Takashi Yamaguchi, English Speaking Japanese Tax Accountant
Tel/Fax : 03-6312-3320
営業時間 : 9:00 - 18:00 (月~金)

Income tax on remittance to Non-Permanent Residents

The tax implication of foreigners living in Japan tends to be complicated.
In particular, “non-permanent residents” should be careful when they earn income abroad.
It is not safe idea that you will not be taxed in Japan as you have no income in Japan.
Income tax may be levied on remittance to Japan.

What is a Non-Permanent Resident (NPR)?

Any individual who has an address in Japan is treated as a resident of Japan for the purpose of the Income Tax Law regardless of their nationality (Income Tax Law (hereinafter referred to as the “ITL” Article 2 Item 3).
Among those residents, an individual who do not have Japanese nationality but has had an address or domicile in Japan for 5 years or less in total within the recent 10 years is called as a “Non-Permanent Resident” (hereinafter referred as “NPR”, ITL Article 2 Item 4).

By the way, the tax status of NPR under the income tax law has nothing to do with the permission for permanent residence under the Immigration Control and Refugee Recognition Act of Japan.

Taxable income of NPR

In the case of NPRs, taxable income in Japan is classified into the following three categories (ITL Article 7 Para 1 Item 2).

  1. Income other than foreign source income (Non-Foreign Source Income)
  2. Foreign source income paid in Japan
  3. Foreign source income remitted to Japan

Non-foreign source income is taxed in the year when it is earned regardless of payment location and remittance (immediate taxation), while foreign source income is taxed when it is paid in Japan or repatriated to Japan (remittance taxation).

Foreign Source Income

Generally, it is income earned outside of Japan, but strictly speaking, it refers to the following 17 types of income stipulated by the Income Tax Law (Article 95, Para 1, Para 4).

  1. Income of business conducted through overseas offices, etc.
  2. Income generated by the management or possession of foreign assets
  3. Capital gains specified by the Cabinet Order as derived from foreign assets
  4. Consideration for the services performed outside of Japan
  5. Lease income derived from for foreign real estate, ship, aircraft, etc.
  6. Interest on savings and deposits with foreign financial institutions, interest on foreign bonds
  7. Dividends from foreign stocks, etc.
  8. Interest on loans, etc. for those who conduct business overseas
  9. Lease or sales consideration for industrial property rights, etc. received from persons who conduct business outside of Japan or lease fees for machinery, equipment, etc.
  10. Salary, pension, retirement allowance, etc. due to the provision of work or other services performed outside of Japan
  11. Prize money, etc. for advertising of business conducted outside of Japan
  12. Pensions received based on insurance contracts with foreign insurance companies
  13. Subsidies, interest, profits or margins on deposits with business premises outside of Japan
  14. Distribution of profits received based on anonymous partnership (Japanese Tokumei Kumiai) agreements for investments into business operators outside Japan
  15. Of the income generated by conducting shipping business by ship or aircraft across the country and abroad, those specified by Cabinet Order as the income that should be derived from the business conducted abroad
  16. Income that can be taxed by a contracting state other than Japan in tax treaties
  17. In addition to the preceding items, income specified by the Cabinet Order as earned outside of Japan

Disappearing “Domestic Source Income”

Income that does not fall under the 17 types mentioned above is Non-Foreign Source Income under the Income Tax Law, even if it is earned overseas.
The former income tax law had a definition of “Domestic Source Income”, and other incomes that did not fall under this definition had been defined as “foreign source income”.
However, it turned out that this way of definition causes loophole in Japanese income taxation. So, in 2017, the Income Tax Law was amended to define Foreign Source Income proactively and abolish the definition of “Domestic Source Income”.
Many practitioners such as tax accountants still use the term “Domestic Source Income” for convenience, but this term no longer exists in the current law, and the former “Domestic Source Income” is, as a result, redefined as a part of the Non-Foreign Source Income.

Confusing tax implication on capital gain on sale of securities

In general, many people would think that sale of foreign assets constitutes Foreign Source Income.
However, this is not straightforward under the Income Tax Law since it provides that “Capital gains specified by the Cabinet Order as derived from foreign assets” as a Foreign Source Income (Article 95, Para 1, Item 3).
As a result, those that do not fall under this “specified by the Cabinet Order” cannot be “Foreign Source Income” but constitute “Non-Foreign Source Income”.
An example is capital gain on securities sold outside of Japan.

Before the 2017 amendment, all of the capital gain on securities sold outside of Japan had been treated as Foreign Source Income under the Income Tax Law.
However, after the amendment, only capital gain derived from securities satisfied certain requirement (Specified Securities) can be treated as Foreign Source Income (ITL Article 7 Para 1 Item 2).
Consequently, capital gain other than Foreign Source Income will be immediately taxed even if non of such proceeds is remitted to Japan.
This was an important revision in international taxation in the 2017 tax reform.

What are the Specified Securities?

They are securities either of listed below (Income Tax Income Law Enforcement Ordinance (hereinafter referred to as the “ITL EO”), Article 17, Para 1; Income Tax Basic Circular (hereinafter referred to as the “Circular”) 7-1).
(1) Those acquired on or before 10 years before the sale of those
(2) Those acquired during the period of 10 years before date of the sales and while a taxpayer is not the NPR 
(3) Those acquired before March 31, 2017 (excluding those that fall under (1) or (2) above)

What does “sold out side of Japan” mean?  

What actually constitutes Foreign Source Income is capital gain derived from the Specified Securities sold outside Japan (ITL EO Article 17 Para 1).
“Sold outside of Japan” means the followings (ITL EO Article 17 Para 1 Item 1 through 3).

  1. Sold in foreign financial instruments markets 
  2. Sold to a foreign financial instruments broker by agency trade
  3. Sold of securities which had been safe-kept in an account at a foreign financial instrument broker or a foreign financial institution

Therefore, sale in exchange markets in Japan or through domestic securities brokers, even if the sold securities are Specified Securities, it will not constitute Foreign Source Income.

Likely overlooked Tax on Remittance

“Remittance Tax” is a typical problem for foreigners who are newcomer to Japan.
As mentioned earlier, income tax on Foreign Source Income of NPR is suspended until it is paid in or remitted to Japan. 
However, as the money is fungible, even if you remit part of money you saved before you come to Japan, it will be subject to Remittance Tax as long as you have Foreign Source Income in the year of the remittance.
If you transfer a large amount of money so that you can buy daily necessities and appliances immediately after your arrival in Japan, you may be taxed unexpectedly.
So you should consider how much money you really need to bring to Japan in advance to the relocation but the most seldom do it.

Meaning of “remittance”

Not only money transfer to domestic bank accounts but also bringing in cash or checks, bills of exchange, letters of credit and other means of payment as well as the following activities are regarded as “remittance” (Circular 7-4).

  1. An act of carrying or sending precious metals, bonds, stock or other items into Japan, which is deemed to have been carried out in lie of ordinary remittance
  2. An act of borrowing money or receiving advance in Japan in exchange of repayment of such debts using savings outside of Japan, which is deemed to have been carried out in lie of ordinary remittance foreign saving

Amounts of remittance and taxable income

The table below shows the taxation method applicable to NPRs.

  Paid in Japan Paid outside of Japan
Non-Foreign Source Income Immediate Taxation Immediate Taxation①
Foreign Source Income Immediate Taxation Remittance Taxation②

All income paid in Japan is immediately taxed.
Non-Foreign Source Income paid outside Japan is also immediately taxed(①).
Foreign Source Income paid outside of Japan is taxed upon remittance(②).

The remittance amount will be appropriated for the income ① (i.e. Non-Foreign Source Income paid outside Japan).
If there is a surplus, it will be appropriated for the income ② (i.e. Foreign Source Income paid outside of Japan)
(ITL EO Article 17, Para 4)

Case 1:Remittance 600

  Paid outside Japan
Non-Foreign Source Income 250①
Foreign Source Income 300②

Taxable Remittance :600 – 250 = 350 > 300 → 300

Case 2:Remittance 500

  Paid outside Japan
Non-Foreign Source Income  250①
Foreign Source Income  300②

Taxable Remittance:500 – 250 = 250 < 300 → 250

Case 3Remittance 200

  Paid outside Japan
Non-Foreign Source Income  250①
Foreign Source Income 300②

Taxable Remittance:200 – 250 = △50 < 300 → 0

If you become a NPR or are no longer a NPR (i.e., change to either non-resident or Permanent Resident) in the middle of the year, the income earned while you were a NPR needs to be segregated into Foreign Source Income and Non-Foreign Source Income then the appropriation rule above should be applied to the remitted amount. 

In order to avoid unnecessary taxation, you should distinguish between the income ① and ②.  Otherwise, all of the income can be regarded as the income ②.

In the case where there is no income ② for the year, no remittance is taxed no matter how much you remit.

Case 4Remittance 600

  Paid outside Japan
Non-Foreign Source Income  250①
Foreign Source Income 0②

Taxable Remittance :600 – 250 = 350 > 0 → 0

If you anticipate that foreign source income will be zero or negative in the near future, you would better to transfer money as much as possible in that year for tax-saving.

Foreign Tax Credit

If Foreign Source Income had already been taxed in foreign countries then remittance of such income is taxed in Japan, the same income will be taxed in two countries.
To eliminate or relief such double taxation, you can claim Foreign Tax Credit.
Residents in Japan (including NPRs) will apply foreign tax credits in the Japanese income tax return.
How much double taxation can be eliminated by Foreign Tax Credits depends on the amount of income tax paid in both Japan and abroad, amount of Non-Foreign Source income and Foreign Source Income for each year. If Foreign Tax Credit likely to eliminate your double taxation, it means you have more options of timing and amount of remittance.
When considering remittance taxation, you should also consider availability of Foreign Tax Credit.

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Before emigration, it is better to check not only security and consumer price levels but also taxation thereof.

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