Japan Tax Guide

Last updated May 2024

Individuals

A. Classification of the residential status of a taxpayer in Japan

1. Residents - If you've lived in Japan continuously for a year or more, whether you have a "JUSHO" (domicile) or a "KYOSHO" (residence), you're considered a resident.

1. Permanent Residents:

1. Japanese Nationals: All Japanese nationals who are residents are considered permanent residents.
2. Foreign Nationals: If you're a foreigner and you've lived in Japan for more than five years in total during the past ten years, you're classified as a permanent resident. This classification is independent of your visa status.

2. Non-Permanent Residents:

1. If you're a foreign national and you've lived in Japan for five years or less in total during the past ten years, you're considered a non-permanent resident.

2. Non-Residents - Anyone who doesn't fit into the "Residents" category above is considered a non-resident.

B. Scope of taxable income in Japan

1. Permanent Resident Taxpayers - You're taxed on all the money you earn, no matter where in the world it comes from.

2. Non-Permanent Resident Taxpayers - You're taxed on the money you make in Japan (Japan-source income) and any money from abroad that's sent to Japan (foreign-source income paid in or remitted to Japan). Plus, you'll also be taxed on capital gains from selling shares you acquired while living in Japan.

3. Non-Resident Taxpayers - You're taxed on the money you make in Japan (Japan-source income). For more information, see here: https://www.nta.go.jp/english/taxes/individual/12006.htm

C. Types of taxable income in Japan

1. Employment Income: Salary, bonuses, stock or share-based income, foreign-service premiums, cost-of-living allowances, tax reimbursements, and other benefits in kind (except for certain tax-exempt items) are classified as taxable remuneration.

1. Japan-Source Employment Income: Japan-source employment income is earned for services rendered in Japan, regardless of where or when the remuneration is paid.

2. Non-Taxable Benefits: Reasonable relocation expenses, including those for a spouse and children, borne by the employer are not taxable. Airfare for home leave, including for family members travelling with the employee, is generally not taxable.

3. Taxation of Housing Benefits: If an employer provides housing, the taxable benefit is determined based on a formula, often resulting in only a percentage of the rent paid being treated as taxable.

1. For directors of domestic or foreign companies, the taxable value is generally 50% of the actual rent (35% if the house is also used for business purposes). However, excessively luxurious housing may be taxed based on market rent.

4. Treatment of Retirement Income: Retirement or severance income receives preferential treatment under Japan tax law.

1. Shareholder-approved retirement payments to a company director are eligible for preferential tax treatment only if the individual has served as a director for over five years with the same company.

2. Equity Compensation

5. Taxation of Stock Options: Income from the exercise of stock options is typically taxed at the date of exercise. The taxable amount is the difference between the fair market value of the stock at exercise and the exercise price.

1. Income from restricted stock units (RSUs) is taxed at the point of vesting.

6. Treatment of Qualified Stock Options: Certain qualified stock options, eligible for Japan tax purposes, are not taxed at exercise. Instead, they are taxed as capital gains when the stocks received at exercise are sold, subject to specific conditions.

7. Point of Taxation: The timing of taxation for equity compensation depends on the terms of the plan.

8. Taxation for Residents: Residents who derive income from exercising employee stock options issued by a non-Japanese company are treated as employment income. This income is subject to Japanese national and local inhabitant’s tax at graduated income tax rates.

1. Gains from selling the acquired equity are subject to income tax at 15.315% national and 5% local tax (for tax residents), unless certain conditions are met.

3. Dividend Income: Dividends are generally taxed at graduated rates after being aggregated with other income.

9. Option for Listed Corporations: Dividends from listed corporations can be taxed separately at a flat rate of 20.315%.

10. Withholding Tax: Dividends paid by Japanese corporations are subject to withholding tax.

11. Treatment of Capital Losses: Certain capital losses may offset dividend income.

4. Interest Income

12. Domestic Bank Deposits: Interest on domestic bank deposits is taxed separately at a flat rate of 20.315% if paid onshore.

13. Offshore Interest: Interest from offshore financial institutions is taxed at graduated rates.

14. Bonds Listed on Exchange: Interest on exchange-listed bonds is taxed at a flat rate of 20.315%.

5. Rental Income: Rental income is the gross rent received minus allowable expenses and depreciation.

15. Treatment of Net Rental Loss: Net rental losses (excluding offshore real estate) can offset other types of income.

16. Limitation on Mortgage Interest: Mortgage interest payments related to land ownership cannot offset non-rental income.

For more information, see here: https://www.nta.go.jp/english/taxes/individual/12014.htm

6. Non-Resident's Income

1. Taxation Rate: Non-residents' income from Japan-source interest, dividends, rental income, and royalties is generally taxed at a rate of 20.42%.
2. Withholding Tax: Withholding tax at source applies, with a rate of 15.315% for interest on bank deposits and designated financial instruments.

3. Tax Return Filing: A tax return must be filed to report rental income and determine the final tax liability. Treaty rates may apply for lower tax rates.

7. Business Income

4. Business Enterprise Tax: Taxpayers conducting their own business are subject to a business enterprise tax imposed by the local prefectural government.

1. This tax is deductible for calculating business income.

5. Tax Rates: Business enterprise tax is generally assessed on business income exceeding JPY 2.9 million. The tax rates vary depending on the type of business, typically at 3%, 4%, or 5%.

D. Types of individual tax in Japan

1. Resident Taxpayers (Non-Permanent and Permanent Residents)

1. National Income Tax - The national income tax rates apply to your total taxable income, which is your total income minus any allowable deductions.

1. The tax rates for National Income Tax in Japan are progressive, meaning they increase as income rises. The tax rates range from 5% to 45%, with several tax brackets in between.
2. Your tax liability is calculated by applying the tax rate for each income bracket to the taxable income in that bracket, then adding up the results. (For more information, please see:

2. Surtax - To help fund post-earthquake reconstruction, a temporary surtax of 2.1% on the national income tax is in place from 2013 to 2037. This is added on top of the regular tax rates.

3. Local Inhabitants Tax

1. Tokyo's Rate: Tokyo imposes a flat local inhabitant's tax rate of 10%.
2. Varies by Location: The rate depends on the tax laws of the local Japanese governments (both prefectural and municipal).
3. How It's Levied: This tax is based on your income from the previous year and is levied in the current year if you were a resident of Japan as of January 1 of the current year.

2. Non-Resident Taxpayers

4. National Income Tax: If you're a non-resident, your Japan-source employment income is taxed at a flat rate of 20.42% on the gross amount, with no deductions allowed. This rate includes the 2.1% surtax (20% × 102.1% = 20.42%).

5. Local Inhabitants Tax: You may also be required to pay the local inhabitants tax if you're registered as a resident in the local municipality's records as of January 1 of the following year. (For more information, see: https://www.nta.go.jp/english/taxes/individual/12004.htm)

E. Types of individual tax in Japan - Other

1. Social Security Contributions - If your salary or bonus, including fringe benefits, is paid in Japan by a local employer (such as a Japanese branch of a foreign corporation), you generally have to pay a share of social insurance premiums. Your share includes contributions for the following:

1. Health Insurance: Covers medical expenses and provides health benefits.
2. Pension Insurance: Ensures retirement benefits and pension payments. For lump-sum withdrawal, see here: https://www.nta.go.jp/english/taxes/individual/12005.htm)
3. Employment Insurance: Provides unemployment benefits and other employment-related support.
4. Worker’s Accident Compensation Insurance: Covers work-related injuries and illnesses.

These contributions are deducted from your salary by your employer.

2. Consumption Tax

5. General Rate: Businesses are charged a consumption tax when they sell goods, provide services, or import goods into Japan.

1. As of April 1, 2014, the rate is 8% (previously 5%).
2. As of October 1, 2019, the rate increased to 10%, though it remains 8% for certain items like specific foods, drinks, and newspapers.

6. Exemptions:

1. Exports and certain services provided to non-residents are not taxed.
2. Specific transactions, such as sales or leases of land, sales of securities, and the provision of public services, are exempt from consumption tax.

7. Refunds for Businesses: Businesses can get a refund on the consumption tax they pay if it relates to taxable revenue. This refund is available if the transaction is properly recorded in the business's books and the relevant invoices are kept. Refunds are claimed by filing a consumption tax return.

3. Property (Fixed Assets) Taxes

8. Annual Fixed Assets Tax:

1. Real Property: This tax is levied by local tax authorities at a rate of 1.7% (including city planning tax) of the property's appraised value.
2. Depreciable Fixed Assets: Taxed at 1.4% of the cost after accounting for statutory depreciation.

9. Registration and License Tax:

1. This tax applies when certain property is registered.
2. The rate ranges from 0.1% to 2% of the taxable basis, which depends on the type of property being registered.

4. Inheritance, Estate, and Gift Taxes

10. Inheritance Tax

1. Tax Imposition: Inheritance tax is a national tax imposed on the recipients of an inheritance.
2. Exemptions for Transfers of Overseas Assets:

1. Transfers between temporary foreigners or non-Japanese nationals outside Japan are exempt from Japan's gift and inheritance tax.
2. However, transfers between non-Japanese nationals and Japanese nationals who have had a 'Jusho' in Japan within the previous ten years are not exempt.

3. Definition of Temporary Foreigners:

1. To be considered a temporary foreigner and qualify for the exemption:

1. The individual must have had a 'Jusho' in Japan for less than ten out of the past 15 years.
2. They must hold a visa issued under Table 1 of the Immigration Control and Refugee Recognition Act.
3. Holding a visa under Table 2 does not qualify for this exemption.

4. Changes Effective April 1, 2021:

1. The exemption from Japan's gift and inheritance tax for transfers of overseas assets now applies regardless of the length of residence in Japan, as long as the foreign national transferor holds a Table 1 visa.
2. This exemption does not apply to foreign national resident recipients of gifts and inheritances of overseas assets.

5. Taxation of Assets Located in Japan: Transfers of assets located in Japan are always subject to Japan's gift and inheritance tax.
6. Valuation and Exemptions:

1. Assets subject to inheritance tax include tangible, intangible, real, or personal property unless specifically exempt.
2. The basic exemption is JPY 30 million plus JPY 6 million per statutory heir.
3. If the gross estate is smaller than the total basic exemption, no filing is required.

7. Calculation of Tax:

1. Tax is determined by allocating assets to statutory heirs and applying graduated inheritance tax rates.
2. The total tax is then allocated based on the actual recipients of the assets.

11. Gift Tax

1. Scope and Exemptions:

1. Gift tax is levied on the recipients of a gift, similar to inheritance tax.
2. The annual gift tax exemption per recipient is JPY 1.1 million.

2. Integration of Inheritance and Gift Tax:

1. An irrevocable election can integrate inheritance and gift tax under certain conditions.
2. Qualified transfers and special exemptions are part of this system, with a maximum threshold and a tax rate of 20% for amounts exceeding it.

3. Valuation and Tax Filing:

1. Valuation of gifted assets freezes at the time of the gift for inheritance tax calculation.
2. Those who made this election will be subject to inheritance tax filing regardless of the situation at the time of inheritance.

F. Deductions and Exemptions

1. Standard Deduction for Resident Employees: Both permanent and non-permanent resident employees can claim an earned income deduction.

1. Calculation Method: The deduction is computed by applying an appropriate rate to gross employment income.

1. The minimum standard deduction is JPY 550,000 or gross employment income, whichever is lower.
2. The maximum deduction limit is currently capped at JPY 1.95 million.

2. Purpose: This standard deduction aims to provide tax relief to resident employees by reducing their taxable income.

For more information, see here: https://www.nta.go.jp/english/taxes/individual/12012.htm

2. Personal Exemptions for Resident Taxpayers: Since tax year 2020, resident taxpayers are entitled to personal exemptions for both national income tax and local inhabitant’s tax based on their total income during the tax year.

3. Special Spouse Exemption: For non-dependent spouses, a special spouse exemption can be claimed, with maximum amounts of JPY 380,000 for national income tax and JPY 330,000 for local inhabitant’s tax, depending on the spouse’s income.

1. Taxpayers with income not exceeding JPY 10 million are eligible for this exemption.

4. Dependent Deductions: Resident taxpayers can claim a deduction for each dependent aged 16 or older, provided the dependent’s income doesn't exceed JPY 480,000 for the year.

1. Dependents need not live with the taxpayer but must receive support as part of the taxpayer’s household.
2. Deduction amounts increase for dependents aged 70 or older or aged 19 to 23. Additional increases apply if the dependent has a disability.

For more information, see here: https://www.nta.go.jp/english/taxes/individual/12016.htm

5. Non-Resident Taxpayers: Non-resident taxpayers, in general, are not eligible for these deductions.

3. Personal Deductions

6. Interest Expenses: Interest payments are not tax deductible.

7. Social Security Contributions: Japanese social security contributions are fully deductible.

8. Medical Expenses: Medical expenses, regardless of where they were paid, are tax deductible, subject to certain limitations.

9. Charitable Contributions: Charitable contributions designated by the Ministry of Finance in Japan are tax deductible, with restrictions.

1. Contributions over JPY 2,000 are deductible, limited to 40% of income, less JPY 2,000.
2. The definition of a qualified contribution is restrictive, typically limited to charities in Japan.

10. Life Insurance Premiums: Premiums paid to a Japanese agency in local currency for life insurance or private pensions are deductible, but to a limited extent, for both national and local inhabitant’s taxes.

11. Earthquake Insurance Premiums: Premiums for earthquake insurance are also deductible, but to a limited extent, for both national and local inhabitant’s taxes.

4. Business Deductions

12. Tax Deductibility of Business Expenses:

1. Business expenses are deductible in certain limited cases.
2. Employer reimbursements for business expenses like commuting, travel, and entertainment are not taxable income for employees if required for the employer’s business.

13. Self-Employed Taxpayers: Self-employed taxpayers can claim business expenses against income, provided they can substantiate the necessity of the expenses.

For more information, see here: https://www.nta.go.jp/english/taxes/individual/12015.htm

5. Losses

14. Capital Losses Offset:

1. From January 1, 2016, capital losses from the sale of publicly traded shares and specified bonds through a qualified Japanese broker can be offset against dividends and interest from the same sources.
2. Capital losses within a publicly traded investments group can be carried over for three years after offsetting against dividends and interest.

6. Foreign Tax Relief

15. Resident Taxpayers:

1. Resident taxpayers can credit foreign income taxes against their Japanese national tax and local inhabitant’s tax liabilities, subject to certain limitations.
2. This credit is applicable when foreign-source income is taxed in Japan.For more information, see here: https://www.nta.go.jp/english/taxes/individual/12007.htm

16. Non-Resident Taxpayers:

1. Non-resident taxpayers are not eligible to claim foreign tax credits on their Japan income tax returns unless they have a permanent establishment (PE) in Japan.
2. Without a PE in Japan, non-resident taxpayers cannot offset foreign taxes paid against their Japan tax liabilities. For morning information, see here: https://www.nta.go.jp/english/taxes/individual/12007-2.htm

7. Tax Treaties of Japan - As of June 1, 2023, Japan has tax treaties with the following countries:

17. Armenia, Australia, Austria, Azerbaijan, Bahamas, Bangladesh, Belarus, Belgium, Bermuda, Brazil, British Virgin Islands, Brunei, Bulgaria, Canada, Cayman Islands, Chile, China, Colombia, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Fiji, Finland, France, Georgia, Germany, Guernsey, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Jamaica, Jersey, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Latvia, Liechtenstein, Lithuania, Luxembourg, Macao, Malaysia, Mexico, Moldova, Morocco, Netherlands, New Zealand, Norway, Oman, Pakistan, Panama, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russia, Samoa, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Tajikistan, Thailand, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan, and Vietnam.
18. These treaties primarily aim to eliminate double taxation and prevent tax evasion and avoidance.

8. Mutual Administrative Assistance: Japan is a signatory to the Convention on Mutual Administrative Assistance in Tax Matters, facilitating cooperation between jurisdictions regarding tax matters.

9. Base Erosion and Profit Shifting (BEPS) Agreement: Japan signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS on June 7, 2017. As of June 20, 2023, this treaty is in effect with several countries to prevent tax evasion strategies.

10. Totalisation Agreements: Japan has entered into social security agreements with various countries to avoid overlaps in social security enrollment and coordinate pension participation periods.

1. These agreements are currently in effect with Australia, Belgium, Brazil, Canada, China, the Czech Republic, Finland, France, Germany, Hungary, India, Ireland, Korea, Luxembourg, the Netherlands, the Philippines, Slovakia, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

G. Tax Filing

1. Taxable Period: The Japanese individual income tax year runs from 1 January to 31 December.

2. Tax Return: In Japan, income tax returns are filed individually; joint filings aren't allowed.

1. The tax year aligns with the calendar year for all residents, and individuals must submit their national tax return by March 15th of the following year. For more information, see here: https://www.nta.go.jp/english/taxes/individual/12011.htm
2. If an individual's income solely comprises employment earnings from one local employer (including Japanese branches of foreign companies) and doesn't exceed JPY 20 million annually, the employer conducts a "year-end adjustment" on the employment income.

1. Additionally, if the total income other than employment income amounts to JPY 200,000 or less, the employee isn't obliged to file an income tax return. For more information, see here: https://www.nta.go.jp/english/taxes/individual/12018.htm

3. Tax Return - Refund: Examples of  situations when a taxpayer can apply for filing returns for a refund:

1. If they terminated their employment during the year and paid more withholding tax than necessary because they are not subject to the year-end adjustment.
2. If they have housing loans for specific reasons, such as acquiring houses under certain requirements.
3. If they conducted specified renovations on their houses.
4. If they built a certified house, which qualifies for a special tax credit.
5. If their property was damaged due to theft or a disaster.
6. If they are eligible for deductions for specially designated expenditures.
7. If they paid a significant amount of medical expenses.
8. If they made specified donations.
9. If they deducted losses related to the transfer of listed stocks and shares from dividend income related to listed stocks and shares, for which separate taxation is selected.

For more information, see here: https://www.nta.go.jp/english/taxes/individual/12009.htm

4. Overseas assets reporting:

1. If you're a permanent resident of Japan and you own assets outside of Japan worth more than JPY 50 million by December 31st of the year, you have to report those assets every year by March 15th of the following year.

5. Assets and liabilities reporting:

1. Resident taxpayers who earn over JPY 20 million in total income and have worldwide assets worth JPY 300 million or more, or financial assets subject to an exit tax of JPY 100 million or more by December 31st, need to report all their assets and liabilities in detail.

1. These reports aren't part of the regular tax return and must be filed separately with the tax office by March 15th of the following year.

6. Payment of tax

2. National Income Tax: When salary is paid in Japan by a local employer, national income tax is typically withheld monthly from the paycheck.

1. However, if salary is paid from overseas, the national tax owed is settled when filing the tax return, rather than being withheld from the salary.
2. In some cases, two provisional payments of national tax may be required in July and November if the previous year’s final tax liability (after the deduction of WHT) was JPY 150,000 or more. For more information, see here: https://www.nta.go.jp/english/taxes/individual/12008.htm
3. If you are planning to leave Japan, see here: https://www.nta.go.jp/english/taxes/individual/12004.htm

3. Local Inhabitant Tax: Local inhabitant's tax is calculated based on the prior year’s income if a taxpayer is registered as a resident as of January 1st of the current year.

1. This tax is paid in four installments: June, August, October, and January of the following year.
2. Alternatively, if the salary is paid in Japan, the tax can be withheld from monthly paychecks from June through May of the following year.

7. Tax audit process: In Japan, the National Tax Agency oversees tax matters, and individual tax audits are carried out by the national tax office in the taxpayer's area of residence, covering the previous three to five years.

8. Statute of limitations:

1. Typically, tax audits have a standard statute of limitations of five years, which can be extended in cases of suspected tax evasion.
2. Starting from the 2020 tax year, an additional three-year statute of limitations applies when a taxpayer fails to provide supporting documents for overseas transactions or assets within 60 days of a request from tax auditors. This extension also occurs when the National Tax Agency seeks information from a treaty country regarding overseas transactions or assets. However, there are exceptions:

1. The three-year extension doesn't apply if the request to the treaty country is made when there are only six months or less left until the original statute of limitations expires.
2. The extension only applies if the taxpayer is informed by the National Tax Agency about the request to the treaty country within three months of the initial request.

H. Departing Japan

1. Tax Administrator - If you're leaving Japan and will no longer be considered a resident for tax purposes, but you still have tax obligations in Japan, you'll need to appoint a tax agent residing in Japan. This agent will handle tax procedures on your behalf. You can appoint either a Japanese corporation or an individual residing in Japan as your tax agent.

1. If you appoint a Tax Administrator before your departure, the deadline for filing the tax return and paying the tax for the year is March 15 of the following year.
2. If you leave Japan without appointing a Tax Administrator, you must file the tax return and pay the tax before your departure.

2. Please note that the tax office where you file your return is determined by your place for tax payment, not the address of your tax agent. For more information, see here: https://www.nta.go.jp/english/taxes/individual/12004.htm

3. For options on how you can pay your Japan tax from overseas, see here: https://www.nta.go.jp/english/tax_payment/taxpayers_overseas/index.htm

Businesses

WIP

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Reference:

https://www.nta.go.jp/english/taxes/individual/index.htm

https://www.nta.go.jp/english/taxes/individual/incometax_2023.htm

https://www.nta.go.jp/english/taxes/corporation/index.htm

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-japanhighlights-2024.pdf

https://taxsummaries.pwc.com/japan

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2023/01/TIES-Japan.pdf (2023)