The act of withholding tax effects both residents and non-residents who work in Japan. Typically, it is the employees responsibility to withhold the tax of their employees and make the correct payment to the government. Residents (permanent and non-permanent) and non-residents are liable to paying withholding tax although this will differ depending on the source of income.
Withholding income tax and special income tax for reconstruction
A withholding tax is defined as an amount that an employer withholds from employees’ wages and pays directly to the government. For certain types of income, the employer is required to pay income tax withheld at the time the employee is paid under the “withholding tax system.”
In this system, the establishment or individual (payer) for which the employee has rendered a service will calculate the latter’s income tax payable and then withhold or deduct this amount from the non-resident’s income payment. The amount withheld is paid to the government as tax.
Who is Liable To Withholding Tax?
There are two categories of taxpayers according to the Income Tax Law of Japan, these include residents and non-residents. To define which category you may fall into, read the following:
- A resident is defined as an individual who has been residing in Japan for a year or longer, continuously. A resident is then classed as either non-permanent or permanent.
- Non-Permanent Residents: This consists of a of resident who is not a Japanese national but has been living in Japan for longer than a year but five years or less in the last ten years. A non-permanent resident is taxed on the greater of income other than foreign-source income under the Japan tax law regardless of where it is paid, or remittance into Japan plus income paid in Japan.
- Permanent Residents: Defined as an individual who is a Japanese national or who has lived in Japan for more than five years in the last ten years. Permanent residents are subject to pay withholding tax on worldwide income regardless of source.
- A non-resident is an individual other than a resident ie. lived in Japan for less than a year. A non-resident of Japan is taxed solely on Japanese-sourced income without deductions or exemptions.
What is Subject to Income Tax?
For non-residents, only income gained in Japan (domestic source income) is subject to income tax and special income tax for reconstruction. The following are examples of income sourced within the country:
- Income that comes from a permanent establishment (PE) that is considered an independent enterprise. A business is considered PE based on its functions, assets and internal transactions with other parts of the business.
- Proceeds from the ownership or management of assets that are located in Japan
- Proceeds from the transfer of assets (through sale or lease) located in the country
- Profit distribution through a PE in Japan under a partnership contract as per Article 667 of the Civil Code
- Consideration received from the transfer of ownership or rights to any real estate such as land or building located in Japan
- Fees earned from providing personal services as in the case of lawyers, athletes, architects and certified public accountants, provided that these services were conducted in Japan
- Proceeds from the rent of real estate or the right to real estate that is located in the country
- Interest earned from Japanese government bonds, municipal bonds or bonds that were issued by Japan-based corporations, as well as bonds by foreign companies provided for funding their Japan business
- Interest earned from loaning money to a person who operates in Japan where the money was used to fund operations in Japan
- Remuneration received for providing personal services in Japan, wages, salaries, public pensions and retirement allowance that were earned from working as a resident taxpayer
- Money earned from advertising a business based in Japan
- Pension from insurance contracts that were established in Japan
Individuals who are required to withhold income tax and special income tax for reconstruction are referred to as withholding agents. All entities that pay an income to employees are considered withholding agents. This includes schools, government institutions, foundations and even individuals. As long as they pay some form of income in exchange for services rendered by another person whose taxes need to be withheld, that entity is a withholding agent.
It should be noted, however, that entities that employ a maximum of two domestic staff are not required to withhold income tax.
Place of Tax Payment
The place of tax payment for income tax and special income tax for reconstruction withheld shall be the location of the company or entity where the income was paid. In the event that the office moves to a different location, the place of tax payment shall remain the original location of the office.
Income Tax Convention
A non-resident may apply for an exemption or reduction of income tax and special income tax for reconstruction by submitting the “Application Form for Income Tax Convention.” This form has three major types:
- Relief from income tax and special income tax for reconstruction on dividends
- Relief from income tax and special income tax for reconstruction on interest
- Relief from income tax and special income tax for reconstruction on royalties
Individuals should submit this form to the employer or the entity that pays their wages (withholding agent), who will, in turn, submit this to the district director of the tax office which has jurisdiction over the place of tax payment. Submission must be made at least one day before the non-resident receives his first paycheck.
If the form is not submitted by the deadline, the tax is withheld at a rate based on prevailing Japanese laws instead of the tax rate that is prescribed by the Income Tax Convention in Japan. The non-resident, however, may apply for a refund of the excess payment by submitting the “Application Form for Refund of the Overpaid Withholding Tax in accordance with the Income Tax Convention.
Changes to the form that has already been submitted may be amended through a form that states the changes no later than a day before the date of the first income payment after the date when the change occurred.
In some cases, the amendment may cause a change in the “Quantity of Principal” and income tax on dividends decreases. In this situation, it is not necessary to submit a form reporting this change.
Income Tax Convention with Limitation on Benefits Article
The Income Tax Convention with LImitation on Benefits Article outlines the conditions under which residents may be granted the benefits of the Convention. When an individual applies for exemption or reduction of taxes withheld, he or she needs to add the Attachment Form for Limitation on Benefits Article (Form 17) and the “residency certification” proving that he or she is a resident of another country.
The withholding agent must state “the fact of confirmation,” “name and affiliation of the individual making the confirmation,” the date of confirmation” and “date of issue of the certification.” He or she must also make a copy of the original residency certification and keep this on file for five years from the date it was presented.
In cases where the individual is domiciled in another country and Japan has a partnership with that country, the non-resident should also include the “List of the Members of Foreign Company or List of the Partners of Entity to identify who is subject to the Income Tax Convention.
Refund for Overpayment of Withholding Tax
Non-residents who are unable to submit an Application Form for Income Tax Convention which allows them to request for exemption or reduction of their income tax will be required to pay income tax according to the prevailing tax rate instead of the rate prescribed under the Income Tax Convention.
They may, however, submit the Application Form for Refund of the Overpaid Withholding Tax in accordance with the Income Tax Convention (Form 11) through their employer or the withholding agent. The form is to be submitted to the District Director of the Tax Office under which the place of tax payment falls. This form allows the non-resident to apply for a refund of the difference between the withholding tax paid and the amount that should have been paid if a reduction or exemption were to be approved.
Along with the form, the non-resident should also attach supporting documents that will verify the tax payments. The form and all other requirements will be submitted through the withholding agent to the district director of the tax office.
Refunds are paid to the non-resident who is applying for them. Alternatively, the individual may also nominate an agent or another individual by virtue of a power of attorney to receive the refund on his or her behalf.
Non-residents who engage in gainful employment or have earned some form of domestic income during their stay in Japan are subject to income tax and special income tax for reconstruction. Because their stay is significantly shorter than a regular tax period, their income is subject to withholding tax at the source. Those who wish to apply for reduction of or exemption from tax withheld through the withholding agent before they receive their first income payment. Alternatively, they may apply for a refund of overpaid taxes if they cannot submit their application to reduce or be exempted from withholding tax.
Withholding tax FAQ
Is withholding tax and income tax the same thing?
Yes, but it is referred to by different names depending on the perspective. As an employee, you are obliged to pay the taxes from your income. Thus, this tax can be named “an income tax”. However, since in Japan the filing of this tax is carried out by the employer who takes (withholds) a certain sum from your salary, this tax is also called “withholding tax”, or also a “retention tax”.
What is the amount of the withholding tax?
The amount of the taxes depends on two factors: your residency status and the amount of your income.
Non-residents are subject to a flat-rate income tax of 20.42% on the gross salary gained from sources in Japan.
Other rates in proportion to the income amount can be found in tables provided by the Japan External Trade Organization (JETRO) here.
Why Is My Tax Withheld?
If all taxpayers in Japan would file their own reports, it would result in a large number of files the authorities will need to review. This would be incredibly time-consuming, and therefore, inefficient therefore those who pay their employees salary (withholding agents) withhold the tax amount from the total payment.
When are tax returns due?
The due date to return your taxes for the previous year are due 15th March.
When Do I Pay My Taxes?
Generally, companies should remit their taxes by the 10th day of the next month, if the 10th day falls on a weekend or holiday then it shall be the next working day.
Although, small businesses (businesses employing 10 people or less) may advantage of a special provision that allows them to remit taxes only twice a year.
Withholding income tax and special income tax for reconstruction