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

Continuing from the previous topic, when the foreigner (Mr. A) is dispatched to Japan from the overseas company (Company A), is the Japanese withholding tax required or a final tax return required?

We have looked at the three cases so far.

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

In the second case, a foreigner Mr. A working for a foreign company A comes to a branch in Japan.

This time the third case.  A foreigner Mr. A who works at a foreign company comes to Japan to work as an employee at a subsidiary.

In the second case, the Japan office is a branch, that is legally the company A itself. In the third case, the Japanese subsidiary is lawfully a different entity from company A.

Resident characteristics of foreigner Mr. A

Regarding the resident nature of Mr. A, we will look at two cases: staying non-resident and becoming a resident. A resident is an individual who has an address in Japan or has been resident for more than one year until now (Article 2, Paragraph 1, Item 3 of the Income Tax Law), and other individuals are called non-residents.

Tax scope

The range of income for which the Japanese tax is imposed depends on the difference between non-residents and residents. If an individual is a resident, further differences are depending on whether the resident is a permanent resident or a non-permanent resident, but we assume him a non-permanent resident. A non-permanent resident is taxed on income other than foreign source income (roughly speaking, income earned in Japan), but external source income is not taxed unless remitted to Japan. See this article for details. Non-residents will be taxed in Japan only if they earn income falling under domestic source income listed in the Income Tax Law (Income Tax Law Article 7.1-3).

The necessity of withholding tax /tax return / Applicability of tax treaty

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 such as dependent’s allowance. We will see the necessity of withholding tax/final tax return/applicability of tax treaty in 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.

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

nonresident subsidiary pay

The necessity of withholding tax

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

The necessity of final tax return

When non-residents are subject to withholding tax, there is no need to file a tax return(Article 172, Paragraph 1 of the Income Tax Law). So Mr. A needs not to file a tax return.

Application of tax treaties and tax exemption for short-term residents

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

The short-term tax exemption applies only to salaries paid by foreign employers for a relatively short period.

The requirement is to meet all three of 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 a permanent establishment (for example, a branch office) in Japan of an employer

Mr. A’s salary is paid by the Japanese subsidiary who is a resident of Japan, so it does not meet the requirement of (2). The short time tax exemption rules will not apply.

As a conclusion, if the Japanese subsidiary pays the salary of employee A who is a non-resident, Mr. A would be withheld and no final tax return will be required.

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

Nonresident parent pays

Necessity of withholding

Withholding tax is not required when paying abroad to non-residents (income tax law, Article 212, paragraph 1).

Necessity of final tax return

If non-residents are not subject to withholding tax, they must file a tax return in Japan (Article 172, paragraph 1 of the Income Tax Act).

Application of tax exemption for short-term residents

Unlike the case where the Japanese subsidiary pays the salary as mentioned above, the salary is paid from the overseas parent company that is not a resident of Japan.

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

The conclusion. If the overseas parent company bears the salary of Mr. A, who is a non-resident, Mr. A would be exempt from taxation in Japan due to the short-term tax exemption. So no withholding tax and tax return are required. Note certain procedures are required to be eligible for a tax treaty.

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

Resident subsidiary pays

Necessity of withholding

When the wages of residents is paid in Japan, the payer needs to withhold tax (Act 183, Income Tax Law).  Since Mr. A is a resident, the monthly salary should be withheld.

Necessity of final tax return

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.

Application of tax exemption for short-term residents

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 short-term tax exemption would not apply.

In conclusion, the resident Mr. A (employee) is withheld and (in many cases) no final tax return is required.

When the overseas parent company pays the salary for Japan sourced income of a resident in a foreign country

Resident parent pays

Necessity of withholding

According to the income tax law, about paying the resident’s salary, if the payment is made in Japan, the payer must withhold tax (Article 183, paragraph 1 of the Income Tax Law).

In other words, if the payment to a resident is made outside of Japan, then no need to withhold tax.

In this case, since the payment is made overseas, the overseas parent company has no withholding obligation.

Necessity of final tax return

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 the annual salary 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).

For more details about the case in which tax returns are not needed, please see here.

Mr. A is not subject to withholding tax, so it would be necessary to file a final tax return for the portion paid by Company A overseas.

Application of tax exemption for short-term residents

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.

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