Japan Tax Residency – How does it affect you?

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Understanding taxation can be a headache, understanding taxes in a second language can be an even bigger one. In this article, we are going to walk you through all the most important information and insights you need to know about what taxes you are liable for when living in Japan.

But before we begin, let’s tackle a really important and frequently asked question.

I am an American expat living in Japan. Do I need to file taxes in Japan? Do I need to file taxes in America?

Yes and Yes. You need to file tax to both authorities, but the amount of tax you owe depends on your tax residency as well as the type of income you have.

If you have established a residence overseas and you pass the bonafide residence test, you can apply for the foreign earned income exclusion if your total annual salary is provided solely from your employer and that income does not exceed a certain amount.

In this case you would likely be liable for 0 taxes in the United States, as long as you are paying your Japanese taxes locally.

https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion-bona-fide-residence-test

Tax residency

Japan has a system of residency-based taxation (RBT). This means that Japanese citizens living overseas that have adopted a residence outside of Japan are not liable for Federal income taxes.

However, the alternative of this system is called citizenship-based taxation (CBT). The United States adopts CBT and requires all American citizens to pay tax to US no matter where they live in the world.

So if you are an American living in Japan for part of the year, and you move back and forth between Japan and the US, you will be liable for taxes in both countries depending on the source of your income and how you file.

The US allows for a residence based taxation exemption up to a certain amount. This is called the Foreign Earned Income Exclusion.

The United States uses the term “US person”/”foreign person” – you can find out more about the distinction here.

If you formerly held a US green card and social security number – you may be liable for US taxes without knowing it.

Resident vs non-resident

The Japanese Income Tax Law Article 2 states a resident (居住者) as a person (1) whose jūsho(住所) is in Japan (2) or who has lived in Japan continuously for at least one year.

If you have been a resident for five years or more, you are considered as permanent resident for tax purposes.

As many of you foreign expats may know, “jūsho” means “address” in Japanese, but the concept of address in this context is very different.

There are two words that could translate to “address” in English, but they hold different meanings in law. Kyosho (居所) and jūsho (住所). Kyosho (居所) means somewhere you are staying.

It could be your dorm when you are a student, or a care home when you retire. However, the jūsho (住所) means “the base of your life.” It is the official place where you call “home.”

If a person appears to be quantified for two countries tax residency, then Japan has a Tax Treaty Implementation law. It helps people to mitigate the loop holes of normal rules in tax residency. It determines the final domain where an individual has pay tax.

For reference, please consult the OECD model tax treaty, you can find which country you are qualified to:

If a person’s permanent home is located in only one of the two countries, then the country with the property should be considered as the country of residence for taxation.

Permanent home means non-temporary access of a physical space for living.

Or:

If a person’s financial spending is majorly coming from and spend at one of the two countries.

Or:

If the individual is a national of one of the two countries.

Non-permanent tax residents

Most countries tax the global income of all their residents. Japan, however, refrains from fully taxing the global income of a small subcategory of tax residents: so-called “non-permanent tax residents” (非永住者).

Income Tax Law Article 2 defines a Japanese tax resident as a non-permanent tax resident if they: (1) are not a Japanese citizen and (2) have not had a jūsho or place of residence in Japan for a total of 5 of the past 10 years.

Unlike national health insurance identity that is evaluated on a year/monthly basis, tax residency in Japan is evaluated on a daily basis! If you have lived in Japan for five years on January 15th, then on the 16th you are qualified as a permanent tax resident. Check the official NTA website here.

Please also note that the non-permanent tax residents’ rules only apply to your income tax. Gift and inheritance taxes are not excluded and laws for those must be consulted.

Scope of taxable income

The Japanese Income Tax Law Article 7 can be categorized into three forms of income

  1. Japan-sourced income
  2. Foreign-sourced income
  3. Neither of 1 nor 2

Japan-sourced income

In the Income Tax Law Article 161 defines what type of earning is considered as Japan-sourced income. You can find which types of income are liable You can find the English version of this document at this website.

Out of all the 17 categories, the major one that you need to pay attention to is the category 12 – for any money you received if you are physically located in Japan at the time of doing the work, you need to file taxes and pay whatever is due.

Many countries have entered into bilateral or even s multilateral tax treaty to avoid double taxation. According to the Income Tax Law Article 162, tax treaties can override any taxes that you owe for the Japan-sourced income. Please check your own country’s tax treaty with Japan.

Foreign-sourced income

The Income Tax Law Article 95-4 defines what type of earning is considered as Foreign-sourced income. You can find the English version of this document at the following website.

For this income, it depends on circumstances whether Japan will tax you. Tax treaties in Japan can also exempt you from paying extra tax for your foreign sourced income. Therefore, please check the bilateral/multilateral treaties of your home country and Japan.

Income that is not taxable

  • Specified benefit income from disability and death
  • Commuting allowance for an employee (under a certain amount)
  • Non-monetary benefits (Company provided car, or apartment, equipment)
  • Relocation income, you can find more in this article by PwC
  • A company housing rental, (if they place you rented is under your employer’s name.) Depending on the circumstances, a percentage of the rent (such us 20%) can be considered as economic rent, which is taxable
  • Home leave if you are an expat who returns to your home country. You are qualified for this once a year.
  • Retirement allowance, you can find more in this article by PwC
  • Allowances or salary increases paid to employees sent overseas temporarily, where the purpose of the money is to provide the employee with a similar quality of life to what they would have enjoyed if they had been living in Japan.
  • Specific governments and international organization’s salaries
  • Resale of used furniture, clothes, appliances, etc., that your family has used in their day-to-day life.

Disclaimer:  We are not professional financial planners or licensed tax specialists, this information is for educational purposes only, please consult the national tax agency of Japan for answers to questions

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