Taxation for Expats Leaving Japan

When an employee is seconded overseas for more than a year or a foreign employee returns to their home country after an extended stay in Japan, they become a non-resident starting the day after their departure. This section covers the year-end tax adjustment, withholding tax, and final tax return for the fiscal year in which the secondment occurred.

The key point is that within a single fiscal year, there are two tax statuses: resident and non-resident. For convenience and to simplify the understanding, we assume that the employee in question has only salary income and no real estate income, capital gains from stock sales, or similar types of income.

Regarding Year-End Tax Adjustments for the Year of Departure

Suppose a taxpayer changes status from resident to non-resident due to leaving Japan during the year. In that case, the company must perform a year-end tax adjustment by the date of departure (Article 190 of the Income Tax Act, Basic Income Tax Ruling 190-1).

However, suppose the total salary and other compensation determined to be payable during that year exceeds 20 million yen. In that case, it will not be subject to year-end tax adjustment.

Deductions for social and life insurance premiums are applicable only to the amounts paid when the taxpayer was a resident (until the date of departure) (Article 76, Paragraph 1 of the Income Tax Act).

Concerning the Final Tax Return for the Year of Departure

For residents whose only income is from salary, there is no need to file a final tax return, as the company handles year-end adjustments and withholding tax. However, those whose salary exceeds 20 million yen must file a tax return.

The filing deadline depends on whether a tax agent has been appointed. If a tax agent is appointed, the tax return would be submitted through the agent between February 16 and March 15 of the year following the year of departure (Article 120, Paragraph 1 of the Income Tax Act).

If no tax agent is appointed, the tax return must be filed before departure (Article 127, Paragraph 1 of the Income Tax Act).

Handling of Salary and Bonus Payments after Departure from Japan

Let’s examine how bonuses are treated when paid in Japan after the employee has left the country. For example, imagine the bonus calculation period is from October 1 to March 31, and the employee left Japan on January 20 during this period, with the bonus being paid on June 15.

By the time the bonus is paid (June 15), the employee is a non-resident, meaning that taxation is limited to Japan-sourced income (Article 7, Paragraph 1, Item 3 of the Income Tax Act).

The portion of the bonus corresponding to the period of domestic work (from October 1 to January 20) is considered Japan-sourced income (Article 161, Paragraph 1, Item 12(a) of the Income Tax Act) and is therefore taxable in Japan. When paying a Japan-sourced salary to a non-resident within Japan, the company must withhold taxes at the source (Article 212, Paragraph 1).

On the other hand, the portion corresponding to the period of overseas work (from January 21 to March 31) is considered foreign-sourced income and is not taxable in Japan. Therefore, the company has no obligation to withhold taxes. Typically, the country where the work was performed overseas will impose income tax.

The above pertains to bonuses, but the salary is treated differently. Suppose an employee becomes a non-resident partway through the salary calculation period, and the following conditions are all met. In that case, the total salary cannot be considered Japan-sourced income (Basic Circular 212-5 of the Income Tax Act). In such cases, no taxation will occur in Japan:

• The salary calculation period is one month or less.
• The entire salary does not correspond to work performed within Japan.
• This rule does not apply to directors of Japanese corporations performing work overseas in their capacity as directors.

Concerning Resident Tax After Departure

In principle, resident tax is levied on individuals with an address within a municipality as of January 1 of the applicable year (Local Tax Act, Article 24, Paragraph 1; Article 39). In this case, the address is generally considered to be the municipality recorded in the individual's Basic Resident Register (Local Tax Act, Article 24, Paragraph 2). Additionally, the resident tax for the current year is based on the income from the previous year.

For salaried employees, the company typically deducts the resident tax from their salary in installments, from June of the current year to May of the following year, and pays it to the municipality on their behalf (Special Collection System). In the year of departure, the company usually collects the remaining amount of resident tax when the employee leaves Japan, paying the remaining balance in a lump sum.

As for the resident tax for the year following the departure, since the individual does not have an address in Japan as of January 1 of that year, there is no obligation to pay resident tax, providing a sense of relief for those no longer residing in Japan.