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Investing in Japan

How to Set Up Business in Japan
Laws & Regulations on Setting Up Business in Japan

Section 3. Taxes in Japan

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

  1. Residents
    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.

    *Non-permanent residents
    Residents having no Japanese citizenship and having a domicile or residence in Japan for less than five years 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.
  2. 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 often completed 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

  1. 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.
  2. 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 in 3.3.4 above. The amount of self-assessed income tax levied on non-residents is calculated in the same manner as for residents. 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% tax on the total amount of that salary.
    The tax rates for self-assessed income tax as an aggregate tax on individual income are as shown below.

Table 3-5 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 - 40%

3.7.3 Withholding income tax
The withholding income tax for residents and non-residents is as described in 3.4.2 and 3.4.4.

3.7.4 Filing and payment
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 from only one payer not exceeding 20 million yen and who have no other income do not need to file a return.
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 Individual residential taxes, individual enterprise tax
"Individual residential taxes" is the collective term for prefectural tax and municipal tax on individual income, and persons having a domicile in Japan as of January 1 each year are subject to these taxes. Individual residential taxes are 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. Residential tax returns must be filed by March 15, but persons submitting self-assessed income tax returns do not have to file again for individual residential tax. The standard rates of individual residential taxes are as shown below.

Table 3-6 Individual residential tax rates
Prefectural tax rate Uniformity 4%
Municipal tax rate Uniformity 6%

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.

(Reference)

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