Withholding Tax for Ski Resort Property in Japan

Understanding Withholding Income Tax For Non-Resident Foreign Nationals Working in Japan

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Taxes in Japan are applied to all the residents of the country. Residents have to pay taxes not only on the income within Japan but also on the income gain all over the world. On the contrary, non-residents have to pay taxes only on the income generated within the country. In other words, the later applies to foreigners who do not reside in Japan but have sold or rented out their property here. In order to prevent cases where foreigners do not declare income generated from the property sale or rentals, Japan has a withholding tax system in place where non-residents pay fixed fees and rentals to the Tax Office in advance on the source of income.

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.

A resident is an individual who has a registered address in the country or has been residing in the country for over a year. There are two groups of residents:

  • Non-permanent residents. These are individuals who are not Japanese nationals and have been living in Japan for longer than a year but for less than five years in the last ten years.
  • Permanent residents. These are individuals who are Japanese nationals or who have been living 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 its source.

A non-resident is an individual who does not meet the criteria of a resident. For example, a person who has been working in an overseas branch of a company for over a year and has resided there for over a year falls under the definition of a non-resident. If a person is a non-resident, he or she will be taxed only on income gained within Japan (the source of income is in Japan) when it comes to withholding tax.

N.B. In order to provide a comprehensive judgment about taxes, individuals residing overseas should confirm their status to the Tax Office or the certified tax accountant in advance.

What Kind of Income is Taxable?

For non-residents, only income gained in Japan (domestic source income) is subject to withholding tax. The following are examples of income sourced within Japan:

  • 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.

The Difference Between a Registered Address and a Residence Address?

A registered address (jusho) is considered to be the center of an individual’s life and is used to objectively determine whether the center of a person’s life is in Japan or not.

A residence address (idokoro) is a place that cannot tell if it is the center of one’s life or not, however, it is where a person lives.

Although these terms are often used interchangeably, a residence is not always the same as the registered address.

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Having Multiple Places of Residence

In case a person lives between two or more countries, his or her registered address, workplace address, property address, circumstances of their family residence, citizenship, etc. may be used to objectively determine what place is to be considered a primary address.

Submitting Final Tax Returns When Leaving Japan in the Middle of a Year

In case an individual who has an obligation to submit the final income tax returns has to leave the country during the year, an appointed tax agent will have to report about the situation to the Tax Office. In this case final tax returns for the current year must be filed by March 15 of the following year.

However, if there is no appointed tax agent, one must fill in returns before leaving Japan. Appointed tax agents act on behalf of an individual and perform such duties as submission of the tax returns, tax payments, and other administrative procedures. Usually, these duties are entrusted with one’s parents, relatives, friends, etc.

Sumbitting Resident Tax When Leaving Japan in the Middle of a Year

Resident tax is calculated based on the income of the previous year on January 1st of the current year. For example, if a person leaves the country in September 2019 and does not have a registered address in Japan as of January 1st, 2020, he or she will not be liable to the residence tax for the year of 2019, even if such person did have an income sometime during 2019.

Withholding Tax for Non-Residents When Buying or Selling Property in Japan

When non-residents sells property in Japan the buyer of such property must pay 10.21% of the selling price as an income tax. In other words, a non-resident who has bought a property has to pay 89.79% of the sum to the seller, and the remaining 10.21% to the Tax Office until the 10th day of the next month. A non-resident who has bought property has to make adjustments in the final tax returns for the sum paid as the income tax.

However, if the price of the sold property is less than 100,000,000, and the property will be used by the buyer or his family members as the place of their residence, there is no need to pay income taxes.

A flowchart to determine the sum of withholding tax when buying or selling
Paying income tax on property acquisition or sale (Flowchart by Mitsui Fudousan Realty)

*1 Whether it is the deposit fee and the intermediary fees, if they are included in the transfer sum, it is necessary to withhold taxes from each payment transaction.
*2 The family members group includes a spouse, a kinship from within the sixth degree by bloodline or kinship from within the third degree of affinity.
*3 The decision of whether the sum exceeds 100,000,000 yen or not is made based on the equity of co-owners.

Withholding Tax for Non-Residents When Leasing or Renting Property in Japan

When non-residents lends property in Japan, the renter of such property must pay 20.42% of the rental price as an income tax. In other words, a non-resident has to pay 79.58% of the rent sum to the owner, and the remaining 20.42% to the Tax Office until the 10th day of the next month. A non-resident who has leased the property has to make adjustments in the final tax returns for the sum paid as the income tax.

However, if the property will be used by the buyer or his family members as the place of their residence, there is no need to pay income taxes

A flowchart to determine the sum of withholding tax when renting or leasing
Paying income tax on property lease and rentals (Flowchart by Mitsui Fudousan Realty)

*The family members group includes a spouse, a kinship from within the sixth degree by bloodline or kinship from within the third degree of affinity.

Summary

Non-residents who gain income from property sale or lease during their stay in Japan are subject to withholding tax. Because their stay is significantly shorter than a regular tax period, their income is subject to withholding tax at the source. The rates may differ depending on the activity a person engages in, the cost of the property, and its primary designation for use.

Those non-residents who happen to leave Japan before the tax yer end would appoint a tax agent and make sure they sumbit the tax returns on time. Other taxes to consider include property aquisition tax, fixed assets tax, consumption tax, capital gains tax.

Withholding Tax for Property in Japan 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 owner or seller, you are obliged to pay the taxes from your income. Thus, this tax can be named “an income tax”. However, as a buyer or renter you have a certain sum withheld from your payments, this tax is also called “withholding tax”, or 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 10.21% when selling property and 20.42% when lending property in Japan.

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 engage in real estate property operations in Japan must withhold the tax amount from their income.

When are tax returns due?

The due date to return your taxes for the previous year is March 15.

When do I pay my taxes?

Generally, one should remit the 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.

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