In my past blog “Resident or Non-resident and Domestic corporation or Foreign Corporation”, I briefly touched on the difference in range of taxable income for residents and nonresidents.
This time, I would like to add little bit detail about the income tax implications triggered by change of tax status; when a resident becomes a non-resident and a non-resident becomes a resident in the middle of the year.
Table of Contents
Individuals who do not have an address or residence in Japan are called “non-residents” for the income tax purposes.
“Residence” simply means a place of your daily life.
When an individual who originally had an address or residence in Japan, i.e., a “resident” loses his/her address or residence in Japan in the middle of the year due to relocation or emigration to another country, his/her tax status will change from a resident to non-resident at that point.
In such a case, how it would affect the tax implication?
Even Japanese citizens with Japanese nationality will become non-residents if they no longer have an address or residence in Japan (income tax law (hereinafter referred to as the “ITL”) Article 2 item 5).
There is no difference in nationality regarding the taxation of income tax after becoming a non-resident.
When a resident becomes a non-resident in the middle of the year, the period of being a resident and the period after becoming a non-resident should be distinguished. Then the income generated within each period is taxed as a resident or a non-resident respectively (ITL Article 8).
Therefore, the range of taxable income as well as taxation methods (comprehensive or separate taxation) and tax rates may change in the middle of the year.
For example, out of the salary paid overseas as an employee of a foreign corporation, the amount corresponding to the domestic working period that occurred during the period of residence is subject to comprehensive taxation (at progressive tax rate). However, the amount corresponding to the period after becoming a non-resident will be subject to tax by separate taxation (at 20.42%).
When a resident “departs” in the middle of the year, he/she must submit a final income tax return for the income earned during the period from January 1 to the date of departure then complete the tax payment before the departure.
If you earn any other income after the departure to December 31 of the year and tax filing is required for such income, you have to file another tax return and pay the tax by March 15 of the following year (ITL Article 120 mutatis mutandis by Article 166).
The term “departure” here does not refer to departure as a general term, but refers to a unique state under the income tax law that you emigrate (become a non-resident) without appointing a “Tax Proxy” (ITL Article 2 Item 42).
The “Tax Proxy” is an agent who declares and pays tax in Japan on behalf of a non-resident taxpayer.
If you appoint a “Tax Proxy” before you leave the country and notify the tax office of it, you will be able to declare the income generated during the resident and non-resident periods all together by March 15th of the following year. (ITL Artcile 120 mutatis mutandis by Article 166, Income Tax Basic Circular 165-1).
The same system exists for local taxes as well as national taxes (notification is required independently).
For the notification to the tax office, the below format is used.
For local tax purpose, you should use the format designated by each local government.
Even after you become a non-resident, when you earn a certain type of income from Japan, you must file the Japanese income tax return.
For example, as for the income derived from working in Japan (salary income), leasing real estate located in Japan (real estate income), transfer of such real estate, etc. (capital gain), you need to declare such income by filing the Japanese income tax return and pay the tax.
So, it would be better to have a Tax Proxy in order to proceed the tax filing and payment smoothly.
When an individual who did not have an address or residence in Japan, i.e. a “non-resident”, becomes to have an address or residence in Japan in the middle of the year, his/her tax status will change to a resident from a non-resident at that point.
Unlike leaving Japan, there are differences in taxation after becoming a resident by your nationality whether you are Japanese national or not.
Non-permanent residents” are individuals who do not have Japanese nationality and have address or residence in Japan for a total period of 5 years or less within the past 10 years (ITL Article 2 item 4).
“Permanent residents” are not formal definition but defined as “residents other than non-permanent residents” under the law (ITL Article 8).
Therefore, a resident with Japanese nationality has no room for being regarded as a non-permanent resident and is immediately treated as a “resident other than a non-permanent resident”, that is, a permanent resident.
Residents who do not have Japanese nationality will be treated as either non-permanent residents or permanent residents depending on the period of having address or residence in Japan.
For such judgement purpose, the below confirmation sheet should be prepared and attached to the income tax return (except for a year without non-permanent resident period. ITL Article 120 para 7) .
Non-residents and residents have very different types and ranges of income taxed in Japan.
Even after becoming a resident, the range of taxable income differs between non-permanent residents and permanent residents, so it is important to distinguish between non-residents and residents (non-permanent residents / permanent residents).
The income generated in each period will be distinguished then can be taxed differently (ITL Article 102, Article 8).
While you are a non-permanent resident, in principle, foreign source income (income generated outside Japan) is not taxed in Japan. However, when you remit funds to Japan in a year you have earned foreign sourced income, the remitted amount will be subject to the income tax to the extent of amount of the foreign source income.
In addition, foreign source income directly paid in Japan is also taxed.
Years when it is obvious that there is no foreign source income, or years when there is no domestic remittance are not a problematic, but if you receive payment or remittance domestically in a year when you earn some foreign income, you will be taxed in Japan. you would have to spend more time and effort to calculate and declare your foreign source income.
If the foreign tax credit does not work well, the tax burden will increase.
Foreign source income taxed in Japan is limited to those generated on or after the date of becoming a resident of Japan (Article 17 para 4 item 6 of the Enforcement Order of the Income Tax Law). So, theoretically speaking, you should not be taxed when you remit your income earned before you become a resident of Japan.
However, practically speaking, it is impossible to segregate money by periods of the income generation (as the money is fungible). Consequently, when other foreign source income is generated in a remittance year, the remittance will be taxed, to the extent of the foreign source income currently earned even if you want to remit the earnings in chronological order from past years.
The tax status changes from non-permanent residents to permanent residents (residents other than non-permanent residents) if the period of residence in the last 10 years exceeds 5 years.
When you reach the fifth year in the middle of the year, taxation as a permanent resident begins from that day.
Once you become a permanent resident, you need to declare all income (world income) including foreign source income regardless of whether you have domestic remittance or payment.
When your status changes from a non-permanent resident to a permanent resident in the middle of the year, the taxable income has to be calculated for respective period of non-permanent resident and permanent resident (ITL Article 8).
Despite you earned domestic source income after leaving Japan or earned foreign source income while you are living in Japan, if you do not declare such income properly, penalty and/or delinquency tax will be imposed on the tax amount unpaid.
Recently, Japanese tax authorities have obtained transaction data not only in Japan but also overseas bank accounts.
Since it is likely a system for checking for omissions is being prepared by comparing the contents of the declaration with the transfer of funds in the bank account, it is too risky to devaluate that they won’t be able to find your unreported income.
After you become a permanent resident, even with foreign national, who own foreign properties exceeding ¥ 50 million must submit the below “summary of foreign properties” and “detail of foreign properties”. There are various penalties for non-compliance of this reporting obligation, so it is better to prepare and submit the reporting in timely manner.国外財産調書
Tax implication of the people who have crossed the borders in a short period of time and who have bases of life or business in multiple countries will become more complex.
When such a situation is anticipated, it is important to study probable tax implications in advance, as well as reactive measures.
To avoid or ease international double taxation, tax planning taking tax treaties and foreign tax credits into consideration is essential.