Looking up at office buildings in Shinjuku, Tokyo, Japan.

Withholding Tax for Foreigners Working at a Japanese Branch

Yoshio Yamaguchi

In the previous article, we examined whether income tax withholding and tax filing are required when a foreigner working overseas temporarily travels to Japan for business purposes.

The two basic principles of income tax we confirmed were as follows:

  1. When paying salaries domestically to non-residents, withholding is required (Income Tax Act, Article 212, Paragraph 1).
  2. If a non-resident receives a salary categorized as Japan-sourced income, and withholding has not occurred, the non-resident must file an income tax return (Income Tax Act, Article 172, Paragraph 1).

This article will examine whether withholding and income tax filing is necessary for Person A, who works for a foreign company (Company A) and is temporarily assigned to its branch in Japan. The difference from the previous article is that Company A has an office (branch, etc.) in Japan. For cases where the foreign employee is dispatched to a Japanese subsidiary rather than a branch, please refer to my article on Tax Withholding and Filing for Foreign Workers in Japan.

Treatment Under Domestic Law

Residency Status of Person A Working at a Japanese Branch of a Foreign Corporation

Whether Person A, who has traveled to Japan from overseas, is considered a resident or non-resident under Japanese tax law will affect the outcome. In this case, we assume that Person A remains a non-resident because the assignment is a short-term business trip lasting less than one year. For details on the classification of residents and non-residents, refer to the National Tax Agency's guidance.

Japan-Sourced Income

We assume that Person A is a non-resident. Non-residents are only subject to Japanese taxation on certain types of Japan-sourced income. Since the portion of Person A's salary related to the period he spent in Japan is classified as Japan-sourced income, it is subject to taxation in Japan (Income Tax Act, Article 161, Paragraph 1, Item 12(i)).

Withholding Obligations of Foreign Company A

Person A, who has been assigned from overseas to a branch in Japan, may have his salary paid either by the headquarters of Foreign Company A located abroad or by the Japanese branch. For example, the branch in Japan may pay the base salary, while the overseas headquarters pay the family allowance.

The relevant principle of income tax law is as follows:

Those paying salaries domestically to non-residents are required to withhold taxes (Income Tax Act, Article 212, Paragraph 1). Conversely, if an overseas entity pays the salary, there is no withholding obligation. However, even if the payment is made abroad, if the payer has a domestic office, business establishment, or branch, it is treated as if the payment was made domestically, and the payer is required to withhold taxes (Income Tax Act, Article 212, Paragraph 2).

Thus, even if Foreign Company A makes the salary payment to non-resident Person A from abroad if Company A has a domestic office or business establishment in Japan, the payment is treated as having been made domestically, and Company A is required to withhold taxes (Article 212, Paragraphs 1 and 2). If the Japanese branch of Company A makes the payment, it qualifies as a "domestic payment to a non-resident," the branch must withhold taxes as usual.

Income Tax Filing Obligations for Non-Resident Person A in Japan

As outlined above, regardless of whether Person A receives his salary through an overseas account or from the Japanese branch, Foreign Company A is treated as having made the payment domestically, and withholding is required. What does this mean for income tax filing?

If a non-resident receives Japan-sourced income and withholding has not been applied, the non-resident is required to file a tax return (Income Tax Act, Article 172, Paragraph 1). Since Person A's taxes are withheld, he does not need to file a tax return in Japan.

Application of Tax Treaties

As explained, under domestic tax law, Person A's salary would be subject to withholding under Japan's Income Tax Act. However, because Person A is a resident of Country A, his income may also be subject to taxation in Country A. This could result in double taxation.

To avoid such double taxation, if Person A qualifies for the "short-term stay exemption" under the tax treaty between Japan and Country A, his income would be exempt from taxation in Japan and only subject to tax in Country A.

Let's look at the requirements for the short-term stay exemption:

  1. The 183-Day Rule: Person A must not have stayed in Japan for more than 183 days during any 12 months beginning or ending in the fiscal year. In this case, we assume that Person A meets this requirement.
  2. The salary must be paid by an employer who is not a resident of Japan: Since Foreign Company A, which is responsible for Person A's salary, is not a resident of Japan, this requirement is also met.
  3. The salary must not be borne by a permanent establishment in Japan:

Regarding requirement 3, if Person A's salary is borne by a permanent establishment, such as a branch in Japan, this condition would not be met, and Person A would not qualify for the short-term stay exemption. The rationale behind this is that if the Japanese branch bears the salary, the branch's taxable income in Japan would decrease, thus reducing corporate tax. If Person A were also exempt from income tax, it would be considered an excessive benefit (Nakatani et al., "Taxation of International Transactions and Overseas Expansion," Tax Research Institute Publishing, p. 679).

On the other hand, if the overseas headquarters bear Person A's salary, the third condition would be met. After completing the necessary procedures, Person A would be eligible for the short-term stay exemption, and taxation in Japan would be avoided.

Conclusion

In summary, whether withholding or income tax filing is required for Person A, who works for a foreign company (Company A) and is temporarily assigned to the Japanese branch, depends on where the salary is borne. If the overseas headquarters bears Person A's salary by submitting the appropriate tax treaty notification, the short-term stay exemption will apply, and Person A will be exempt from Japanese taxation. Therefore, neither withholding nor filing will be necessary. On the other hand, if the Japanese branch bears Person A's salary, the short-term stay exemption will not apply, and withholding will be required, but no tax return will be necessary.

Note: In the case of payments to non-residents, whether the payment is classified as domestic or overseas affects the company's withholding obligation. For relevant case law, refer to the decision on June 28, 2011 (Collection of Rulings, Volume 83). This article is based on Japanese laws and regulations as of December 15, 2019.

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