INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 13): Japan
By Haruki Yoshida, IDEA International Accounting Office
Japan is a member of OECD and Japanese tax law respects international rules. Arm’s length transaction is the basis for transfer pricing, and tax law requires supporting documents to demonstrate that transactions are fairly performed. Tax haven protection law is implemented to prevent tax avoidance by setting up a corporation in tax haven countries.
Money laundering is not regulated by Japanese tax law; however, for foreigners and foreign corporations, it is diffcult to open a bank account. Withholding tax is assessed to foreigners and foreign corporations on cash dividends/loyalty (20.42%) and loan interest (15.315%). Real estate rent (20.42%) and capital gains of real estate sales (10.21%) are also subject to withholding tax. (Reduced tax rates may apply with tax treaties with many countries.)
VAT of 10% (called consumption tax in Japan) also needs to be paid by consumers when they purchase goods and services. (For food and drinks, except alcohol, dining out and newspaper subscriptions, an 8% reduced tax rate is applied.)
Foreign Tax and Financial Reporting Requirements in Japan
1. Main types of business and taxes for each entity:
a. Corporation and corporate income tax
If you set up a legal entity (corporation/Kabushiki Kaisha) in Japan, Japanese corporate tax is assessed for all income (Japansource income and world income) generated by this entity. The effective corporate income tax rate is about 30% (including enterprise tax and corporate inhabitant tax.) There is no minimum share capital requirement. You will need to set up a yearend date, but it can be any month of your choosing. The financial statement and corporate income tax returns must be filed within two months after the financial year.
If you set up a branch in Japan, it is not considered an independent legal entity but a “Permanent Establishment” for the head offce of your country. The scope of taxable income of corporate income tax is limited to the income from sources in Japan. Foreign income attributable to the branch operation is generally not subject to corporate income taxes; however, entirely Japansource income (regardless of whether the income is attributable to the branch operation or not) is subject to Japanese corporate income tax.
If you are using an agent in Japan, again “permanent establishment” is important. An agent in Japan may be considered as “permanent establishment” and Japanese corporate income tax is assessed.
b. Individual person and individual income tax
An individual person is subject to individual tax, which is a progressive rate from 0% to 45% depending on income.
The concept of “residency” is important for individual persons. Foreigners doing business in Japan are classified in three types as follows, and the scope of tax assessment is different.
A person who has lived in Japan for less than one year and does not have his primary base of living in Japan. Non-residents pay taxes only on income from sources in Japan, but not on income from abroad.
ii. Non-Permanent Resident
A person who has lived in Japan for less than five years but has no intention of living in Japan permanently. Nonpermanent residents pay taxes on all income except on income from abroad that does not get sent to Japan.
iii. Permanent Resident
A person who has lived in Japan for at least five years or has the intention of staying in Japan permanently. Permanent residents pay taxes on all income from Japan and abroad.
2. Types of trusts, foundations, and tax rates for each structure
Japan has a structure for trusts and foundations; however, these entities are normally used for nonprofit charitable activities. There is no special income tax rate for trusts/foundations, and if they have profit generating activities, corporate income tax is assessed.
3. Tax compliance requirements for owners of foreign assets
a. Bank account
Bank deposit interest rates are currently extremely low in Japan, so it is not recommended to invest in a Japanese yen bank deposit. Due to money-laundering issues it is diffcult for non-resident foreigners (or foreign corporations) to open a bank account.
Foreigners have already purchased more than half of Japanese shares. Ordinarily those foreign investors are entities outside Japan, such as foreign security trading corporations or financial institutions such as banks or pension funds. Foreigners can purchase Japanese shares by opening an account with a security broker.
Shares are mobile assets and all incomes (e.g., dividends or capital gains) related to share transactions are considered as non-Japan source income. Thus, Japanese tax is not assessed on non-resident foreigners or foreign corporations.
However, 20.42% withholding tax is assessed on cash dividends. (Reduced tax rates may apply with tax treaties depending on the foreigner’s resident country). No withholding tax is assessed on capital gains from share sales transactions.
c. Real estate
Foreigners from many countries all over the world have come to Japan to buy real estate for investment purposes or for their private use. There are no distinctions between Japanese and other nonresident foreigners. The number of foreigners purchasing real estate such as condominiums and commercial buildings in Central Tokyo, as well as resort properties in Hokkaido, is increasing.
Real estate is land or property in Japan, so all incomes (e.g., rent/lease/ capital gains) related to real estate transactions are considered as Japansource income; thus, Japanese tax is assessed even if you are a non-resident foreigner or foreign corporation.
However, 20.42% withholding tax is assessed on real estate rent/lease. (If rent/lease is paid by relatives for residence, the withholding tax is exempted).
Withholding tax of 10.21% is assessed on capital gains from real estate sales transactions. (This does not apply, however, when the value of the real estate is JPY 100 million or less and the property is solely for the purchaser’s residence or the purchaser’s family’s residence).
Both incomes (rent/lease/capital gains) are subject to Japanese tax and these paid withholding taxes will be settled by annual tax returns. You need to appoint a tax representative to handle Japanese tax returns.
4. Tax compliance requirements for real estate
There are compliance requirements for foreign owners to remit cash though banks to buy real estate for investment purposes if the amount exceeds JPY 100 million (because it is considered a capital transaction under the Japanese foreign exchange and foreign trade control act). Foreign owners (corporations or persons) need to submit an application for the cash remittance within 20 days from the purchase of real estate.
Foreign owners must also register the ownership of the real estate/building, although the registration will probably be done on the owner’s behalf by a real estate trading corporation.
Collaboration with Other GGI Members
GGI members are working together to assist your wealth planning matters between countries. IDEA’s accounting offce is in Tokyo and assists GGI clients to establish company, tax filing, and accounting services.
Haruki YoshidaGGI member firm
IDEA International Accounting Office
Auditing and Accounting, Tax
Tokyo, Yokohama, Japan
T: +81 3 5888 7015
IDEA International Accounting Office mainly handles international matters for international clients, including assisting start-up for foreign companies, accounting, and tax compilation.
Haruki Yoshida is the Managing Representative in the IDEA International Accounting Office and the managing partner in the IDEA Audit Firm. He received an MBA from Yokohama City University. He is a certified public accountant (CPA) and a certified information systems auditor (CISA).
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: eyetronic - stock.adobe.com