3.7 Overview of Personal Tax System
Section 3: Taxes in Japan
This section discusses the aspects of Japan’s tax system that are most relevant to a foreign corporation or individual investing in Japan. Emphasis is placed on corporate tax structures, tax treaties, and personal taxes.
3.1 Overview of Japanese Corporate Tax System for Investment in Japan
3.2 Domestic-Sourced Income
3.3 Overview of Corporate Income Taxes (Corporate Tax, Corporate Inhabitant Tax, Enterprise Tax)
3.4 Overview of Withholding Income Tax
3.5 Tax Treaties
3.6 Overview of Consumption Tax
3.7 Overview of Personal Tax System
3.8 Other Principal Taxes
3.9 Other Principal Corporate Taxation Regarding International Transactions
3.7 Overview of Personal Tax System
All individuals, regardless of nationality, are classified as either residents or non-residents. Individual income tax comprises self-assessed income tax and withholding income tax. Self-assessed income tax will be levied on the individual's income for the calendar year.
3.7.1 Concept of Residence and Taxable Income
Persons having a domicile in Japan(*) and persons having a residence in Japan 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.
(Note)Non-permanent residents: Residents having no Japanese citizenship and having a domicile or residence in Japan for five years or less within the period of ten years are non-permanent residents.
The scope of taxation for non-permanent residents corresponds to that for residents, but tax will not be assessed in Japan on income sourced outside Japan as long as that income is not paid within Japan or is not remitted to Japan.
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.
* "Domicile" as used above refers to the principal base and center of one's life. "Residence" refers to a location in which an individual continually resides for a certain time but which does not qualify as a base and center of his/her life.
3.7.2 Self-Assessed Income Tax
- 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 (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 doing business through a designated agent in Japan, or (c) other non-residents.
Taxable income is calculated within the scope of income established for each classification. The method of taxation for non-residents will also change in terms of income tax pertaining to 2017 or later. 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 certain limits such as non-application 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.
Table 3-4 Individual Income Tax Rates
Brackets of taxable income Tax rates - Or under 1,950,000 yen 5% Over 1,950,000 yen Or under 3,300,000 yen 10% Over 3,300,000 yen Or under 6,950,000 yen 20% Over 6,950,000 yen Or under 9,000,000 yen 23% Over 9,000,000 yen Or under 18,000,000 yen 33% Over 18,000,000 yen Or under 40,000,000 yen 40% Over 40,000,000 yen - 45%
- Income tax on employment income is calculated based on the amount obtained by deducting the following employment income deductions from income.
Table 3-5 Employment Income Deductions
Employment income Employment income deductions Up to 1,625,000 yen 650,000 yen Over 1,625,000 yen and up to 1,800,000 yen (employment income) x 40% Over 1,800,000 yen and up to 3,600,000 yen (employment income) x 30% + 180,000 yen Over 3,600,000 yen and up to 6,600,000 yen (employment income) x 20% + 540,000 yen Over 6,600,000 yen and up to 10,000,000 yen (employment income) x 10% + 1,200,000 yen Over 10,000,000 yen and up to 15,000,000 yen (employment income) x 5% + 1,700,000 yen Over 15,000,000 yen 2,450,000 yen
The withholding income tax for residents and non-residents is as described in 3.4.2 and 3.4.4.
Residents must submit an income tax return for the income earned each year, except when tax payment procedures have been completed through withholding at source, and must pay the tax owed between February 16 and March 15 of the following year. Persons whose total income does not exceed total deductions and persons who receive salary income subject to withholding tax at source (year-end adjustment) from only one payer not exceeding 20 million yen in that year and who have no other income exceeding 200,000 yen do not, as a rule, need to file a return.
As a rule, non-residents file and pay taxes following the same regulations as residents. However, non-residents leaving Japan without designating a tax agent and reporting this fact to the director of the taxation office must submit an income tax return and pay the tax owed prior to leaving Japan.
3.7.5 Restoration Income Surtax
From January 1, 2013, to December 31, 2037, individuals and corporations will be subject to a 2.1% restoration income surtax on the amount of withholding tax on income and self-assessed income tax. For example, the tax rate under domestic law for withholding tax on interest paid to a foreign corporation is 20%, to which will be added restoration income surtax (20% x 2.1%), resulting in a total 20.42% tax withheld at source.
Note that a restoration income surtax is not levied where the withholding tax rate provided for under domestic law is reduced or eliminated by tax treaty.
3.7.6 Individual Inhabitant Taxes, Individual Enterprise Tax
"Individual inhabitant taxes" is the collective term for prefectural tax and municipal tax on individual income, and persons having a domicile etc. in Japan as of January 1 each year are subject to these taxes. Individual inhabitant taxes consist of an income-graded component and a flat-rate (fixed amount) component etc. The income-graded component is assessed on income for the preceding year and, except in special cases, taxable income for these taxes is calculated in accordance with the provisions for calculating income for income tax purposes. Inhabitant tax returns must be filed by March 15, but persons submitting self-assessed income tax returns do not have to file again for individual inhabitant tax. The standard rates of individual inhabitant taxes for the income-graded component are as shown below.
Table 3-6 Standard Rates of Individual Inhabitant Tax (Income-Graded Component)
|Prefectural tax rate||Uniformity||4%|
|Municipal tax rate||Uniformity||6%|
(Note) The standard rate of tax for the flat-rate component is 1,000 yen for prefectural inhabitant tax and 3,000 yen for municipal inhabitant tax.For 10 years from 2014 to 2023, however, these rates will respectively be 1,500 yen and 3,500 yen.
Tax rates may differ from the standard tax rate depending on the local government concerned.
Individuals engaged in certain businesses specified in local tax laws must pay enterprise taxes. Taxable income for enterprise tax purposes is generally calculated in accordance with the provisions for calculating income for income tax purposes, except where special stipulations apply. Returns must be filed by March 15, and taxes must be paid in August and November in accordance with tax notices issued by the prefectural government. Individual enterprise tax rates range from 3% to 5%, depending on the type of business.