3.7 Overview of individual tax system

Residents

Persons having a domicile in Japan*1 and persons having a residence in Japan*2 for one year or more are termed residents. The worldwide income of residents, regardless of the location of the source of income, is subject to income tax.

Non-residents

Persons not qualifying as residents are termed non-residents. Japanese income tax for non-residents will be assessed on income sourced within Japan. As described in 3.4.4 above, the scope of taxable income for withholding tax on non-residents is covered under the provisions for domestic-sourced income, so, except in special cases, taxation for non-residents is now more commonly completed only through withholding at source procedures.

Self-assessed income tax on residents

Income is calculated using methods established for each of a number of income classifications. The tax is calculated by subtracting the various income deductions from the total amount of income and then multiplying the difference, which is the amount of taxable income, by the progressive tax rates below. Any withholding income tax levied on the income beforehand will be deducted from the calculated tax.

Self-assessed income tax on non-residents

Non-residents are classified by their circumstances into non-residents who have a permanent establishment (PE) ((a) non-residents having an office, etc., in Japan, (b) non-residents continuously engaged in construction or assembly in Japan for one year or more, or (c) doing business through a designated agent in Japan) and to non-residents who do not have a PE.
In case PE is defined differently in tax treaty, tax treaty definition shall prevail.

Taxable income is calculated within the scope of income established for each classification. In the method of taxation for non-residents, income tax becomes taxable by dividing income into income attributable to PE and other domestic source income depending on the existence of PE. The amount of self-assessed income tax levied on non-residents is, as a rule, calculated in the same manner as for residents (subject to differences in the treatment such as the limit amounts of applicable income deductions and foreign tax deductions). Non-residents who earn salary income paid for services provided in Japan and not deemed subject to withholding tax in Japan must file a return and pay a 20.42% tax on the total amount of that salary.

The tax rates for self-assessed income tax on individual income (in the case of residents and of aggregate taxation of non-residents) are as shown below.

Income tax on employment income is calculated based on the amount obtained by deducting the following employment income deductions from income.

Taxpayers and scope of taxable properties

When expatriates received properties by inheritance/gift while in Japan

If a person has an address in Japan at the time of inheritance/gift, the person who received the properties is an inheritance and gift taxpayer. In this case, regardless of the nationality of the person who received the properties and the address of the person who gave the properties, all of the properties acquired are taxable. In other words, not only properties located in Japan but also properties located outside the country are subject to inheritance/gift tax.
However, if an expatriate is a non-permanent resident (who has status of residence and has had an address in Japan for an aggregate period of 10 years or less within 15 years preceding the commencement of inheritance) and has acquired propertiesy outside Japan by inheritance and so on from their family living in their home country, or has received properties from a foreigner decedent or donor (who has status of residence and an address in Japan), only domestic properties are taxable.

When expatriates passed away or gave a gift while in Japan

When a foreign resident acquired a property by inheritance and so on from an expatriate in Japan, if the address of the person who gave the properties at the time of giving the properties was in Japan, all of the properties acquired are subject to tax, regardless of the nationality of the person who received the properties. In other words, it is noteworthy that not only properties located in Japan but also properties located outside the country are subject to the inheritance/gift tax. However, when the expatriate is a temporary resident (who had status of residence and an address in Japan) and if the person receiving the properties lives outside Japan and does not have a Japanese nationality (or has a Japanese nationality but has not had an address in Japan for 10 years or more), only domestic properties are taxable. Also, if a person who has received the properties lives in Japan but is a non-permanent resident (who has status of residence and has had an address in Japan for an aggregate period of 10 years or less within 15 years preceding the commencement of inheritance), only domestic properties are taxable.

After expatriates have returned home on completion of their business in Japan

When neither the person who gave the properties nor the person who received the properties has an address in Japan, only the properties located in Japan are subject to inheritance/gift tax. However, if the person who gave the properties or the person who received the properties had a Japanese nationality and an address in Japan within 10 years preceding the inheritance/gift, not only the properties located in Japan but also the properties located outside the country are subject to inheritance/gift tax.

Tax rates of inheritance tax and gift tax

The rates are between 10% to 55% for both the inheritance tax and gift tax, but there is a difference between the inheritance tax and the gift tax in the taxable amount each tax rate is applied.

Foreign tax credits

If a person who has acquired a property located outside Japan by inheritance or gift and the property is subject to a tax corresponding to the inheritance/gift tax in the country where the property is located (for gift tax, including the cases where the tax is imposed on the person who gave the property), a certain amount of the tax imposed in the foreign country will be credited against the inheritance/gift tax in Japan by the provisions of the foreign tax credits to avoid double taxation.