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;
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
First, the tax implications will differ depending on whether the foreign people (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 that you will generally live for more than one year in Japan, you are presumed to have an address in Japan.
As for the foreigner Mr. A’s resident nature, he is going to Japan for a short business trip, so we usually assume that his period does not exceed one year. Let’s suppose that Mr. A remains a non-resident during his stay in Japan.
(Please refer here for the details of residents and non-residents).
The scope of taxation for non-residents
Next, when and to what kind of income the non-residents would be taxed in Japan?
Non-residents are taxed in Japan only if they have a certain Japan 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, it doesn’t matter who pays you, who you work for, or where to pay. It is essential where you physically work.
In Mr. A’s case, the part of the salary that corresponds to the working period in Japan will be recognized as the Japan domestic source income. He has to calculate the amount of it out of his whole salary and pay the tax in Japan (income tax article 161, paragraph 1, item 12a).
The necessity of withholding tax for foreign company A
The salary of a foreigner who comes to Japan on a short-term business trip like Mr. A would be usually paid by the foreign corporation (Company A), and the payment would be made overseas.
With respect to the non-resident employment income, the payer will be required to withhold taxes only if the payment is done 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 that company A is obliged to withhold tax (Article 212, Paragraph 1, Paragraph 2).
The necessity of final tax return for foreigner Mr. A
Non-resident (Mr. A) receives the salary of Japanese source income outside of Japan without withholding tax, then Mr. A needs to file a final tax return in Japan.
Tax exemption for short-term residents
Mr. A, as shown above, needs to pay the income tax in Japan. At the same time, he would be also subject to taxation in his country (Country A) on that Japan sourced income. That is double taxation.
If the overseas business trip leads to double taxation, it will hinder interpersonal exchanges and international transactions. To alleviate this impediment, tax treaties have set rules regarding tax exemption for short-term visitors, and exempt them from taxation in the income sourced country (Japan) under certain conditions.
All of the following three conditions must be met for the short-term tax exemption. There seems to be a slight difference among the tax treaties. Here we will confirm the OECD model tax treaty(* 1).
(* 1) Co-authored by Tsuyoshi Kawada, “OECD Model Tax Treaty Commentary 4th Edition”
① 183 days standard: The person who receives the salary should not stay longer than 183 days in the source country.
For any twelve-month period that begins or ends in the tax year, the stay in Japan must not exceed 183 days. For example, if you stay for a total of 10 months, the last five months in this tax year, and the first five months of the following tax year, it will exceed 183 days.
② The employer who pays the individual’s salary is not a resident of the source country.
Employer A, who pays Mr. A’s salary, should not be a resident of Japan.
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.
This post is based on the laws in Japan as of December 20, 2019.