Japan withholding tax and final tax return for foreign officers of foreign-affiliated companies

Continuing from the previous topic, if the foreigner (Mr. A) is dispatched to a Japanese subsidiary from the overseas company (Company A), let’s see if withholding tax is required or a final tax return is required.

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.

The second case, Mr. A, employed by the foreign company A, works on a short-term business trip to a branch in Japan,

The third case, Mr. A, employed by the foreign company A, is dispatched to the subsidiar in Japan as its employee.

This fourth time, Mr. A, employed by the foreign company A, is dispatched as an officer to the subsidiar in Japan.

It should be noted that officers and employees are taxed differently when it comes to non-residents.

Resident characteristics of foreign officer A

Suppose there would be two cases. One is that Mr. A remains a non-resident. 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 will not have an address in Japan. In such a case he will remain a non-resident.

The other case is that Mr. A lived in Japan for more than a year. He will be a resident (non-permanent resident).

Click here for details on the classification of residents or non-residents.

Case; Non-residents

Scope of Domestic source income

Non-residents are taxed in Japan when they have certain domestic source income. Certain domestic source income is listed in Article 161 of the Income Tax law. Regarding salary income, the range of domestic source income differs depending on whether non-residents are officers or employees of Japanese companies.

For employees, domestic source income regarding salary is limited to the portion corresponding to the period of work in Japan. On the other hand, for officers, the salary of domestic source income is all salaries paid based on their qualifications as officers of a Japanese company (Individual Income Tax Law Article 161, Paragraph 1, Item 12, Parentheses, Income Tax Law Enforcement Order, Article 285, Paragraph 1).

Employees Officers of the 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

For example, suppose Mr. A has an overseas address and usually works at an offshore parent company.  He would attend the subsidiary’s board meetings. Even though there is little work in Japan, the executive compensation paid to Mr. A by the Japanese subsidiary will be fully taxed in Japan because it is deemed to be a domestic source income.

Non-residents > Japanese subsidiary pays salary

 

Non-resident Subsidiary pay

Withholding tax

The salary paid to non-residents officers of the Japanese subsidiary, whether it is a part corresponding to a period of work in Japan or a part corresponding to a period of overseas work, is all domestic source income. All would be subject to tax in Japan.

When paying salaries in Japan to non-residents, there is a withholding obligation (Article 212, Paragraph 1).

Tax return

When non-residents are withheld tax, a tax return is not required (Article 172, Income Tax).

Tax treaty (Tax exemption for short-term residents)

For details about the requirement of tax exemption for the short-term residents, please refer to the previous topic. The tax exemption for short-term residents is limited to the salary received from the employer outside of Japan. Therefore, there is no short-term tax exemption for Mr. A since the Japanese company is the payer.

The conclusion.

When Japanese subsidiary pays to their non-resident officer, the short-term tax exemption does not apply, it would need to withhold salary, No need to file the tax return

Non-residents > Overseas parent company pays salary

 

Withholding tax

What if the overseas parent company pays to Mr. A who is a non-resident?  The parent company would pay because he is an employee or a director of the parent company. In other words, he is not paid based on the position as the officer of the Japanese company. So return to the basic, only employment income that arises from working in Japan is considered domestic source income, which would be subject to tax in Japan.

If domestic source income is paid overseas to non-residents, and the payer (overseas parent company) does not have a branch office in Japan, there is no obligation to withhold tax(Article 212, Paragraph 1 of the Income Tax Law).

Tax return

Non-residents are required to file a tax return in Japan if they are not withheld (Article 172, Paragraph 1 of the Income Tax Act).

Tax treaty (tax exemption for short-term residents)

The tax exemption for short-term residents is limited 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.

The conclusion. When the overseas company pays the salary to the non-resident officer of the  Japanese subsidiary, it is not required to withhold tax by filing tax treaty notification.

Case; Non-permanent resident

The scope of domestic source income

Residents are further divided into non-permanent residents and permanent residents. Most foreign people relocating to Japan will likely apply to a non-permanent resident.
Concerning taxation for non-permanent residents, please refer to this article.

Non-permanent residents are taxed in Japan when they have income other than foreign source income (referred to here as domestic source income for convenience) (Article 7, Paragraph 1, Item 2 of the Income Tax Law). Salary income is also taxed in Japan if it falls under domestic source income. It is necessary to keep in mind that the range of salary income corresponding to domestic source income differs between employees and executives. For an employee’s salary, domestic source income is a salary arising from work performed in Japan (Article 95, paragraph 4, item 10 (a) of the Income Tax Law). On the other hand, for an officer’s salary of a Japanese company, domestic sources income is the salary arising from the status as a Japanese corporate officer, regardless of the place where he or she worked (written in parentheses in Article 95, paragraph 4, item 10).

 

Employee Officer of the 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

Mr. A, a non-permanent resident, was paid a salary from a Japanese subsidiary based on his / her position as a director of a Japanese company, so he/she would be subject to taxation in Japan.

What if Mr. A, a non-permanent resident, also gets paid from his overseas parent company? The salary paid by the overseas parent company is not based on the position of the director of the Japanese company. If it is based on work performed abroad, it would be foreign source income, and he/she would not be taxed in Japan (*). If it is based on work in Japan, he/she would be taxed in Japan.
(*) Foreign-sourced income is subject to tax in Japan if paid and remitted to Japan.

Non-permanent residents > Japanese subsidiary pays salary

Withholding tax

The salary paid by the Japanese subsidiary would be withheld (Article 183, Income Tax Law).

As a general rule, all the residents need to file a final tax return. However, in certain cases, such as residents with salary income being withheld tax and adjusted at the year-end by the payer, 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

In principle, residents are required to file a final tax return. However, in certain cases, such as the salary is less than 20 million yen, you do not have to file a final tax return (Article 120, Article 121, Paragraph 1 of the Income Tax Law). Since Mr. A is an officer, there is a possibility that it has exceeded 20 million yen, in which case a final tax return will be required. Please see here for details about the case you need to file a tax return.

Tax treaties-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 that Mr. A is a resident, Short-term stay tax exemption does not apply.
The conclusion is that short-term stay tax exemption does not apply to Mr. A, who has been a resident. Tax is withheld from the Japanese subsidiary. In certain cases, such as the salary is over ¥20,000,000, a final tax return is required.

Non-permanent resident > overseas parent company pays the salary

Withholding tax

What if there is a salary paid overseas by the foreign parent company, and there is a portion corresponding to the work in Japan?

When the salary of a resident is paid outside of Japan, no need to withhold (Article 183, Paragraph 1 of the Income Tax Law).

Tax return

There is no withholding tax, it is necessary to file a final tax return in Japan (Article 121, Paragraph 1, Item 2 of the Income Tax Law).

Application of tax exemption for short-term residents

The short-term tax exemption is for non-residents in Japan, so it does not apply to Mr. A, who is a resident.

The conclusion is that short-term tax exemption will not be applied to Mr. A. For the portion of the salary corresponding to domestic work, the overseas parent company does not need to withhold tax, and a tax return is basically required (except in certain cases, such as over 20 million yen).

This post is based on the laws as of December 8, 2019. The opinion is the writer’s personal opinion. Please consult with your tax accountant for the actual tax process.