Expatriate tax - Japan

It is important that the international assignee’s assignment letter and benefits package are structured in a tax-efficient manner before entering Japan.

To quicken the visa process, prior to submitting their visa application, the employer or sponsor should obtain in advance a certificate of eligibility to enter Japan from the Immigration Bureau.

If an international assignee’s spouse and/or dependents relocate to Japan they will require dependent visas. If the international assignee’s spouse also intends to work in Japan, they also must obtain the appropriate visa.

The tax year in Japan for individual taxpayers is from 1 January to 31 December.

Tax returns and payments must be made by 15 March the following year (if 15 March falls on a weekend or a holiday, then the first business day following). Extensions are not available.

The following progressive income tax rates apply to the annual taxable income:

National income tax brackets:

• Income: ¥1 – ¥1,950,000
  • Tax Rate: 5%
  • Deduction: -
    
• Income: ¥1,950,001 – ¥3,300,000
  • Tax Rate: 10%
  • Deduction: ¥97,500
    
• Income: ¥3,300,001 – ¥6,950,000
  • Tax Rate: 20%
  • Deduction: ¥427,500
    
• Income: ¥6,950,001 – ¥9,000,000
  • Tax Rate: 23%
  • Deduction: ¥636,000
• Income: ¥9,000,001 – ¥18,000,000
  • Tax Rate: 33%
  • Deduction: ¥1,536,000
    
• Income: ¥18,000,001 – ¥40,000,000
  • Tax Rate: 40%
  • Deduction: ¥2,796,000
    
• Income: Over ¥40,000,000
  • Tax Rate: 45%
  • Deduction: ¥4,796,000
    

In addition to the above National Income Tax, a surtax to fund for the reconstruction of Japan’s northeast region devastated by the 11 March 2011 earthquake and tsunami will be imposed at 2.1% on the National Income Tax amount calculated by the above table from 2013 to 2037.

In addition to National Income Tax, Japan’s Local Inhabitant Tax for a given tax year is levied on individuals who reside in Japan as of January 1 of the following year. The tax rate is a flat 10% of the taxable income amount as reported on the tax return. In addition, per capita levy of JPY 4,000, along with a Forest Environment Tax of JPY 1,000, is also imposed.

Sample income tax calculation (for a single taxpayer)

 Income Details (Year 2025 in ¥)

• Employment earnings before deductions: ¥16,260,872
• Employment income deduction: ¥1,950,000
• Employment income after deduction: ¥14,310,872
• Total taxable income: ¥14,310,872
  Deductions
• Social Security Contributions: ¥1,261,292
• Spouse deduction: ¥0
• Dependent deduction: ¥0
• Basic deduction: ¥580,000
• Total deductions from income: ¥1,841,292
• Net taxable income: ¥12,469,000
• National Income Tax due: ¥2,578,770
• Special Income Tax: ¥54,154
• Local Inhabitant Tax due: ¥1,266,900

Overseas Assets Report

A permanent resident taxpayer of Japan will be required to submit a report of overseas assets to the tax office by 30 June every year (or the next business day if 30 June falls on a weekend or a national holiday) if such assets are worth over JPY50M on the last day of the previous year. Those who do not file or file a false report may face imprisonment of up to one year or a fine of up to JPY 500,000. Further, if the reporting is not made and income generated from such overseas assets are not reported on the tax return, an additional 5% penalty is assessed on the non-reported income.

Assets & Liabilities Report

• An individual is required to file an Assets and Liabilities Report with the tax office by June 30 of the following year (or the next business day if June 30 falls on a weekend or national holiday) if either of the following condition is met: An individual who is required to file an income tax return or an individual who can claim refund by filing an income tax return and:
  • Has total amount of various net income excluding retirement income for the year exceeding JPY 20 million, and
  • As of December 31 of the tax year, holds either
    • Total value of the assets amount to JPY 300 million or more, or
    • Total value of the assets subject to Exit Tax amount to JPY 100 million or more.
• Residents who hold worldwide assets with a total value of JPY 1 billion or more as of December 31 of the tax year.

Assets subject to the Exit Tax are financial assets such as stocks, securities, bonds, unsettled derivative transactions and similar financial instruments.

If the reporting is not made and income generated from such assets are not reported on the tax return, an additional 5% penalty is assessed on the non-reported income.

The scope of an international assignee’s income subject to Japan income tax depends on the individual’s tax residency status. A permanent resident, a resident who is either (a) a Japanese national, or (b) a foreign national who has lived in Japan for five years or more of the past ten years, is subject to income tax at marginal rates on worldwide income. A non-permanent resident is subject to income tax at marginal rates on all Japan source income, and on any foreign source income brought, paid, or remitted into Japan. A non-resident is taxed on Japan source income and any income effectively connected with a permanent establishment in Japan.

In Japan, all individuals fall within one of the following three categories of taxpayers: non-resident, non-permanent resident, or permanent resident.

A resident taxpayer is any individual who has a domicile (a center of living) in Japan, has maintained a residence continuously in Japan for one year or more, or intends to reside in Japan for one year or more as evidenced by international assignment letter or expected assignment duration in Japan based on nature of work. An individual other than a resident is considered a non-resident taxpayer.

A permanent resident taxpayer is a resident who is either (a) a Japan national, or (b) a foreign national who has lived in Japan for more than five of the previous ten years. A resident foreign national who has not lived in Japan for more than five of the past ten years is considered a non-permanent resident.

Salary paid by an employer based on services performed in Japan is considered Japan source income, even if the salary is paid abroad. Therefore, non-residents are also subject to Japanese income tax on this type of salary and will generally have an obligation to file a tax return if income tax is not withheld from the salary.

Bonuses paid in cash should be declared as employment income as of the date paid. Most fringe benefits are treated as compensation and included in taxable income. Fringe benefits paid by a Japan corporation or a branch or office in Japan are subject to withholding income tax at source. Fringe benefits paid by a foreign corporation or office located outside of Japan are generally out of the scope of the withholding obligation and therefore must be declared on the tax return.

Japanese income tax arises on employment income derived from services performed in Japan. Tax is assessed on all employment income, including all salaries and wages, bonuses, overtime pay, gratuities, stock awards, benefits, etc.

Currently employees earning over JPY 8.5 million are entitled to a capped deduction from income equal to JPY 1,950,000 in general.

However, certain residents whose annual salary income exceeds JPY 8.5 million may be eligible for an additional deduction up to JPY 1.5 million from their employment income.  To qualify, an individual must meet at least one of the following criteria:

• The individual qualifies exemption for persons with special disabilities.
• The individual has dependent relatives under the age of 23.
• The individuals has a spouse or dependent relative who qualifies exemption for persons with special disabilities.

Generally, benefits in kind or allowances paid to the employee for tax, utility expenses, medical expenses, car expenses, etc., are treated the same as salary income. However, Japan’s income tax law specifies beneficial tax treatment of the following benefits providing certain conditions are met. International assignment letter properly structured with respect to these benefits can result in significant tax savings: residential accommodation, school fees, loans to employees or directors, language lessons, and insurance.

Certain payments received upon leaving an employer are considered as ‘retirement income’ and are taxed separately from bonuses and normal employment income.  The retirement income is taxed at progressive rates separately from other income.  The calculation of taxable retirement income is as follows:

• General Retirement Income

Taxable income = (retirement income received – retirement income deduction) x 50%.

The retirement income deduction is JPY 400,000 for each year of service up to 20 years and JPY 700,000 for each year of service over 20 years.

• Specified Directors’ Retirement Income

Directors who have fewer than five years' service will not receive the 50% reduction and the income will be calculated as:

Taxable income = (retirement income received – retirement income deduction)

• Short-term Retirement Income

If years of service served as a non-director is five years or less (excluding the case described in (II) above), the retirement income will be calculated as follows:

• • If the retirement income, after deducting the retirement income deduction, is equal to or less than JPY 3 million
    
    Taxable income = (retirement income received – retirement income deduction) x 50%
    
    
  • If the retirement income, after deducting the retirement income deduction, is more than JPY 3 million
    
    Taxable income = JPY 1,500,000 + {retirement income received – (JPY 3,000,000 + retirement income deduction)}.

There are no specific tax concessions for expatriates; however, the correct structuring of housing and other benefits as part of the compensation package can result in significant tax savings.

Where the same income has been subject to tax in both Japan and a foreign jurisdiction, relief from double taxation may be available. In certain cases, Japan’s domestic law allows a foreign tax credit only if the taxpayer is a tax resident of Japan both when the foreign source income was earned and also when the foreign tax on the income was paid.

In addition to a basic deduction amount JPY 950,000 which is subject to phase out for individuals with based on individual’s total income exceeding JPY 1.32M effectively from the tax year 2025, further income deductions may be available to individuals for the following:

• casualty loss (due to disasters or theft);
• medical expenses exceeding JPY 100,000 in a calendar year (including those paid outside Japan) or self-medication expenses exceeding JPY 12,000 for preventive purposes;
• donations above JPY 2,000 to qualified charities in Japan;
• life insurance premiums paid in Japan;
• earthquake insurance premiums paid in Japan;
• Japan’s social insurance premiums;
• spousal deduction;
• dependent deduction (for dependents aged 16 or older);
• allowance for a widow or widower.

Gains on sales of stocks and real property are taxed separately from other income.

Capital gains on real property held for more than five years as of 1 January of the year of the sale are taxed at the long-term rate of 20% (15% National Income Tax, 5% Local Inhabitant Tax). Gains on real property held for a shorter period are taxed at 39% (30% national, 9% local). Additional 2.1% surtax will be applied on the amount of National Income Tax.

Capital losses from the sale of real property can be deducted only from capital gains on real property. Capital losses on the taxpayer’s principal residence can be carried forward three years. Otherwise, there is generally no carry forward of capital losses on real property for individuals.

Taxation of capital gains from the sale of foreign listed shares

The tax rate on capital gains from the sale of shares is 20% (15% National Income Tax, 5% Local Income Tax). Additional 2.1% surtax will be applied on the amount of National Income Tax.

Capital loss from the sale of listed shares

A capital loss from the sale of listed shares can be offset against capital gains from the sale of listed shares in the same calendar year. If after offsetting a capital loss still remains, it generally cannot be offset against other types of income. For example, you are not allowed to offset capital loss on the sale of listed shares from salary income. However, if the loss contains a capital loss from the sale of listed shares sold through a securities company registered in Japan, this portion can be deducted from dividend income paid by listed companies if the ‘Separate Taxation System’ on dividends has been selected.

If a capital loss from the sale of listed shares through a securities company registered in Japan remains after making the offset mentioned in the previous paragraph, this excess loss can be carried forward to the following three years by filing a tax return. The carried forward loss will be deducted from capital gains arising from the sale of shares and dividend income paid by listed companies for the next three years. Please note that you need to file a tax return every year in order to apply this carry forward, even if you have no obligation to do so.

Inheritance tax for non-Japanese nationals

Japan’s inheritance tax (IHT) is based on the residence status of the beneficiary and/or the location of the assets inherited. Beneficiaries domiciled in Japan are subject to IHT on the property they receive, while beneficiaries not domiciled in Japan are only subject to IHT on assets inherited that are located in Japan. IHT is levied at progressive rates on the fair market value of the property inherited, less related expenses. Further deductions are allowed, depending on the status of the heir. A specific spousal allowance is also available. The net value of the inheritance is taxed as follows:

Inheritance Tax Rates by Asset Value

• Up to ¥10 million
  • Tax Rate: 10%
  • Deduction: -
• ¥10 million to ¥30 million
  • Tax Rate: 15%
  • Deduction: ¥500,000
    
• ¥30 million to ¥50 million
  • Tax Rate: 20%
  • Deduction: ¥2,000,000
    
• ¥50 million to ¥100 million
  • Tax Rate: 30%
  • Deduction: ¥7,000,000
    
• ¥100 million to ¥200 million
  • Tax Rate: 40%
  • Deduction: ¥17,000,000
    
• ¥200 million to ¥300 million
  • Tax Rate: 45%
  • Deduction: ¥27,000,000
    
• ¥300 million to ¥600 million
  • Tax Rate: 50%
  • Deduction: ¥42,000,000
    
• Over ¥600 million
  • Tax Rate: 55%
  • Deduction: ¥72,000,000
    

Gift tax

Japan’s gift tax is an obligation for the recipient of the gift. The basic deduction is ¥1.1m every year

 Taxable Income (After Basic Deduction)

• Under ¥2 million
  • Tax Rate: 10%
  • Deduction: -
• Under ¥3 million
  • Tax Rate: 15%
  • Deduction: ¥100,000
• Under ¥4 million
  • Tax Rate: 20%
  • Deduction: ¥250,000
• Under ¥6 million
  • Tax Rate: 30%
  • Deduction: ¥650,000
• Under ¥10 million
  • Tax Rate: 40%
  • Deduction: ¥1,250,000
• Under ¥15 million
  • Tax Rate: 45%
  • Deduction: ¥1,750,000
• Under ¥30 million
  • Tax Rate: 50%
  • Deduction: ¥2,500,000
• Over ¥30 million
  • Tax Rate: 55%
  • Deduction: ¥4,000,000

A person who receives investment income in the form of interest, dividends, or royalties, is subject to withholding income tax at source if it is paid in Japan. Applicable tax rates differ depending on the tax resident status of the recipient, or the existence of a tax treaty between Japan and the investor’s home jurisdiction. Generally, a tax rate of 20% applies unless a more beneficial tax rate is available under an applicable tax treaty.

Fixed asset tax and city planning tax are levied by municipalities on land, buildings, and other depreciable property located in the municipality. The annual tax rates are 1.4% and 0.3% respectively of the assessed value of fixed assets.

An employer (either a corporate entity, Japan branch of a foreign corporation or a sole proprietorship with five or more employees) with a Japan payroll is required to join Japan’s social security plan, which is comprised of insurance components for health (and nursing care for employees aged 40 and above), welfare pension, employment, and workers’ accident compensation. Both the employer and employee are required to contribute except for workers’ accident compensation insurance which is contributed fully by the employer. Withholding rates for employees (employers) are, approximately, as follows:

• Health insurance = 4.955% (4.955%);
• Welfare pension insurance = 9.15% (9.15%);
• Nursing care insurance (aged 40~65) = 0.795% (0.795%);
• Employment insurance = 0.55% (0.90%);
• Workers’ accident compensation insurance = N/A (0.3%).

Stock options granted to an international assignee during Japan assignment will be subject to tax in Japan when an employee exercise the stock options.

Non-qualified stock options are taxed as regular salary income at the date of exercise on the difference between the exercise price and the fair market value of the stock at exercise. Tax on capital gains made upon the sale of the stock will be levied on the difference between sales proceed and fair market value at exercise.

Qualified stock options (generally applicable to stock of Japanese companies) are taxable only upon sale, with capital gains tax being levied on the difference between sales proceed and exercise price.

There is no wealth tax in Japan.

Permanent residents in Japan are taxed on their worldwide income. Non-permanent residents are taxed on their Japan source income in addition to any foreign source income remitted (or brought or paid) into Japan. This means that for non-permanent resident taxpayers, cash remitted into Japan may be taxed at Japan’s marginal income tax rates if the taxpayer has any foreign source income in the same calendar year. Taxpayers with income from non-Japan sources should be aware of the tax implications when remitting any funds into the country.

Working outside Japan

An offshore compensation package is an important tax planning tool for non-permanent resident taxpayers who spend part of the year on work assignments outside Japan. Having salary paid offshore allows the non-permanent taxpayer to exclude the income related to the periods spent abroad on business from Japan tax.

However, Japan’s income tax law specifies beneficial tax treatment of the following benefits providing certain conditions are met.

An employment agreement properly structured with respect to certain benefits in kind, such as residential accommodation or children’s school fees, can result in significant tax savings.

Other issues that should be considered are the tax implications of offshore or onshore compensation arrangements, the timing of compensation benefits and taxes, and special issues related to directors or senior officers, foreign entertainers, and athletes.

Grant Thornton Japan’s Global Mobility Services team can advise international assignees and their employers on these and related opportunities.