This article will discuss tax-non-residence in Japan, the types of Japanese residence for tax purposes, and general tax implications for people seeking a second residence in Japan.
Japan is one of the safest, wealthiest, and most beautiful countries in the world. Moreover, Japan boasts one of the world’s most powerful passports.
Given those stats, who wouldn’t want to be a part of the “land of the rising sun”? However, Japan isn’t super emigration friendly or tax-friendly, and you have to jump many hoops to be a Japanese resident. Knowing the exact implications of your tax status in Japan, therefore, is of vital importance to ensure you are being taxed correctly within the country. It also ensures a clean break after you decide to leave. This guide will help you to gain a better understanding of how the system works and, of course, if you do require assistance, feel free to reach out to us to discuss becoming a Nomad Capitalist client.
Japan – Country Overview
Japan is an island nation lying off the east coast of Asia. It is one of the world’s most urbanized and densely populated countries, with a population of 125,493,239.
Tokyo is the capital and largest city. The Greater Tokyo Area is the most populous metropolitan area in the world. The official language is Japanese, and the official currency is the Japanese Yen.
Japan is a highly developed country and a member of international organizations like the United Nations, OECD, G20, etc.
Japan – Economy
Japan has the world’s third-largest economy by nominal GDP and the fourth-largest by purchasing power parity (PPP).
Japan bore considerable hardship following its defeat in the Second World War, yet in the postwar years experienced what was dubbed an economic miracle, becoming the world’s second-largest economy by 1972.
Today, Japan remains a global leader in the technology sector and is world-renowned for its automotive, electronic, and robotic industries.
In addition to its enormous contributions to the world of art and culture, it also has had a profound effect on the entertainment industry, particularly in fields such as animation. Japan also supercharged the global video game industry in the 1980s, which is still growing and set to exceed $200 billion this year.
Types of Taxes in Japan
Japanese taxes are classified into two categories – national and local taxes.
- National Taxes, such as Individual Income Tax, are paid to the national government.
- Local Taxes, such as Individual Inhabitant Tax, are paid to the prefectural or municipal government.
Japan has property taxes, consumption taxes, personal and corporate income taxes, automobile taxes, etc.
Who Pays Taxes in Japan?
According to Japan’s Ministry of Justice, for income tax purposes, individuals in Japan are classified into three categories:
- Non-Permanent Residents
Let’s discuss each category in detail below.
The following people are termed as tax residents in Japan:
- People with a registered address (domicile) in Japan, or
- People who’ve had a residence in Japan until the present for over a year (non-permanent residents are excluded).
Non-Permanent Resident Taxpayers
The following people are termed as non-permanent-residents in Japan:
- Japanese residents (as defined above) who’ve lived in Japan for five years or less and don’t have Japanese nationality.
The following people are termed as non-residents in Japan:
- People who’ve lived in Japan for less than a year and don’t have a registered address (domicile) or residence in Japan.
In essence, any person living in Japan who doesn’t qualify as a resident is a non-resident.
What is the Scope of Personal Taxable Income?
The scope of income taxes varies according to the type of residence.
- Residents are taxed on their entire worldwide income, earned inside and outside Japan.
- Non-permanent residents are taxed on their locally-sourced income. Their foreign-earned income is also taxed if paid within or remitted to Japan.
- Non-residents are taxed only on their locally-sourced income, such as salary, wages, and other types of income.
How to Pay Taxes in Japan?
Filing a tax return in Japan is a combination of two systems – a self-assessment system and a withholding tax system.
- Self-Assessment: A person determines their tax liability/amount by filing a tax return.
- Withholding Income Tax: The employer subtracts the taxes from the employee’s employment income (salary, wage, etc.) and submits them.
Foreign employees living and working in Japan usually don’t have to worry about filing a tax return, thanks to the withholding tax system.
Employees in Japan need to file a tax return only if:
- Their employer does not withhold taxes (e.g., any employer outside Japan).
- They have more than one employer.
- Their annual income is more than 20,000,000 yen.
- They have a side income of more than 200,000 yen.
- They leave Japan before the end of the tax year.
Employees whose income taxes are withheld from their salaries by their employer will have an eventual adjustment made within their year’s final salary.
Non-residents in Japan qualify for very few tax deductions if any.
Income tax consultation and payments for every tax year must be made between February 16 and March 15 of the following year.
Tax Rates in Japan for Non-Residents
A non-resident’s Japan-sourced employment income (wages, salaries, annuities, etc.) is subject to a flat withholding tax rate of 20.42%, with no deductions available.
This rate includes the 2.1% surtax rate. Everyone living in Japan must pay a special surtax for reconstruction assistance concerning the Tohoku earthquake disaster. The tax is valid from 2013 to 2037.
In addition to any withholding income tax levied, non-residents may also be subjected to aggregate taxation depending on the nature of their income.
Per aggregate taxation, non-residents will have to calculate their tax liability through self-assessment and file an income tax return.
In Japan, national income tax rates are levied at a progressive rate. The progressive tax rates can go up to 45% of taxable income minus the deductions.
Tax Treaties between Japan and Your Country of Residence
Double taxation treaties are excellent mediums to qualify you for a tax deduction. Japan has double tax treaties with over 80 countries, including the US, UK, Australia, etc.
If a Japanese non-resident is a resident in a country with which Japan has entered into a tax treaty, their income may be either tax-exempt or taxed at a lower rate.
Should You Establish a Tax-Non-Residency in Japan?
There’s no straightforward answer to this question. It entirely depends upon your circumstances. However, living in Japan as a non-resident may give you an excellent first-hand experience of the Japanese lifestyle, taxes, business environment, and investment opportunities.
That experience could be integral for deciding whether you want to live in Japan full-time.
After the non-residency period, if you decide to make the land of the rising sun your second home, we can help you with it.
The Japanese tax system is difficult to deal with without the help of a professional tax agent. However, with our holistic and strategic residence planning, you can live and work in Japan, paying fewer taxes than expected.
All you have to do is reach out to us, and we’ll take care of the rest.
Japan Non-Resident Tax in 2023: The Ultimate Guide FAQ
Japan has progressive income tax rates ranging from 5% (for less than 1.95 million yen) to 45% (for more than 40 million yen). Each taxpayer is also subjected to a special surtax of 2.1%.
Japan can be considered a high-tax country, considering that its tax brackets go as high as 45% to 55%, depending upon the type of tax. For example, Japan has the highest inheritance tax in the world, with the maximum tax rate reaching 55%.