Japanese withholding tax and final tax return for foreign employee of foreign-affiliated companies

Continuing from the previous topic, when a foreigner (Mr. A) is dispatched to Japan from an overseas company (Company A), how do we deal with the Japanese withholding tax and a final tax return?

We have looked at the three cases so far.

In the first case, Mr. A, a foreign individual working for a foreign company A, comes to Japan on a short business trip.

In the second case, a foreign individual Mr. A comes to a branch in Japan.

This time the third case.  A foreign individual comes to Japan to work as an employee at a subsidiary.

Regarding the resident nature of Mr. A, we will suppose two cases. One is a non-resident and the other is a resident.

A resident is an individual who has a residence in Japan or has temporary residence for more than one year (Article 2, Paragraph 1, Item 3 of the Income Tax Law), and the other than a resident is called a non-resident.

The salary of Mr. A assigned to the Japanese subsidiary from the overseas company would be usually borne by the Japanese subsidiary. Also, the foreign parent company may pay some amount of the salary. We will see the necessity of withholding tax/final tax return/applicability of tax treaty in four cases as follows.

The domestic subsidiary bears the salary of Mr. A, who is a non-resident.
The overseas parent company pays the salary of Mr. A, who is a non-resident.

The domestic subsidiary bears the salary of Mr. A, who became a resident.

The overseas parent company pays the salary of Mr. A who became a resident.

The domestic subsidiary bears the salary of Mr. A who remains a non-resident

Non-residents > Japanese subsidiary pays > Scope of taxation for non-residents

Non-residents are subject to Japanese income tax on only domestic source income (Article 16).

The salary corresponding to the period of service in Japan is considered domestic source income, which will be taxed in Japan.
In contrast, the salary for the period of service in foreign country is considered a foreign source income, which will not be taxed in Japan.

Non-residents > Japan subsidiary pays >Withholding tax

When an employer pays salary to non-residents in Japan for his service in Japan, then an employer is required to withhold tax (income tax law, Article 212, paragraph 1). So the domestic subsidiary must withhold tax from Mr. A’s salary.

Non-residents > Japan subsidiary pays >Tax return

When non-resident is paid a salary corresponding to the working period in Japan with withheld income taxes upon the payment, he does not need to file a tax return(Article 172, Paragraph 1 of the Income Tax Law).

Non-residents > Japan subsidiary pays > The short-term tax exemption

If there is a tax treaty between Country A where Mr. A is a resident and Japan, we should examine the application of short-term tax exemption.

The requirements are the following:

(1) Stay in Japan should not exceed 183 days

(2) The individual’s salary is paid by an employer who is not a resident of Japan.

(3) The individual’s salary shall not be borne by an employer’s permanent establishment (for example, a branch office) in Japan.

It does not meet the requirement (2) since Mr. A’s salary is paid by the Japanese subsidiary who is a resident of Japan.

The short time tax exemption rules will not apply.

The overseas parent company pays the salary of Mr. A (employee) who is a non-resident

Non-residents>oversea company pays> Scope of taxation

Non-residents are taxed in Japan only on their domestic source income. Concerning salary, salary for the period of service in Japan is considered a domestic source income. It does not matter whether the salary was paid by the foreign parent company or the Japanese subsidiary.

Non-residents>oversea company pays>Withholding tax

Withholding tax is not required when non-residents are paid overseas (income tax law, Article 212, paragraph 1).

Non-residents>oversea company pays>The necessity of final tax return

When non-residents are paid a salary based on the working period in Japan they must file a tax return in Japan (Article 172, paragraph 1 of the Income Tax Act).

Non-residents>oversea company pays>Tax exemption for short stayers

The salary is paid from the overseas parent company that is not a Japanese resident.

Therefore, (2) is cleared and Mr. A will be exempt from taxation in Japan by applying the tax exemption for short-term residents.

The Japanese subsidiary bears the salary of Mr. A (employee) who is a resident

Scope of taxation for non-permanent residents

Residents are divided into permanent residents and non-permanent residents.
A non-permanent resident is a resident who does not have Japanese nationality and has been in Japan for less than five years in the past ten years. Residents other than non-permanent residents are called permanent residents.

The scope of taxable income differs between permanent residents and non-permanent residents.

Non-permanent residents are taxed on non-foreign source income (≒domestic source income) and foreign source income paid in Japan or remitted to Japan.

(Click here for the scope of taxation for non-permanent residents)

In the case of non-permanent resident, the salary corresponding to his service period in Japan is considered domestic source income and taxable in Japan. The salary corresponding to the service period outside Japan is taxable in Japan only if it is paid in Japan or remitted to Japan.

For example, if Mr. A returns to his home country and works there for a short period of time, his salary corresponding to that period is a foreign source of income.

If the Japanese subsidiary pays the salary in Japan for the foreign source income, it will be taxed in Japan because it was paid in Japan.

Residents>Japan subsidiary pays>withholding tax

As a resident, Mr. A will be withheld tax from his monthly salary, whether for a period of domestic service or a foreign service period (Article 183(1) of the Income Tax Act).

As a general rule, residents must file a final tax return (Article 120, Paragraph 1 of the Income Tax Law).

However, when the salary is withheld and adjusted at the year-end, and its amount is 20 million yen or less, etc., there is no need to file a tax return (Article 121 paragraph 1 of the Income Tax Law).

Please refer to here for more detail on the case the resident need not file.

The short term tax exemption

The short-term tax exemption is for non-residents who are staying in Japan for a short period. In this case, Mr. A is a Japanese resident, so a short-term tax exemption would not apply.

When the overseas parent company pays for a resident.

Non-permanent residents are taxed on non-foreign source income (≒domestic source income) and foreign source income paid in Japan or remitted to Japan.

Of the salary paid outside Japan by the foreign parent company, the domestic service period’s salary is taxable in Japan.

The salary for the overseas service period will be taxed if it is remitted to Japan.

Resident>Overseas company pays> Withholding tax

If the residents are paid salary in Japan, the payer must withhold tax (Article 183, paragraph 1 of the Income Tax Law).

If the payment to a resident is made outside of Japan, no need to withhold tax.

The overseas parent company has no withholding obligation since Mr. A’s payment is made overseas.

Resident>Overseas company pays>Tax return

As the salary paid by the foreign parent company for his service period in Japan will not be withheld. Mr. A is required to file a tax return (Article 120, Paragraph 1 of the Act).

The salary paid by the foreign parent company for his overseas service period is not subject to taxation in Japan, so he is not required to file an income tax return. However, if the salary is remitted to Japan, it will be subject to Japanese taxation, and he needs to file a tax return.

The short term tax exemption

The short-term tax exemption is for non-residents who are staying in Japan for a short period. In this case, Mr. A is a Japanese resident, so no short-term tax exemption applies.