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Japanese withholding tax and tax return for foreign directors of foreign-affiliated companies.
We have checked the three cases so far,
In the first case, Mr. A, employed by the foreign company A, comes to Japan on a short business trip.
In the second case, Mr. A, employed by the foreign company A, works on a short-term business trip to a branch in Japan.
In the third case, Mr. A, employed by the foreign company A, is dispatched to the subsidiary in Japan as its employee.
This fourth time, Mr. A, employed by the foreign company A, is dispatched to the subsidiary as an officer in Japan.
Let’s see if withholding tax is required, a final tax return is required.
It should be noted that officers and employees are taxed differently when it comes to non-residents.
The other case is that Mr. A lives in Japan for more than a year. He would be treated as a resident (non-permanent resident).
Click here for details on the classification of residents or non-residents.
Th point is that, regarding non-residents’ salary income, the scope of domestic source income is different between directors and employees.
As a general rule, the salary that corresponds to the period of work in Japan is considered a domestic source income, which would be taxed in Japan. The portion corresponding to the period of service overseas is considered foreign source income, which is not subject to Japanese income tax.
However, there is an exception to this rule.
When a non-resident of a Japanese company gets paid salary as a director, even a salary earned outside Japan is treated as a Japan source income, which is subject to taxation in Japan (Article 161, Paragraph 1, Item 12 of the Income Tax Act).
When Japanese subsidiary pays salaries in Japan to the non-resident directors, it needs to withhold the income tax from the salary (Article 212, Paragraph 1).
The following three are the conditions for the short-term tax exemption.
a. 183 days: The person who receives the salary does not stay longer than 183 days in the income source country.
b. The employer who pays the salary is not a resident of the income source country.
c. The individual’s salary shall not be borne by the employer’s permanent establishment in the income source country.
In this case, the employer who pays the salary to Mr. A is a resident of the income source country (Japan), which does not meet the b.
The salary is considered a domestic source of income when it corresponds to the period of service in Japan.
It is a foreign source income when it corresponds to the service outside Japan. (He is not paid as a Japanese company’s director).Non-resident’s foreign source income is not subject to Japanese taxation.
Please refer to this article for details.
As a general rule, the salary income corresponding to the service in Japan is considered a non-foreign source income. However, there is an exception when the resident is the Japanese corporation’s director. In such a case, income earned outside of Japan is also treated as non-foreign source income (Article 95, Paragraph 4, Item 10, Parenthesis A of the Income Tax Act), which is subject to Japanese taxation .
The salaries income paid by Japanese subsidiary for both the domestic service and overseas service are non-foreign source income.
A resident (non-permanent resident) is taxed in Japan, basically, on domestic source income (Article 7, Paragraph 1, Item 2 of the Income Tax Act).
As a general rule, the salary income that corresponds to the working period in Japan would be a domestic source income.
However, when the resident gets paid as a Japanese corporation’s director, income earned outside of Japan is also considered a domestic source income and is subject to taxation in Japan.
How about the the situation when the director gets paid by the overseas parent company?
The salary paid to Mr. A would be paid as an employee or a a director of a foreign corporation. So getting back to the basics, only the portion corresponding to the period of service in Japan is considered domestic source income.
The portion corresponding to the service outside Japan is foreign source income, which is not taxed unless it is remitted to Japan. No tax return is required.
This post is based on the laws as of December 8, 2019. The opinion is the writer’s personal opinion.
In the second case, Mr. A, employed by the foreign company A, works on a short-term business trip to a branch in Japan.
In the third case, Mr. A, employed by the foreign company A, is dispatched to the subsidiary in Japan as its employee.
This fourth time, Mr. A, employed by the foreign company A, is dispatched to the subsidiary as an officer in Japan.
Let’s see if withholding tax is required, a final tax return is required.
It should be noted that officers and employees are taxed differently when it comes to non-residents.
Resident characteristics of foreign officer A
We suppose two cases. One is that Mr. A remains a non-resident for Japan tax purposes. For example, though the overseas parent company dispatches Mr. A to the Japanese subsidiary to become its officer, he routinely works at the offshore parent company. He attends the board meetings of the Japanese subsidiary through TV to engage in its management. Mr. A does not have an address in Japan. In such a case he would remain a non-resident.The other case is that Mr. A lives in Japan for more than a year. He would be treated as a resident (non-permanent resident).
Click here for details on the classification of residents or non-residents.
Case; Non-residents
Non-residents > Japanese subsidiary pays the salary
Scope of Domestic source income
Non-residents are taxed in Japan when they have a certain domestic source income.Th point is that, regarding non-residents’ salary income, the scope of domestic source income is different between directors and employees.
As a general rule, the salary that corresponds to the period of work in Japan is considered a domestic source income, which would be taxed in Japan. The portion corresponding to the period of service overseas is considered foreign source income, which is not subject to Japanese income tax.
However, there is an exception to this rule.
When a non-resident of a Japanese company gets paid salary as a director, even a salary earned outside Japan is treated as a Japan source income, which is subject to taxation in Japan (Article 161, Paragraph 1, Item 12 of the Income Tax Act).
| Employees | Director of a Japanese company | |
| Salaries corresponding to the period of work in Japan | Domestic source income | Domestic source income |
| Salaries corresponding to the period of work overseas | Foreign source income |
Non-residents > Japanese subsidiary pays the salary > withholding tax
Salaries corresponding to a service in Japan as well as a service outside Japan are regarded as Japan source income.When Japanese subsidiary pays salaries in Japan to the non-resident directors, it needs to withhold the income tax from the salary (Article 212, Paragraph 1).
Non-residents > Japanese subsidiary pays the salary> Tax return
When a non-resident director gets paid in Japan with its tax withheld, tax return is not required except in certain cases. (If salary is over 20 million yen, tax return is required).Non-residents > Japanese subsidiary pays the salary> Tax exemption for short-term residents
Tax treaties usually have a tax exemption rule for non-residents’ short-term stay.The following three are the conditions for the short-term tax exemption.
a. 183 days: The person who receives the salary does not stay longer than 183 days in the income source country.
b. The employer who pays the salary is not a resident of the income source country.
c. The individual’s salary shall not be borne by the employer’s permanent establishment in the income source country.
In this case, the employer who pays the salary to Mr. A is a resident of the income source country (Japan), which does not meet the b.
Non-residents > Overseas parent company pays the salary
The salary is considered a domestic source of income when it corresponds to the period of service in Japan.
It is a foreign source income when it corresponds to the service outside Japan. (He is not paid as a Japanese company’s director).Non-resident’s foreign source income is not subject to Japanese taxation.
Non-residents > Overseas parent company pays> Withholding tax
When a salary is paid outside of Japan, the payer is not required to withhold tax.Non-residents > Overseas parent company pays>Tax return
Non-residents are required to file a tax return in Japan if they are not withheld on the Japan source income.Non-residents > Overseas parent company pays>Tax treaty
The tax exemption for short-term residents is applied to the salary received from the employer outside of Japan. Therefore, the salary received from overseas parent companies may be subject to short-term stay tax exemption if other requirements are satisfied.Case; Non-permanent resident
Non-permanent resident > Japanese subsidiary pays
The scope of domestic source income, when Japanese subsidiary pays
Residents are further divided into non-permanent residents and permanent residents. Non-permanent residents are taxed when they have non-foreign source income (nearly equal to domestic source income)| Non-foreign source income(≒Domestic source income) | Foreign source income | |||||
| Paid in Japan | Paid overseas | |||||
| Permanent resident | Taxed | |||||
| Non-permanent resident | Taxed | Taxed if remitted to Japan | ||||
| Non-taxed if not remmited to Japan | ||||||
| Non-resident | Taxed | Non-taxed | ||||
As a general rule, the salary income corresponding to the service in Japan is considered a non-foreign source income. However, there is an exception when the resident is the Japanese corporation’s director. In such a case, income earned outside of Japan is also treated as non-foreign source income (Article 95, Paragraph 4, Item 10, Parenthesis A of the Income Tax Act), which is subject to Japanese taxation .
The salaries income paid by Japanese subsidiary for both the domestic service and overseas service are non-foreign source income.
Non-permanent resident > Japanese subsidiary pays> Withholding tax
As a non-permanent resident, the salaries to his service in Japan and overseas are domestic source income, which are required to be withheld tax upon payments.Non-permanent resident > Japanese subsidiary pays>Tax return
In certain cases, such as residents with salary income withheld tax and adjusted at the year-end by the employer, and salary is less than 20 million yen, etc., then he does not need to file a final tax return (Article 120 of the Income Tax Law, Article 121 Paragraph 1). Details are here. https://www.nta.go.jp/taxes/shiraberu/taxanswer/shotoku/1900.htm Since Mr. A is an director, there is a possibility that it would exceed 20 million yen. Then a final tax return would be required.Non-permanent resident > Japanese subsidiary pays>tax exemption for short-term residents
The tax exemption for short-term residents is a rule that exempts non-residents coming to Japan from taxation in Japan. It is assumed here that Mr. A is a resident, Short-term stay tax exemption does not apply.Non-permanent resident > overseas parent company pays the salary
A resident (non-permanent resident) is taxed in Japan, basically, on domestic source income (Article 7, Paragraph 1, Item 2 of the Income Tax Act).
As a general rule, the salary income that corresponds to the working period in Japan would be a domestic source income.
However, when the resident gets paid as a Japanese corporation’s director, income earned outside of Japan is also considered a domestic source income and is subject to taxation in Japan.
How about the the situation when the director gets paid by the overseas parent company?
The salary paid to Mr. A would be paid as an employee or a a director of a foreign corporation. So getting back to the basics, only the portion corresponding to the period of service in Japan is considered domestic source income.
Non-permanent resident > Overseas parent company pays>Withholding tax
No withholding is required when the salary is paid outside Japan.Non-permanent resident > Overseas parent company pays>Tax return
If the portion of the salary corresponding to the domestic service period was not withheld, he needs to file a tax return in Japan.The portion corresponding to the service outside Japan is foreign source income, which is not taxed unless it is remitted to Japan. No tax return is required.
Non-permanent resident > Overseas parent company pays > Application of tax exemption
The short-term tax exemption is for non-residents in Japan, so it does not apply to Mr. A, who is a resident.This post is based on the laws as of December 8, 2019. The opinion is the writer’s personal opinion.
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