Taxes in Japan…
Have you ever come up with a brilliant business idea, but the thought of dealing with the infamously complex taxes in Japan stopped you from chasing your dream? If your answer is yes – this article is for you.
Even if your answer is no, but you plan to live in Japan for a longer period, do not close this article just yet- I’m sure we have information that might be useful for you too.
Overseas income, residency status, and tax breaks – all this and more about taxes in Japan in today’s article.
But before we move on let me warn you: the tips we provide in this article are just to give you a basic understanding of the tax implications in Japan.
In no event do we guarantee that the information provided in this article will be an absolute solution to your particular situation.
You can only receive a professional interpretation of your case after having a tax accountant analyze your background, documents, and facts.
Alright, with this idea planted firmly in mind, let’s get the ball rolling!
We will discuss TOP 5 FAQs about taxes in Japan we usually receive from our clients.
Taxes in Japan | Question 1:
Will I be taxed on my overseas income from day 1 in Japan?
No, the tax is levied on the worldwide income only when you become a permanent resident in Japan. Please note that «permanent resident» for tax purposes differs from immigration law. You’re treated as a permanent resident for tax purposes if you have resided in Japan for more than 5 years.
Attention for those who have double nationality: Japanese citizenship + foreign country’s citizenship
They either treat you as a non-resident or a permanent resident for tax purposes in such a situation. And the length of stay in Japan cuts no ice here.
If you’re a permanent resident for tax purposes, they levy the tax on both your overseas income and domestic from day 1 in Japan.
Taxes in Japan | Question 2:
When do I start being treated as a Japanese resident?
Alright, here we’d like to clear up the popular misconception about taxes in Japan. Many people believe that foreigners get treated as Japanese residents only after living in Japan for more than 6 months (183 days rule).
Absolutely false. Taxes in Japan are not as easy as ABC.
In reality, the judgment is based on objective facts such as:
- home address
- primary occupation
- place of your assets
- relatives/family status
Please note the priority order is used in such situations. The priority order is the same as the order of the above numbers.
Let’s dive in and discuss the most typical cases.
Case1: Expats who plan to live in Japan for less than 1 year or who extend their stay due to Covid or other reasons.
If it is evident in advance that you’ll be staying in Japan for 1 year or less (let’s say you have an overseas secondment contract for 1 year only), you’ll be treated as non-residents for tax purposes.
Let’s refer to the example below. It will help us better understand how taxes in Japan work in such a situation.
Scheduled date of entry into Japan: August 20, X1
Estimated departure: August 20, X2
Period of stay: August 21, X1 – August 20, X2
In very basic sense and most common situations, if you have to stay in Japan beyond the day on which 1 year has passed since the entry date, you’ll get treated as a resident for tax purposes.
If you can leave Japan before or on the day on which 1 year has passed since the entry date, you’ll be treated as a non-resident for tax purposes.
So, technically, the requirement of “residing in Japan for more than 1 year” will only be satisfied if then you continue to reside in Japan after August 21, X2.
Alright, clear here.
But what happens if it was clear in advance that you would stay in Japan for 1 year or less, but after arriving in Japan and staying here for a while, you HAD TO extend your stay for the reasons that hardly depend on you (like Covid-19, for example).
How does it change your tax status in Japan?
Unfortunately, in such situations, you will get treated as Japanese residents from the next day after the day on which you learned you would need to extend your stay.
It is worth noting that there is a non-resident tax in Japan. It is levied at a flat rate of 20.42 % on the gross salary and allowances (without deductions and exemptions). In addition, they classify it as a Japanese income source.
Therefore, our general advice is that working under this tax status for a Japanese company is not advantageous.
For non-resident taxpayers, whose salary income was not subject to 20.42% Withholding Tax, it is also necessary to file an Individual Income Tax Return to pay the tax at a 20.42% tax rate.
It is the case for expats who receive Japan’s source salary income from an overseas company.
Case 2: Expats who plan to live in Japan for more than one year
If you come to Japan for a long time ( you have a visa for more than 1 year), be it for work, studies, or other reasons, you should be aware of your tax position. Because you get treated as a Japanese resident the next day after passing through an immigration gate.
Case 3: People who came to Japan to establish a company and applied for a management visa. But while waiting for the approval they stay in JP under a tourist visa. When do they become residents?
It’s not like we’re going to discover a universe here, but people who come to Japan under a tourist visa, legally cannot work in Japan. No income, no tax. As simple as that.
What does it mean for your residency period?
We’ve handled many similar cases and in our experience, the tax residency will be counted from the next day you acquire the Business Manager VISA.
Case 4: A person who has double nationality (one is Japanese). How does the tax residency work in this case?
Yet again, for people who have double nationality, there is no possibility of being treated as non-permanent residents. They are always either permanent or non-residents.
The judgment is again based on the following criteria to understand whether you’re a non-resident or permanent resident:
- home address
- place of your assets
- relatives/family status
The decision is made based on the assessment of the 4 above which means we cannot provide a definite conclusion until we hear your background and facts. Please contact a professional for personalized advice.
Case 5: Owners of multiple estates around the world who change their place of residence from one country to another within a year and reside in JP under 183 days.
Again, it is essential to note that whether a person is a Japanese resident is not simply determined by the length of stay but by the overall factors, such as nationality, family’s address, etc.
Therefore, even if you’re moving from one place of residence to another over several countries within a year and the total period of residency in Japan is under 183 days, you still have a chance of being treated Japanese resident based on the assessment of the following 4 criteria:
- your home address
- your primary occupation
- place of your assets
- your relatives/family status
Case 6: Your company sends you to their Japanese subsidiary to receive some kind of training for 5 months
There are Double Tax Agreements for non-residents who visit Japan on a short-term basis (let’s say they have a long business trip).
These DTAs generally exempt such individuals from taxation in Japan. The provisions of every DTA may differ and depend on the country, so if you plan to go on a long business trip to Japan it’s better to contact a professional in advance.
It’s because to apply for such exemption, you’ll need to carry out certain procedures and submit a notification to the Japanese Tax Office.
Yeah…I hope you didn’t expect taxes in Japan to be pretty straightforward. I mean, it’s Japan, after all!
Taxes in Japan | Question 3:
I am a sole proprietor, are there any tax breaks I can enjoy?
“Blue Form Return” screams every single article we’ve ever written or consultation we have ever provided. Yet, most foreign sole proprietors in Japan are not aware of its existence.
What is it, and why is it so important? And what does it mean for your taxes in Japan?
Let’s dive in and discuss the details.
So in Japan, there are two filing types for Final Income Tax Return: White Return (shiro-iro shinkoku, 白色申告) and Blue Return (ao-iro shinkoku, 青色申告). Blue Form Return offers greater tax benefits – you can get up to 650,000 yen in tax deduction if you file your Final Income Tax Return online and up to 550,000 if you do a paper filing.
The most significant difference between the White Return and the Blue Return lies in the set of documents you’ll need to prepare and attach to your Final Tax Return. If you want to enjoy the benefits of the Blue-Form, you’ll need to do the following:
Step 1: When you register your sole proprietorship at the tax office by filing a “Notification of Business Opening” make sure you also submit “Application for Approval of Filing Blue Return Type” at that time.
Step 2: Once you’ve opted for the Blu Return Filing type you’ll have to adhere to the double-entry booking system throughout the year. Make sure you keep your books clean and updated – this is one of the requirements to comply with if you want to get a deduction.
Step 3: When filing your Final Income Tax Return, you’ll also be required to attach Blue Return Financial Statement. It consists of Income Statement, 2 Profit&Loss Statements, and a Balance Sheet, so a total of 4 pages.
It’s important to note that the amount of deduction you get depends on how clean your books are and whether or not the Blue Return Financial Statement is prepared properly at the time of filing.
If everything is well-organized – congratulations! You’ve been a real stickler for paperwork all year round (the most important for start-ups!) and now can get the maximum amount of deduction.
If your books are messy and the Blue Return Financial Statement has mistakes, then the maximum amount of deduction you can get is 100,000 yen. In that case, you won’t need to prepare a Balance Sheet (page 4 in the Blue Return Financial Statement).
What are some other perks of the Blue Return Filing type?
Well, there sure are some:
If you have full-time family employees who are exclusively engaged in your business, you can treat their salaries as necessary expenses. So in the Income Statement, you will need to indicate the total gross amount of salaries paid to them (cell 38).
In addition to that, there is a special tab in Schedule 2 of Final Tax Return Form B where you will need to indicate the personal information of those family employees as well as their amounts. Please be careful – the amount in cell 38 of the Income Statement should coincide with the amount in cell 50 of Final Income Tax Form B Schedule 2.
Please note you’ll need to submit “Notification of salary for full-time family employee of a blue-return taxpayer” in advance to apply for this deduction.
Benefit 2. You can carry forward revenue losses for 3 years
Benefit 3. You can also carry back revenue losses to the previous year
Benefit 4. You can calculate the allowance for uncollectible receivables
Benefit 5. Special treatment of assets depreciation
If you are a Blue-Return Filer and meet certain requirements, you can take advantage of a special rule that allows you to write off all depreciable assets with an acquisition cost of less than 300,000 yen as an expense in the year of purchase.
If you opted for the White Return Filing type when registering your business, and would like to switch to Blue Return, you’ll need to apply at the tax office. Please note the due date is quite strict, so if you miss it you’ll need to wait until the next year.
When do I need to opt for Blue-Return Filing?
The deadline for filing an Application for Approval of Filing Blue Return Type is quite limited.
For Sole Proprietors
You need to submit the application within two months of the business opening date (in case the business opening date is after January 16th) or until March 15th.
You should submit it either within three months of the incorporation date or on the last day of the first business year. (whichever is earlier)
What we usually recommend to our clients is to submit the Blue-Return Application together with the Notification of Business Opening – this way you won’t forget about it and won’t need to worry about the deadlines.
Al in all, it’s definitely worth opting for the Blue Return Filing type although it’s a lot of legwork.
After all, who said taxes in Japan were easy?
Another way to reduce your tax amount is to increase your business expenses.
For example, if you’re just starting out and do not plan to rent an office, you can calculate a certain portion of your house rent (if any) or utility bills as a business expense. So make sure to be a stickler for paperwork and store every single record of an expense related to your business.
Taxes in Japan | Question 4 :
I have a company ( so I’m the founder and CEO). And I live in the house that my company rents for me. So the lease agreement is under my company’s name, not me as an individual. Is there anything I can do from a tax-saving perspective?
We would need more details about this situation, but let’s do the simulation.
- You’re a company owner
- You live in a house the rent agreement for which is under your company’s name (not yours as an individual):
- The company didn’t purchase the house, it’s just a rent
- Total rent fee is 130,00 JPY (the company pays to the landlord)
- You bear a certain portion of the rental fee as well, let’s say 50,000 JPY (you pay this rent fee to your company)
In that case, your company can take advantage of the tax-saving method called Sahataku (社宅) and calculate a certain portion of the rent fee (plus a certain % of the utility bills) as expenses/employee benefit expenses.
Let’s refer to the numbers we indicated above:
130,000 JPY: the rent fee your company pays to the landlord and
50,000 JPY: your company’s profit (the rent fee the company receives from you).
In that case, the difference of 80,000 JPY can be recorded by the company as an expense.
Normally you would also need to cut your salary/director’s fee by 80,000 JPY (actual rent fee borne by the company) – it will help you reduce the company’s social insurance premiums.
In addition to that, you as a company executive can benefit from this as well as it will lower your Income Tax, Resident Tax, and Social Insurance Premiums meaning your total net paycheck will increase.
The calculation is usually quite cumbersome and requires special knowledge and documents like a floor plan. Also, if the calculations and the documentation are not prepared properly, the tax office might deny the expense and tax it as your salary. So you’d better seek professional help, if possible. But this tax-saving plan is anyway very powerful, so it’s worth trying.
Taxes in Japan | Question 5:
Japanese Consumption Tax aka VAT. My company in Japan doesn’t have a VAT number, is it even possible to claim the refund?
Yes, it is possible to get a refund.
It is true that the Japanese Consumption Tax Law hasn’t adopted a VAT invoicing system yet. Instead, you’ll be required to maintain the accounting records (General Ledgers) to support the claimed amounts.
The new invoicing system (Qualified Invoice System) which is similar to the VAT invoicing system will come into effect from October 2023. Recently, the Japanese government has taken several transitional measures to give businesses some time to implement the changes.
The main difference between the current invoicing system and the new invoicing system is that the new one must include a breakdown of applicable tax rates for the given transaction and the VAT Number of a taxable business.
Compare 2 invoices:
All in all, the Japanese tax system surely offers tax benefits or tax planning strategies that can help minimize your taxes in Japan. But it is only possible to take advantage of them if you know the tax regulations. That’s the reason we always recommend not to breeze over hiring a tax accountant as your business decisions can greatly affect your tax exposure in Japan.
We hope the information in this article has been helpful for you and you’ll start making informed decisions from now on (in addition to turning into a real stickler for paperwork!).