Taxation Rules for Non-Permanent Residents in Japan

This article will examine how the scope of taxation in Japan differs between permanent resident and non-permanent resident foreign nationals.

What Is a Non-Permanent Resident?

Individuals subject to Japan's income tax are classified as residents or non-residents.

Residents are individuals who have a domicile in Japan or have resided in Japan for more than one year (Article 2, Item 3 of the Income Tax Act). Nationality, whether Japanese or foreign, is not a factor.

Non-residents are individuals who do not meet the criteria for residency.

Residents are further classified into permanent residents and non-permanent residents.

A non-permanent resident is an individual who is a resident of Japan but does not possess Japanese nationality and has maintained a domicile in Japan for five years or less within the past ten years (Article 2, Item 4 of the Income Tax Act).

Scope of Taxation

The scope of taxation in Japan varies depending on whether an individual is classified as a non-resident, a resident (permanent), or a resident (non-permanent).

For individuals classified as permanent residents, all income earned globally, whether it originates domestically or internationally, is subject to taxation in Japan (Article 7, Item 1 of the Income Tax Act).

Domestic-source income refers to income derived from activities or assets within Japan. Examples include income from business activities conducted through domestic offices, income from leasing or transferring real estate within Japan, salary income earned from employment in Japan, and dividend income from domestic corporations (Article 161 of the Income Tax Act).

Foreign-source income refers to income derived from activities or assets outside of Japan. Examples include salary income earned from employment overseas (Article 95, Item 4, Section 10(i)) and dividend income from foreign corporations (Article 95, Item 7(i)).

For individuals classified as non-permanent residents, the scope of taxation is as follows:

1. Income other than foreign-source income (≒domestic-source income)\*1
2. Foreign-source income paid in Japan or remitted to Japan from abroad.

Rules for Taxation on Remittances

• Bringing currency, precious metals, bonds, etc., into Japan, sending them into Japan, or using a foreign bank's credit card in Japan with funds settled by a foreign bank all fall under the scope of remittance taxation.
• Taxes may apply even if the remittance is from a country other than the one where the income was earned (source: *Foreigners' Taxation and Procedures* by Koki Abe).
• If a remittance from overseas is refunded—for instance, if you transfer money from a foreign account to a domestic Japanese account but then immediately refund it back to the foreign account—the initial amount transferred is still considered the amount remitted to Japan (Case Study Collection No. 76, Aug. 4, 2008).

Taxation on Salary

How do you distinguish between domestic and foreign-source income in the case of salary?

The distinction is based on the physical location of the work. Income earned from working within Japan is considered domestic-source income, while income earned from working abroad is considered foreign-source income.

For example, if you work from your home in Japan as an employee of a company based in the US, and your salary is deposited into a US bank account, the income is still considered domestic-source income because you are physically working in Japan. The country where the company is based or where the salary is paid is irrelevant.

However, there is an exception for directors of Japanese corporations. Even if their work is performed abroad, their salary is treated as domestic-source income (Income Tax Act, Article 161, Paragraph 1, Item 12 (i)).

If work is performed both domestically and abroad, the domestic-source income is calculated using the following formula:

Domestic-source salary income = Total salary × (Period of work in Japan ÷ Period used to calculate salary income)

Conclusion