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Income tax

Income tax (所得税) is a national tax on income. It is collected and enforced by the National Tax Agency (NTA, 国税庁).

The NTA's income tax information page is here, and the (smaller) English-language version is here. High-quality Japanese income tax information is also available on the websites of the big four global accounting firms, such as PWC's newsletters and updates and this comprehensive PDF published by KPMG.

Instead of repeating the information available from other reputable sources, this wiki will focus on the most fundamental (and commonly misunderstood) aspects of Japanese income tax.

Tax residency​

Like most countries, Japan adopts residency-based taxation, with tax treaties generally ensuring that every individual is a tax resident of one (and only one) country at all times. (For reference, the only major country that doesn't adopt residency-based taxation is the US, which uses a "US person"/"foreign person" distinction instead of a resident/non-resident one.)

Resident vs non-resident​

Article 2 of the Income Tax Law defines a resident (居住者) as a person:

  • whose jūsho is in Japan; or
  • who has lived in Japan continuously for at least one year.

The word jūsho (住所) is sometimes translated as "address" or "domicile", but these terms can be misleading. The concept of a jūsho is defined by Japan's Civil Code as "生活の本拠" (Article 22), which could in turn be translated as "the base of one's life".

Notably, a jūsho is more than just "the place you are currently staying" (居所, Civil Code Article 23). For example, a student staying in a university dormitory, an elderly person staying in a long-term care facility, or an employee sent to work in a remote office, would all typically have their jūsho at their "home" address, not at their current residence.

If there is uncertainty as to whether the "base of [an individual's] life" is in Japan (i.e., whether they have a jūsho), the first step is to consider their occupation.

Regulations under the Income Tax Law state that a person will be presumed to have a jūsho in Japan if their occupation or business is one that would normally require a person to live in Japan for at least one year (Ordinance 14), and that a person will be presumed to have a jūsho outside Japan if their occupation or business is one that would normally require a person to live outside Japan for at least one year (Ordinance 15). Furthermore, the NTA has stated (Income Tax Notice 3–3) that they interpret both these ordinances as referring to all occupations and businesses except those that are explicitly limited to a period of less than one year.

If the presence or absence of a jūsho cannot be confirmed by reference to a person's occupation or business, it may be necessary to consider additional factors, such as the location of any family members with whom the person is sharing living expenses, and the location of the person's valuable assets/possessions. See this page for a discussion of some past judicial decisions regarding tax residence.

Finally, it is important to note that Japan's Tax Treaty Implementation Law creates an exception to the normal rules of tax residency. Specifically, Article 6 allows for the tie-breaking provisions of a tax treaty to override the Income Tax Law with respect to a person's tax residency.

The tie-breaking provisions of a tax treaty apply when a person appears to be a tax resident of both countries. In that case, the treaty typically prescribes a hierarchy of methods for determining which of the two countries the person is ultimately a tax resident of. For example, the OECD model tax treaty prescribes the following series of tests.

  • If the individual has a "permanent home" available to them in only one of the two countries (meaning a physical space to which they have constant, non-temporary access for residential purposes), they are a tax resident of that country. Otherwise:
  • if the individual's "personal and economic relations" are centered in one country more than the other (meaning their family, friends, occupation, political/cultural activities, place of business, etc.), they are a tax resident of that country. Otherwise:
  • if the individual has a "habitual abode" in only one of the two countries (meaning they clearly spend more time living in one country than the other), they are a tax resident of that country. Otherwise:
  • if the individual is a national of only one of the two countries, they are a tax resident of that country.

If these tests do not resolve which country the individual is a tax resident of, the tax authorities of both countries must negotiate with each other and reach a conclusion regarding the individual's status. See the OECD's commentary (PDF) on the model tax treaty for more details.

Non-permanent tax residents​

Most countries tax the global income of all their residents. Japan, however, refrains from fully taxing the global income of a small subcategory of tax residents: so-called "non-permanent tax residents" (非永住者).

Article 2 of the Income Tax Law defines a Japanese tax resident as a non-permanent tax resident if they:

  • are not a Japanese citizen; and
  • have not had a jūsho or place of residence in Japan for a total of 5 of the past 10 years.

Note that the periods of residence do not need to be continuous, and a resident's status as a non-permanent resident (or otherwise) is evaluated per day, not per year. For example, if you accrue 5 years of Japanese residence on August 5, then you will be a non-permanent tax resident until August 5 and a normal tax resident from August 6 (see the NTA's website here).

Also note that the category of "non-permanent tax residents" only applies to income tax. Gift and inheritance tax, for example, use a different method of determining which tax residents have global liability.

Scope of taxable income​

The Income Tax Law divides taxable income into three categories (Article 7):

  • Japan-source income
  • Foreign-source income
  • Income that is neither Japan-source nor foreign-source

The concept of "source" in these definitions is often misunderstood. It can be useful to think of the "source" of income as the activity or asset that is generating the income. The location of payment is not especially relevant.

Japan-source income​

The Income Tax Law prescribes 17 different categories of "Japan-source" income (Article 161). An English description of those categories is provided by the NTA here.

For many people, the most significant category of "Japan-source" income is category 12:

Salaries, wages or other remuneration received for work carried out in Japan

In practice, this means that any work done by a person who is physically located in Japan at the time of doing the work will be Japan-source income, regardless of where it is paid or the location of the entity making the payment.

However, especially in connection with this category, it is very important to note that bilateral tax treaties are capable of overriding the Income Tax Law's definition of "Japan-source income" (Article 162). So it is necessary to check the contents of all relevant tax treaties before concluding that particular income is "Japan-source".

Foreign-source income​

The Income Tax Law prescribes 17 different categories of "foreign-source" income (Article 95-4). An English description of those categories is provided by the NTA here (see section 3).

As with Japan-source income, tax treaties can also override the Income Tax Law with respect to the definition of foreign-source income. Specifically, income that another country has the ability to tax, under the terms of a treaty with Japan, is always foreign-source income.

However, it is worth noting that "US persons" are to be considered to be "foreign persons" for the purposes of determining whether the US has the ability to tax specific income, in the context of the definition of foreign-source income (see Article 23(3) of the US-Japan Tax Treaty). So the fact that income is able to be taxed by the US due to the taxpayer being a US citizen, for example, does not automatically render the income "foreign-source".

Income that is neither Japan-source nor foreign-source​

This category of income may be applicable to non-permanent tax residents (NPR) if they 1) realize foreign capital gains under certain conditions (see below) or 2) have foreign-sourced income and remit money into Japan. See this document from PwC that describes the relevant rules for whether foreign capital gains are taxable in Japan while NPR status.

Since April 1 2017, if you acquire securities outside of Japan while you are NPR status and you sell those securities while NPR status, income from the sale is taxable in Japan even without a remittance into Japan. Capital gains from securities acquired while not a tax resident of Japan but sold while NPR are not taxable in Japan unless you remit money into Japan.

Income that would otherwise be classified as foreign-source can become taxable in Japan to the extent you remit money into Japan in the same year the foreign-source income occurs. Note that it does not matter whether the money remitted into Japan comes from the foreign-source income that occurred that year or some other source like savings acquired in previous years. It only matters that while you are NPR status, foreign-source income and a remittance into Japan happened in the same year.

See this collection of posts about NPR issues, much of which is related to this topic of income that is neither Japan-source nor foreign-source.

Income that is not taxable​

  • Certain types of disability and death benefits

  • A certain amount of money that an employee receives in the form of a "commuting allowance".

  • Non-monetary benefits received by an employee where the receipt of the benefit is necessary to enable the employee to perform their duties (e.g., driving lessons received by a bus driver, or Japanese lessons).

  • Educational expenses when certain criteria are met (see this thread regarding corporate contribution programs).

  • Relocation allowance (moving for work purpose), see #28, p9 here https://www.pwc.com/jp/en/tax-services/assets/pdf/gm-folio-japan.pdf

  • Housing, pending the housing is provided by work and the employee pays back a minimum amount (such as 20%, usually taken directly from salary slips). In this case, the contract is made between the owner (of whatever housing, it does not have to be a company-owned building) and the company, the employee is not making a contract directly with the owner. Note that housing allowance is different, and taxed in the same way as normal salary - and can be removed by the employer (while salary normally cannot be reduced without reason). So while company housing is financially more attractive than salary, housing allowance is less attractive (taxable and less flexible). See #23 p9 here : https://www.pwc.com/jp/en/tax-services/assets/pdf/gm-folio-japan.pdf

  • Home leave : an air ticket per year, direct to (spouse's) home country, for a foreign employee and family, may be non-taxable. See #26 p9 here : https://www.pwc.com/jp/en/tax-services/assets/pdf/gm-folio-japan.pdf

  • Retirement allowance : based on number of years of service, retirement allowance can be tax free, see #20 p8 here : https://www.pwc.com/jp/en/tax-services/assets/pdf/gm-folio-japan.pdf

  • Allowances or salary increases paid to employees sent overseas temporarily, where the purpose of the money is to provide the employee with a similar quality of life to what they would have enjoyed if they had been living in Japan.

  • Salaries received by employees of certain foreign governments and international organizations.

  • Profit generated by the sale of furniture, clothes, appliances, etc., that your family has used in their day-to-day life.

Types of income​

Interest​

Dividends​

Capital gains​

Miscellaneous income​

Filing an Income Tax Return​

See here.

Tax Credits​

Foreign Tax Credit​

See the Guide to Japan’s Foreign Tax Credit.

Deductions​

Dependent deduction​

Relative by blood can be declared up to 6 degree on the 'blood'side, and 3 degrees on your spouse side. NTA graph showing who can be counted as dependent.

Declaring a foreign dependent needs proof of your remittance(s) of at least 380 kJPY (as of 2023) to an identified account in their name (not in their parent names in case of minors), identification document of the dependent (such as passport with current address), and proof of relationship (such as birth certificate, marriage registry etc), with a translation of such document (that can be done by yourself).

Comment about dependents living overseas

Deduction for Medical expenses above 100kJPY/year​

Deduction of health related expenses above 100kJPY and up to 2000kJPY per filer NTA english guide PDF, p39-41 and detailed NTA page in Japanese

Note that fees for annual health checkups including "ningen dock" and all elective tests do not count toward the medical expenses deduction. If, however, a medical problem is discovered from these sorts of tests, they then do qualify for the medical expenses deduction. this NTA answer.

This deduction is per filer and you can pay for the medical expenses of a family member as long as you paid for the expenses.