allowed. If salary is paid from a Japanese corporation including a branch of a foreign corporation, certain amount has to be withheld, and the amount to be withheld depends on the gross taxable salary. At the end of a calendar year, the corporation has to calculate the annual tax based on the amount paid in 1 year. An individual who has salary income only does not have to file a tax return unless s/he receives high salary. The income is included in General Income Pool. In Tax Reform 2012, it was decided that there is a cap amount of Standard Salary Deduction from 2013, and the maximum amount of deduction is 2,450,000 yen.
6.	Retirement Income:	Amount mainly received from the employer at the time of retirement. There is a standard deduction and the amount depends on the number of years of work. The taxable amount is half of the calculated amount except for directors whose service of years are equal to or less than 5 years (from 2013/01/01). There is a pool only for this income type, and the Standard Progressive Tax Rate is applied. Repatriated foreigners might be able to elect this income type. It is planed that certain short term Directors or others cannot use this type in the future.
7.	Timber Sales Income:	Income received by selling certain timber. Because it takes a long time to grow timber, tax burden is mitigated. Timber Sales Income is calculated differently. There is a pool only for this type. Timber Sales Income after deducting expenses is divided by 5, and tax is calculated by applying the Standard Progressive Tax Rate, and the calculated tax amount is multiplied by 5, thus the applied tax is smaller than other income affected by progressive rate.
8.	Sales Income (Capital Gain):	Income received by selling certain assets. Often, referred to as Capital Gain/Loss. Although there are some exceptions, generally, income by selling any assets are taxed in Japan. In the past, most of income from selling assets was included in the General Pool. However, there are a lot of exceptions now, and for instance, income from selling Real Estate or Stocks is taxed separately. In general, the tax rate in 2012 for Real Estate Sales is 20% (National 15%, Local 5%) or 39% (National 30%, Local 9%) depending on the length of the holding period. And in 2012, the tax rate for Stocks Sale is 10% (National 7%, Local 3%) for the listed stocks sold using a Japanese Financial Institution (to be increased in the future to 20% + Recovery Tax) and 20 % (National 15%, Local 5%) for the other Stocks Sale. For Separately Taxed items, no offset against other income types are allowed.
9.	Windfall Income:	Income received from certain insurances, horse racing, gift by a corporation, prizes, etc. JPY 500,000 is deducted from this income. Only half of the amount is included in the General Income Pool. Even if there is a loss, offsets with other income type cannot be made.
10.	Miscellaneous Income:	Any other income described above. If there is a loss, no offsets with other income type can be made. Included in General Income Pool.

Taxable Unit
	In some jurisdictions, a tax return to aggregate family member income or spouse income is allowed, but not in Japan. If both of a married couple has income, generally, each of them is taxed separately.


In addition to the deductions calculated in each income type, the Resident taxpayer can deduct the following items if applicable. Non-Resident can deduct #1, #7, #13 only with some limitations.
1.	Miscellaneous Loss:	Certain loss incurred by a theft, disaster or defalcation.
2.	Medical Expenses:	Certain medical expenses.
3.	Social Insurance:	Certain payments for public insurance.
4.	Retirement Fund:	Contributions to certain Retirement Income Fund including Japanese 401k.
5.	Life Insurance:	Certain payments for Life Insurance.
6.	Earthquake Insurance:	Certain payments for Earthquake Insurance.
7.	Charitable Contribution:	Certain payments for Charitable Contribution.
8.	Disabled:	JPY 270,000, 400,000 or 750,000 per a certain disabled person.
9.	Widow:	JPY 270,000 or 350,000 per a certain widow.
10.	Working Student:	JPY 270,000 for a certain working student.
11.	Spouse:	JPY 380,000 or 480,000 for a certain spouse. Applies to a legally married spouse only. In addition to the regular spouse deduction, additional deduction might be available depending on the taxpayer’s annual income and the spouse annual income.
12.	Dependent:	JPY 380,000 to 630,000 per a certain dependent, usually children or parents. For dependents under age 16, no deductions are allowed from the 2011 (Heisei 23) Tax Reform. It is considered that dependents who live abroad are also eligible for this deduction, but some supporting documents will be needed.
13.	Basic:	JPY 380,000 for the taxpayer.

Japan Source Income
	Under Individual Income Tax law, the following items are considered as Japan Source. Tax Treaties might stipulate otherwise, and if there are any discrepancies, Tax Treaty overwrites.
	1.	Income from Business operated in Japan or Income generated by Keeping/Managing/Selling Assets located in Japan.
	2.	Certain income in Japan allocated from a business generated by a Civil Law Partnership (Nin-I Kumiai, NK) or other similar organization.
	3.	Income from sale of land, rights on land, building, equipments attached to building or structures in Japan.
	4.	Income generated by a person whose business is to dispatch certain personal services to others in Japan. Personal services include services conducted by an actor, actress, musician, professional athlete, or services by a person who has professional knowledge/skills in science technology , business management , etc. This is an income by a service dispatcher, not by a person who conducts personal services (see #10).
	5.	Income from renting real estate or rights on real estates/certain rights in Japan, or renting a ship or an airplane to a resident or a domestic corporation.
	6.	Interest income from Japanese Government Bonds, Municipal Government Bonds, bonds issued by domestic corporations, certain bonds issued by foreign corporations after 2008 May where the bonds were used for a business in Japan through its Permanent Establishment in Japan, bank accounts deposited into business offices in Japan.
	7.	Dividends from domestic corporations, investment funds entrusted to a business office in Japan.
	8.	Interest income from a loan lent to a person who does business in Japan and related to the business in Japan.
	9.	Royalties of industrial property rights etc. received from a person who performs business in Japan, sale of industrial property rights etc., lease/rental payments for machines/equipments related to business in Japan. Payments for translation falls into this category.
	10.	Salaries, wages, bonuses, retirement payments, paid for the work in Japan, remunerations for personal services in Japan, public pension, etc. If the individual who receives these income is a Director under National Corporate Income Tax Law, income derived from activities in foreign countries are also considered as a Japan Source.
	11.	Prizes to advertize a business performed in Japan.
	12.	Certain pension agreement entered into via a business office located in Japan.
	13.	Interest equivalent of certain Periodic Deposits deposited with a business office located in Japan.
	14.	Allocation of profit from an investment in Tokumei Kumiai (TK, silent partnership) which performs business in Japan.

Major items to be considered for Expats
	Place of Salary Payment and withholding tax
		Some corporations might have arrangements so that monthly salaries are paid from overseas entity different from a Japanese subsidiary. In this case, in general, there is no obligation for the Japanese corporation to withhold national individual income taxes for expats. However, for instance, if the Japanese corporation is the lessee of the housing, this means that the Japanese corporation gives economic benefits to the expat directly (=pays salary directly) and the Japanese corporation is liable to withhold taxes. When fringe benefits were deemed to have been paid by the Japanese subsidiary, Taxes Gross-up (National and / or Local) might be needed depending on the agreement with the Expat.
	Housing
		Generally, in Japan, Housing arrangements for its employees have some tax merits for the employees. If the housing lease agreement is entered into between the landlord and the corporation, the amount needs to be added to the taxable income of the employee is much smaller than the actual rent amount. Housing to its directors are treated similarly in general, but the amount of benefit to be included in the taxable income differs depending on the square meters of the housing including commonly used area and other elements, except for a gorgeous housing.
	Home Leave
		Generally, in Japan, Home Leave expenses are not taxable to the expats if reasonable. Home Leave means to go back to the home country once per year with family by using corporation’s expense. In order to be non-taxable to the expat, the amount has to be reasonable, and the route has to be economical. The non-taxable Home Leave treatment is allowed only to expats hired abroad, and local hired cannot use this benefit.
	School / Contribution Program
		When a corporation pays tuition for family of employee, usually, the tuition is treated as a fringe benefit and taxable to the individual. However, for now, some international schools offer “Corporate Contribution Program”. Under this scheme, although it could be controversial, the payments to the school are treated as Contribution expenses that have a ceiling to be a deducible amount, and it is considered that there is no taxable amount for the individual. It will be important that the corporation perceives this payment as a contribution to the school.
	Commuting Expenses
		In general, reasonable and economical commuting expenses are non-taxable in Japan.
	Payments to Directors or Pay Increase of Directors
		Payment to Directors, including fringe benefits, or Pay Increase of Directors need special attentions from National Corporate Income Tax Law point of view. Generally, any payments including Fringe Benefits to Directors that are not Fixed-Term-Fixed-Amount are not deductible under Corporate Income Tax Law, and this may impact Effective Tax Rate of the corporation. Additionally, in general, Pay increase of Directors should occur within 3 months (usually Annual General Shareholders’ Meeting are held within 3 months, and the salary of Directors is determined at the meeting ) after a new fiscal year begins to be deductible for the Corporate Income Tax Law purpose.
	Bonus Payments After Repatriation
		Generally, a portion of bonus payments after repatriation attributable to work in Japan is taxable in Japan as an income of Non-Resident. If the office in Japan is not a subsidiary but a branch, the branch will have a tax withholding responsibility even if such bonus is paid by the Head Office or other branch.
	Local Individual Taxes
		Generally, local Individual Taxes are levied when an individual has a residence in Japan on January 1st , and taxable amounts depend on the income of the previous year. If a resident individual stays in Japan for only 1 day on January 1st, the person is liable for a full year tax, and there is no pro rata calculation, therefore it will be important to plan when to repatriate.
	Inheritance Tax
		If an expat is a resident in Japan, it is possible that the person is liable for Inheritance tax or gift tax, depending on the amount of inheritance or gift. In Japan, the person who receives inheritance or gift is liable for inheritance tax or gift tax.
	Stock Options
		Generally, Stock Option is taxed as a salary income when exercised, even if no cash is received. This also applies to stock options granted by a foreign parent corporation. Because Stock Options are generally taxed as a salary income, a higher tax rate than that of stock sale might apply. Generally, if a Non-Permanent Resident (NPR) exercises stock options, Japan Source portion only is taxed in Japan. However, if s/he remits the money exceeding Japan portion to Japan, the whole remitted amount is taxed in Japan. If a person who worked as an expat in Japan goes back to home country and exercise stock option, the person is liable for the tax for the Japan Source portion with tax rate of 20% as a Non-Resident. If the office in Japan is a branch, the branch has a tax withholding responsibility.
		“Tax Free Stock Option at the time of Exercise” system exists in Japan, but there are a lot of restrictions, and applying this to a subsidiary of a foreign corporation might be essentially impossible.

Tax Credits
	There are several tax credits allowed to individuals in Japan. The most important tax credit for an expat will be foreign tax credit. If there is some income that is taxed by both Japan and other country, international double taxation exists. Foreign Tax Credit might be available to mitigate this tax burden under some restrictions.

Stock Options granted by foreign corporation
	In the past, there was no need for a Japanese subsidiary or a branch to report stock options granted to employees or directors in Japan. However, by the Tax Reform 2012, it was decided that the Japanese subsidiary or the Japanese branch has to report stock options or similar arrangements to the Tax Authority.

Reporting of Assets in Foreign Countries
	Residents who has assets in foreign countries has to report these assets if the total value of assets is more than 50 million yen. This reporting requirement will be effective from 2014. There is a penalty if not filed on time. The penalty is imprisonment of one year (maximum) or fine of 500,000 yen (from 2015).

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Prepared by JITACS. All rights reserved. This document contains overview only. Please contact your Tax Consultants for the details. JITACS is not responsible for accuracy of the contents nor is not liable for any damages caused.