I believe there are many employees who have been seconded to overseas subsidiaries from Japan but are now returning to Japan due to the effects of the corona. There are probably cases where they have been unable to return to their overseas offices, and 183 days are about to pass. Let’s examine the taxation relationship in this case.
Even though the employee’s stay in Japan is unplanned and prolonged, the employee’s residency remains essentially non-resident in Japan.
Taxation on Salary in Japan
Non-residents are subject to Japanese income tax only if they have Japanese source income. Employment income earned from working in Japan is considered a domestic source income. It is subject to taxation (Article 161(1)(12)(a) of the Income Tax Act).
Similarly, regarding the bonus, Japanese income tax will be applied to the portion corresponding to Japan’s period of service.
Methods of taxation
The overseas subsidiary would continue to make payments to the offshore bank account for the period of service in Japan. Although the payment is made overseas, the Japanese income tax will be imposed on it. However, the foreign subsidiary that makes the amount is not obliged to withhold tax at source (Article 212(1) and (2) of the Income Tax Act).
However, the non-resident employee is obliged to file an income tax return for his or her wages and other benefits by March 15 of the following year, or earlier, if the non-resident leaves Japan (Article 164(2)(ii) and 172(1) of the Income Tax Act). The tax rate is 20.42%.
On the other hand, the Japanese parent company may pay a part of the salary in Japan to continue the social insurance in Japan for the seconded employees. This domestic payment portion must be subject to withholding tax (Article 212(1) of the Income Tax Act).
Income Tax Liability
In many cases, the overseas subsidiary would bear the income tax of the seconded employees working in its states. This time, the Japanese income tax is levied on employment income that occurred in Japan. Who bears this burden according to internal rule, the employee, or the company? Many companies may need to consider it for the first time.
If a tax accountant is hired to file an income tax return in Japan, it will be necessary to determine who bears the fee for the tax accountant, the company, or the employee.
If the Japanese parent company pays the Japanese income tax for the employee, it is also considered a salary, so the company will need to make a gross-up calculation.
The problem of double taxation
Employment income corresponding to the period of service in Japan will be subject to taxation in the foreign state where the employee resides if the state has adopted the worldwide income taxation system. When there is double taxation between Japan and the foreign state tax credit will likely be applied, and a tax refund will be obtained in the state of residence. It will be necessary to determine which should pay for the tax accountant fee, the foreign subsidiary or the employee.
If the foreign state taxes only the source income of that country, it will not tax on the employment income earned in Japan since it is “foreign source income”.
Tax Exemption for Short Term Residents
The above is a case in which the tax treaty exemption for a short term visitor does not apply to employees who have temporarily returned to Japan. If the short term tax exemption is applied, the income tax in Japan is exempted.
Although some differences are depending on the tax treaty with which country, the short-term resident tax exemption requirements are generally the following three
- The period of stay in Japan must not exceed 183 days.
Generally, within 12 consecutive months, the total stay must not exceed 183 days. On the other hand, some countries require a stay of 183 days or less in a calendar year to qualify for the short term resident tax exemption.
- A non-Japanese employer must pay the individual’s salary.
- The individual’s salary is not covered by the employer’s permanent establishment in Japan.