Japanese withholding tax and tax returns for foreigners who come to Japan on a business trip

We would like to see if a tax return /withholding tax is required for foreigners in Japan.

Foreigners would be assigned to Japan in several cases as follows;

  • Case1. An overseas company dispatches its people to Japan for a short business trip,
  • Case2. An overseas company dispatches its people to a branch in Japan,
  • Case3. An overseas company dispatches its people  to a Japanese subsidiary as its employee,
  • Case4. An overseas company dispatches its people to Japanese subsidiary as its officer.

Firstly, we will look into Case 1, a foreigner sent to Japan on a short business trip (assuming there is no branch in Japan).

Residency of foreigner Mr. A

Resident status

First, the tax implications will differ depending on whether the foreign person (Mr. A) is a Japanese resident or a non-resident.

A resident is an individual who has an address in Japan or who has stayed for more than one year until now (Article 2, Paragraph 1, Item 3 of the Income Tax Law). If you have a profession with which you are supposed to live in Japan for more than one year, you are presumed to have an address in Japan.

Mr. A is going to Japan for a short business trip, so his period in Japan would not exceed one year.  We can suppose Mr. A remains a non-resident during his stay in Japan.cope of taxation for non-residents

Scope of tax liability of non-residents

Next, what kind of income would the non-residents be taxed in Japan?

Non-residents are taxed in Japan only if they have a certain Japanese domestic source income (income tax Article 5 Paragraph 2).

Domestic source income means the income generated in Japan (income tax 161). As for employment income, the portion of the salary corresponding to the business trip period in Japan is considered domestic source income.

Mr. A will calculate the Japanese source income amount by dividing by the ratio of the number of days.

 


Withholding tax obligation

Suppose Mr. A will be paid by the foreign corporation (Company A), and the payment will be made to an overseas bank account.

For the non-resident employment income, the payer will be required to withhold taxes only if the payment is made in Japan (*).

In other words, if a salary is paid outside of Japan, then no need to withhold.

If applied to this case, Company A, who pays salary overseas, will not be obliged to withhold.

(*) What is the payment outside of Japan or domestic payment?.  It does not depend only on whether the transferred bank account with a store in Japan or a bank account with a store outside the country. We want to see it at another opportunity.

(**) As an exception, even when domestic source income is paid to non-residents overseas, if the payer (foreign corporation A) has an office or a branch in Japan, the foreign corporation A is deemed to pay in Japan, so a company A is obliged to withhold tax  (Article 212, Paragraph 1, Paragraph 2).

 

Japanese tax return

The salary of Japanese source income is paid abroad without withholding tax, then Mr. A needs to file a final tax return in Japan.

 

183 days ruledents

Mr. A, as shown above, needs to pay the income tax in Japan.  At the same time, he would also be subject to taxation in his country (Country A) on that Japan-sourced income. That is double taxation.

To avoid double taxation, the tax treaties have set rules regarding tax exemption for short-term visitors.

The following three conditions must be met for the short-term tax exemption.

① 183 days standard:  The person who receives the salary should not stay longer than 183 days in the source country.

② The employer who pays the individual’s salary is not a resident of the source country.

③ The individual’s salary shall not be borne by the employer’s permanent establishment.

Employer A does not have a permanent establishment such as a branch in Japan.

Therefore, Mr. A would be exempt from Japanese taxation if he files a tax treaty application form.  He does not need to file a tax return in Japan.