Japan Tax Rules for Foreign Business Visitors

A foreign company is sending a foreign national to Japan, and there are several scenarios to consider. Let's examine whether foreign nationals must file a tax return in Japan for each scenario.

• Case 1: When a foreign national working for an overseas company is sent to Japan on a short-term business trip.
• Case 2: When a foreign national working for an overseas company is dispatched to a local branch or office in Japan.
• Case 3: When a foreign national working for an overseas company is assigned as an employee to a Japanese subsidiary (often a foreign-affiliated company).
• Case 4: When a foreign national working for an overseas company is appointed as an executive of a Japanese subsidiary.

In this first installment, we will discuss the scenario of a foreign national being sent to Japan on a short-term business trip. The assumption here is that there is no office or branch in Japan.

For example, if a foreign company considers expanding into Japan, it may send an employee on a short-term business trip to conduct on-site investigations or to Japan for business negotiations.

Let's refer to the foreign company as Foreign Corporation A, the country where A is based as Country A, and the foreign national coming to Japan as Person A.

Residency Status of Foreign National A

The tax obligations in Japan differ depending on whether Person A is considered a resident or a non-resident of Japan, so it is essential to determine his residency status. A "resident" is defined as an individual who either has a domicile in Japan or has maintained a residence in Japan continuously for more than one year (Income Tax Act, Article 2, Paragraph 1, Item 3). In Person A's case, we assume he remains a non-resident since he is in Japan only for short business trips that do not exceed one year.

Presence of Domestic Source Income

Non-residents are taxed differently from residents in Japan; they are subject to income tax only if they have specific domestic source income (Income Tax Act, Article 5, Paragraph 2). Domestic source income refers to income generated from sources within Japan. Examples include salary income paid for work performed in Japan (Income Tax Act, Article 161, Paragraph 1, Item 12) and real estate income derived from renting out property located in Japan (Item 7).

In this case, part of the salary received by Person A, a non-resident, corresponds to the period he spent on a short-term business trip to Japan. This portion qualifies as domestic source income and is therefore subject to taxation in Japan (Income Tax Act, Article 161, Paragraph 1, Item 12(a)).

Withholding Tax Obligation for Company A Paying Wages

In the case of Person A, a foreign national on a short-term business trip to Japan, the wages are paid by the foreign corporation (Company A) where Person A is employed, and these payments are likely made outside Japan.

Under the Japanese Income Tax Act, if a non-resident receives wages classified as Japan-source income and the payment is made within Japan, the payer must withhold taxes. However, if the payment is made outside Japan, there is no withholding tax obligation (Article 212, Paragraph 1 of the Income Tax Act).

Applying this to the current case, Company A is not obligated to withhold taxes since Company A pays wages to Person A, a non-resident outside of Japan.

(*) As an exception, if wages classified as Japan-source income are paid to a non-resident outside Japan by a foreign corporation like Company A, and that foreign corporation has an office, branch, or other permanent establishment in Japan, the payment is deemed to be made within Japan. In such cases, Company A must withhold taxes (Article 212, Paragraphs 1 and 2). This will be discussed further in the next installment.

On the Requirement for Foreign National Person A to File a Tax Return

When a non-resident receives salary payments that constitute domestic-source income in Japan and are not subject to withholding tax, the salary earner is required to submit a final tax return (Income Tax Act, Article 172, Paragraph 1).

In other words, if withholding tax has not been applied, the individual must file a tax return to collect taxes from their income.

Non-resident Person A has not applied for withholding tax and has yet to pay Japanese taxes. Therefore, Person A must file a tax return in Japan.

It is expected that Person A will also be provided with travel and transportation expenses. Under the Income Tax Act, travel and transportation expenses are non-taxable (Income Tax Act, Article 9, Paragraph 1, Items 4 and 5). There is no distinction between residents and non-residents in this regard.

Tax Treaty Treatment – Exemption for Short-Term Stays

When a foreign national employed by an overseas company visits Japan on a short-term business trip, their salary earned during their stay in Japan is subject to Japanese income tax. At the same time, the country of origin (Country A) will often also tax this Japan-sourced income (worldwide income taxation), resulting in double taxation.

To mitigate this, which could otherwise hinder international exchanges and transactions, tax treaties include provisions for short-term stay exemptions, allowing foreign nationals who meet certain conditions to be exempt from taxation in the country where the work was performed (in this case, Japan). 

To qualify for the short-term stay exemption, three conditions must be met. While there may be slight variations depending on the specific tax treaty, the following conditions are based on the OECD Model Tax Convention:

1. 183-Day Rule: The individual (Person A) must not stay in the source country (Japan) for more than 183 days.
   (*) The 183 days must not be exceeded during any twelve-month period that begins or ends in the relevant tax year. For example, if Person A stays in Japan for five and a half months at the end of one tax year and another five and a half months at the beginning of the next tax year, the total stay would exceed 183 days.
2. The employer paying the salary (Company A) must not be a resident of the source country (Japan). 
   Since Company A, which pays Person A’s salary, is not a resident of Japan, this condition is satisfied.
3. The salary must not be borne by a permanent establishment (such as a branch) of the employer (Company A) in Japan. 

Company A does not have a permanent establishment (such as a branch) in Japan, so this condition does not apply.

Based on the above, Person A meets the requirements for the short-term stay exemption under the tax treaty, and upon completing certain procedures, he will be exempt from taxation in the source country (Japan), meaning that neither withholding tax nor a tax return is required. 

This article is based on laws and regulations as of December 5, 2019.

Conclusion

Understanding Japan’s tax obligations for foreign nationals on short-term business trips is essential for any overseas company planning to send employees to Japan. As discussed, whether Person A must file a tax return or pay withholding tax largely depends on residency status, income source, and tax treaty provisions.