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Tax treaty and tax exemption of Japan

Tax treaty and tax exemption of Japan

Assumed a non resident of Japan ( including a person who has residence in Japan for less than one year )
or legal entity who does not have head office in Japan receives fee or salary in Japan.
(hereinafter “non resident”)

In this case, non resident can reduce income tax by submission of “notification paper relating to tax treaty”.

Or non resident can exempt from income tax by submission of “notification paper relating to tax treaty”.

According to Japan tax law, non resident needs to pay tax based on domestic source income.

In the case non resident has branch office or sales office in Japan, it can submit tax filing in the same way as resident company.

In other case, non resident pays tax by withholding. So, a person or company (employer. resident) pays fee or salary to non resident, employer withholds certain amount of money (assumed “10 yen”) and employer pays the 10 yen to tax office by 10th of next month.

Percentage of withholding tax differs depending on category of transaction.

1) In the case non resident sells real estate and receives selling price, she (buyer) deducts 10.21% of selling price.

2) In the case non resident works in Japan and receives salary, his employer deducts 20.42% of his salary.

However this process may cause double taxation. Ms.N (Non resident) engages in interpretation work in Japan and receives fee in Japan (assumed “30th,October, 2023”).

At the time Ms.N receives fee, her employer has deducted some amount. On the other hand, in Ms.N’s home country (assumed “America”), even if she receives fee in Japan, she needs to pay tax for America.

In order to avoid this double taxation, Japanese government has concluded tax treaty (sozei jouyaku = 租税条約) with several nations.

According to this tax treaty, in the event Ms.N submits “Notification paper relating to Tax treaty”,she can reduce or exempt from amount of withholding tax.

Then, Her employer does not need to conduct tax withholding.

Ms.N needs to submit this notification paper to tax office via her employer by 29th,October, 2023.

If she has not submitted this notification paper by date of payment 29th,October, 2023, her employer needs to conduct tax withholding.

And later (within five years) Mr.N can submit this notification paper relating to tax treaty and application form for refund of withholding tax related to tax treaty via her employer. And she can reduce or exempt from income tax in Japan.

There are several kinds of notification paper relating to Tax Treaty.

And amount of refund and possible or impossible of refund differs depending on each country and reason of payment ( salary, software royalties, dividend ).

For example. Resident company pays software royalties for American company and performs tax withholding of 20.24%. If this American company applies for exemption from corporation tax according to tax treaty, this American company does not need to pay income tax in Japan.

🌻Residents of Japan and Japanese Taxes

Nancy recently obtained a status of residence in Japan as an English teacher.

She works as an employee of a company in Japan, but occasionally returns to the U.S. to work as an employee of a U.S.-based corporation (NY Corporation).

She has not lived in Japan for more than 5 years. Therefore, she is not a permanent resident for tax purposes.

When she receives a salary of 10 million yen from the NY corporation, it is deposited into her U.S. bank account.

👉As for this 10,000,000 yen, it is foreign source income(国外源泉所得=Kokugai Gensen Shotoku).

This means that the labor that caused the income was performed outside of Japan.

In this case, she does not have to pay income tax on the 10 million yen to the Japanese government.

However, when she transfers that 10,000,000 yen she received from her bank account in the U.S. to her bank account in Japan, Japanese tax is also imposed on that 10,000,000 yen.

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