Final tax return for the year when a foreigner enters Japan

Hello, this is Yoshio Yamaguchi of YG international tax accounting firm.

I would like to see what happens to year-end adjustments and tax returns for the year when a foreigner is sent to a Japanese subsidiary and enters Japan. Suppose foreigners will live in Japan for more than one year so that they will be treated as residents of Japan from the day after entry (Article 2, Paragraph 1, Item 3 of the Income Tax Law). The point is that in the year of entry, the foreigner has both statuses a non-resident and a resident.

Tax scope

Before entering Japan, the foreigner is classified as a non-resident, whose range of tax liability is limited to Japan source income.  After entering Japan, they are classified as “non-permanent residents”, who is a resident of Japan but who does not have Japanese nationality and who has had an address in Japan within the past ten years for a total of 5 years or less. The rage of tax liability for non-permanent residents are;

(1) income other than foreign source income (≒Japan source income)

(2) foreign-sourced income paid in Japan or sent to Japan from abroad.

For more details about the taxation of non-permanent residents, please see this post.

If they get paid a salary before entering Japan in their home country during the non-resident period, they will not be taxed in Japan (below orange part).

However, it is necessary to pay attention if their salary or bonus is paid after entering Japan (=non-permanent resident period, above the blue part). Let’s look at the following bonus for example.

The first bonus paid after entering Japan.

For example, suppose the bonus calculation period is from October 1 to March 31, and the entry date is February 1, and the bonus payment date is June 1. In this case, from October 1 to February 1 of the entry date, the portion corresponding to the overseas work period before entering Japan is external source income, and from February 2 to March 31 the part corresponding to the period of service in Japan is domestic source income.

“The foreign source income before entry is not taxable in Japan because it originated during the period of non-residents”……This is wrong.

 

It was June 1, after entering Japan, that the bonus income was specifically determined and paid. At this time, the employee is a non-permanent resident. Non-permanent residents are subject to tax on;

(1) income other than foreign source income (≒Japan source income)

(2) foreign-source income paid in Japan or sent to Japan from abroad.

So out of the bonuses received,

(1) the amount corresponding to the domestic working period (≒Japan source income)

(2) the amount corresponding to the overseas working period paid in Japan (foreign-source income paid in Japan)

would be taxed in Japan for non-permanent residents.

That is, all the amount of the bonus would be subject to Japan income tax and the company has to withhold from all bonuses (Article 183, Paragraph 1 of the Income Tax Law).

Whose is the income tax refunded by the foreign tax credit?

The overseas duty period portion of the above bonuses may be subject to income tax in a foreign country where the payee had worked, as well as in Japan. As such, the foreigner is subject to double income tax in Japan and abroad, so they can reduce or refund the tax imposed abroad by applying for a foreign tax credit in Japan, the country of residence.  If the income tax is refunded, it would be fair to attribute the refunded income tax to the company if the company has borne the foreign income tax. This point should be stipulated in advance in the company’s employment rules, and the employees should be fully informed. This treatment is not a law but would be fairer.

Regarding the year-end adjustment

After the date of entry, if you submit a file for dependents of salary earners whose salary is less than 20 million yen, the year-end adjustment will be applied to those whose salary is due by the end of the year after the date of entry (Article 190 of the Income Tax Law).