Japan withholding tax and final tax return for foreigners of Japan branch

Hello, This is Yoshio Yamaguchi.

Last time, when a foreign resident come on a short business trip to Japan, we confirmed whether withholding tax is required for the salary related to this and whether a final tax return is required.

The basic principles of income tax law we checked were the following two.

  1. When paying salaries in Japan to non-residents, payers are obliged to withhold tax (Individual Income Tax Law, Article 212, Paragraph 1). (In other words, if paying overseas then no need to withhold).
  2. If a non-resident receives a salary payment that is Japanese source income without withholding tax, a final tax return must be filed in Japan. (income tax 172, paragraph 1)

This time, we will take up a case where a foreigner makes a short business trip at a Japan branch.

The different point from the last case is that there is a base (such as the branch) in Japan or not.

Residency of foreigner Mr. A

First, it’s a short-term business trip, so let’s assume it would be less than a year, and he is still a non-resident. Same as the last case.

A non-resident would be taxed in Japan only on the Japan sourced income.

Existence of Japan domestic source income

Next, regarding whether or not there is domestic source income, the salary portion corresponding to the period of Mr. A’s short-term business trip to Japan is based on domestic source income, so it is subject to taxation in Japan. (Income tax Article 161 paragraph 1 item 12 a). Same as the last case.

The necessity of overseas Company A’s withholding tax

The difference from the previous case is the existence of permanent establishment (such as a branch) in Japan, which leads to the difference in withholding obligation.

The salary of Mr. A may be paid outside Japan by the headquarters of the foreign corporation A, who employs Mr. A or paid by the branch office in Japan. Or, the basic salary may be paid by the Japan branch, but the overseas head office may pay the allowance.

Basically, those who pay salaries in Japan to non-residents are obliged to withhold taxes (Article 212, Paragraph 1 of the Income Tax Law). (In other words, if there is payment outside Japan to non-residents, there is no withholding obligation).

However, even when the domestic source income is paid overseas, if the payer has a base in Japan such as a branch office, the payer is deemed it pays in Japan. It turned out the payer has to withhold tax (Article 212, Paragraph 2 of the Income Tax Law).

In this case, when the foreign company A pays a salary wherever in Japan or overseas, the payment will be deemed to have done in Japan because company A has a base in Japan ( Company is subject to withholding (Article 212, Paragraph 1)). The company A is required to withhold tax.

The necessity of final tax return for foreigner Mr. A

When non-resident are withheld tax, he/she is not required to submit a final tax return.

Therefore, with tax withheld, Mr. A does not need to file a tax return.

Application of tax treaties

Mr. A’s salary was withheld according to Japanese income tax regulations.

At the same time, if the salary tax is imposed by the tax law of country A where Mr. A resides, he will be double taxed.

To avoid double taxation, if you meet the three requirements for tax exemption for short-term residents as stipulated in the tax treaty, Japan’s tax will be exempted and only the tax of the country A will be imposed.

Let’s look at the requirements.

  1.  183 days rule
    Stay in Japan must not exceed 183 days in any 12 month period beginning or ending in the tax year. Let’s assume here that it has not exceeded 183 days.
  2. The individual’s salary is paid by an employer who is not a resident of Japan.  Mr. A’s salary is paid by an employer (Company A) who is not a resident of Japan, so this requirement is satisfied.
  3. The individual’s salary shall not be borne by a permanent establishment in Japan of a foreign employer.

If Mr. A’s salary is paid at the overseas head office, the requirement of 3 will be satisfied and Mr. A would be exempt from Japanese taxation, no need to be withheld and no need to file a tax return.

If Mr. A’s salary is paid by the permanent establishment (the branch) in Japan, it will not meet the requirement of 3, and Mr. A will not be able to receive the benefits of tax exemption for short-term residents. Mr. A would be taxed in Japan by withholding tax. No need to file a tax return.

(*) In the case of payments to non-residents, the criteria for determining whether domestic payments or overseas payments are essential because the withholding obligation changes depending on whether the payment is domestic or overseas. We want to look at it at another opportunity.

This post is based on the relevant laws as of fifth December FY2019.

 

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