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  • Service: Tax, International Executive Services
  • Type: Regulatory update, Survey report
  • Date: 12/14/2013

Income Tax 

Taxation of international executives
Tax returns and compliance
Tax rates
Residence rules
Termination of residence
Economic employer approach
Types of taxable compensation
Tax-exempt income
Expatriate concessions
Non-resident salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/prepayments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation


All income tax information is summarized by KPMG Tax Corporation.


Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?


15 March. Extensions of the filing deadline are generally not allowed.


What is the tax year-end?


31 December.


What are the compliance requirements for tax returns in Japan?


Residents


Spouses are not taxed jointly; each individual is treated as a separate taxpayer. All taxpayers (including spouses and children) file tax returns separately. Income of children is filed on separate returns.


An individual tax return must be filed if income exceeds a specified amount. A resident taxpayer who receives employment income from outside of Japan is required to file a tax return.


A resident taxpayer is required to file a final return for each calendar year by 15 March of the following year and pay income tax. If a resident taxpayer leaves Japan, the individual must file a tax return before the departure date or by 15 March of the following year if a tax agent is appointed before the departure date. An exception applies for a person whose total salary has been subjected to year-end adjustment of withholding tax.


Non-residents


A non-resident taxpayer, whose employment income has not been subject to a 20 percent withholding tax, must file a return by the day of his/her departure from Japan, or by 15 March of the following year if a tax agent is appointed, and pay the 20 percent tax.


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Tax rates

What are the current income tax rates for residents and non-residents in Japan?


Residents


The following tax rates are applied to total taxable income, which is total income minus allowable deductions. These apply to both permanent and non-permanent resident taxpayers:


National income tax table for 2012


Taxable income bracket Total tax on income below bracket Tax rate on income in bracket
From JPY To JPY JPY Percent
0 1,950,000 0 5
1,950,001 3,300,000 97,500 10
3,300,001 6,950,000 232,500 20
6,950,001 9,000,000 962,500 23
9,000,001 18,000,000 1,434,000 33
18,000,001 and up 4,404,000 40

Local inhabitants tax table for 2012


Taxable income bracket Total tax on income below bracket Tax rate on income in bracket
From JPY To JPY JPY Percent
Prefectural
0 No limit 0 4
Municipal
0 No limit 0 6

Non-residents


A non-resident is taxed at a flat rate of 20 percent on the gross salary and allowances attributable to sources in Japan without deductions.


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Residence rules

For the purposes of taxation, how is an individual defined as a resident of Japan?


According to the Income Tax Law of Japan, there are two categories of individual taxpayers, a resident and a non-resident.


Resident


A resident is an individual who has a domicile in Japan or has resided in Japan for a continuous period of one year or more. A resident is further classified as either a non-permanent resident or a permanent resident.


Permanent and non-permanent resident


A non-permanent resident is an individual who is not a Japanese national and has a domicile in Japan or has resided in Japan for more than one year and less than five years in the last 10 years.


A non-permanent resident is taxed on the greater of Japanese-sourced income regardless of where it is paid, or remittance into Japan plus income paid in Japan.


A permanent resident is a resident other than a non-permanent resident. Therefore, an individual who is a Japanese national or who has a domicile in Japan or resided in Japan for more than five years in the last 10 years.


A permanent resident is subject to income tax on worldwide income regardless of source.


Non-resident


A non-resident is an individual other than resident.


A non-resident is taxed only on Japanese-sourced income, without deductions or exemptions.


If a non-resident is a resident of a country with which Japan has concluded a tax treaty, income may be either exempt or subject to a lower rate of tax.


Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to Japan for more than 10 days after their assignment is over and they repatriate.


No.


What if the assignee enters Japan before their assignment begins?


This will depend on the individual circumstances of the assignee and the treaty provisions in place. Residence in Japan generally commences from the day following the date the assignee arrives in Japan to start the assignment.


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Termination of residence

Are there any tax compliance requirements when leaving Japan?


The tax office notes a taxpayer’s entry in Japan from the residency management system with a municipality. Tax return must be filed before departure or alternatively, the taxpayer must appoint a tax agent by notice to the tax office before departure.


What if the assignee comes back for a trip after residency has terminated?


As above, this will depend on the individual circumstances of the assignee and the treaty provisions in place.


Communication between immigration and taxation authorities


Do the immigration authorities in Japan provide information to the local taxation authorities regarding when a person enters or leaves Japan?


In general, no. However, tax authorities can obtain the information from immigration authorities.


Filing requirements


Will an assignee have a filing requirement in Japan after they leave Japan and repatriate?


Depending on the timing of departure and whether or not they receive any income post departure which relates to their Japan assignment. In this case, non-resident tax return/withholding is required.


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Economic employer approach1

Do the taxation authorities in Japan adopt the economic employer approach to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Japan considering the adoption of this interpretation of economic employer in the future?


The taxation authorities in Japan currently do not adopt the economic employer approach.


De minimus number of days2


Are there a de minimus number of days before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?


Not applicable.


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Types of taxable compensation

What categories are subject to income tax in general situations?


There are two types of individual taxes in Japan, a National Income Tax (NIT) and a Local Inhabitant Tax (LIT).


Permanent and non-permanent residents are subject to both taxes, while non-residents are only subject to the National Income Tax. Both types of taxes are based on the same income items.


However, the types of deductions allowed against income differ for the two taxes. Below is a table showing the general income and deduction items for both taxes:


Income items Subject to:
NIT LIT*
Employment income x x
Business income x x
Rental income x x
Dividend income x x
Capital gains x x
Occasional income x x
Miscellaneous income x x
Interest income x x
Retirement income x x

* Non-residents are not subject to LIT.


Deductible items

Deductible for:

NIT LIT
Personal deduction (exemption) x x
Employment income deduction x x
Capital gains deduction x x
Occasional income deduction x x
Casualty losses x x
Medical expenses x x
Social insurance premiums x x
Life insurance premiums x x
Earthquake insurance premiums x x
Contributions on or donations to national or local government bodies, and so on in Japan, or certain specified political donations x x*

* Not deduction but tax credit is available for the Local Inhabitant Tax under some conditions.


National income tax


Income items subject to tax:


Income Item General taxable amount

Is a loss in this category deductible?

Employment income3 Gross compensation

N/A

Business income Gross receipts less necessary expenses

Yes

Rental income from real estate4 Gross receipts less necessary expenses

Yes

Dividend income Gross receipts less interest on borrowings to acquire principal

No

Interest income Gross receipts

No

Capital gains5 (except from securities, land or buildings) 100 percent of short-term gains and 50 percent of long-term gains (after special deduction)

Yes

Occasional income 50 percent of gross receipts less necessary expenses and special deduction

No

Miscellaneous income (e.g., pension) Gross receipts less necessary expenses

No


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Tax-exempt income

Are there any areas of income that are exempt from taxation in Japan? If so, please provide a general definition of these areas.


Certain employer provided housing allowances (employer’s contribution to rent)


Taxable. Subject to certain conditions, if the assessed rental (that is, the value of the taxable economic benefit) is included in taxable income, rent paid by an employer is non-taxable. Assessed rental is determined using a formula which considers the type and value of the premises. Generally, the taxable amount is in the range of 5 percent to 10 percent of the actual rent for an employee or 50 percent for a registered director of Japanese company (the 50 percent rate can be reduced to 35 percent if the premises are used partly for business purposes).


Certain employer provided housing allowances (cost of utilities)


Taxable.


Living away from home allowance (LAFHA)


Taxable.


Certain employer provided tax reimbursements


Taxable. Any tax reimbursements or settlements made by an employer for an expatriate should be included in taxable income.


Certain employer provided relocation reimbursements


Non-taxable. Reimbursements of actual moving cost in connection to the assignees relocation to/from Japan are generally non-taxable.


Home leave


Taxable. Subject to certain conditions, non-taxable. Cash or an in-kind benefit provided by an employer to an expatriate in Japan to facilitate a home leave trip to that expatriate’s and/or spouse's country of origin can generally not be treated as taxable income. The home leave expenses can also cover the costs of the expatriate’s co-habiting family members. Such home leave should, generally, be limited to a single trip per year and should be in accordance with the employer’s working rules, terms of the expatriate’s contract and so on. Further, the expenses should be reasonable based upon the relevant facts, such as available routes, distances, fares, and so on.


Certain employer provided education costs


Taxable. Tuition fees for children paid by an employer are taxable to the employee. However, an exception to such taxable treatment has been established by special tax rulings with respect to the contribution plan of certain international schools in Japan. Under such plans, an employer company can effectively make a donation to the school and in recognition of this children of employees are exempt from tuition fees for attending the school. The employees are not required to report any benefit arising from this arrangement as taxable income. However, employer companies are required to treat the contribution payments as donations for corporate income tax purposes. Donations have only limited deductibility for corporate tax purposes. Certain international schools have now been granted status as Specified Public Interest Facilitating Corporations (SPIFC). As a result, it may be possible for companies to enjoy a tax deduction for a greater portion of donations to such qualifying schools.


Certain bonus payments


Taxable.


Certain interest subsidies


Taxable.


Certain auto allowances


Taxable. However, a company car used purely for the employer’s business purposes can be treated as a non-taxable economic benefit.


Health insurance


Taxable.


Commutation allowance


Non-taxable. A commutation (transportation) allowance may be paid tax free up to lesser of JPY100,000 or the actual monthly transportation costs.


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Expatriate concessions

Are there any concessions made for expatriates in Japan?


See residency rule section.


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Non-resident salary earned from working abroad

Is salary earned from working abroad taxed in Japan? If so, how?


Since employment income is considered to arise at the location at which employment services are rendered, income corresponding to employment services while expatriates are traveling outside Japan is treated as foreign-sourced income. The income allocation is based on the number of days spent on business outside Japan. The day of departure from Japan is not counted as a day of absence from Japan but the day of return to Japan is counted as an absent day. Where expatriates take home leave, the number of such days spent outside Japan is eliminated from the computation used to allocate employment income. Generally speaking, a non-permanent resident would not be taxed on the portion of income that relates to services performed abroad. Please note that the income allocation is not applied for a permanent resident and registered director of Japanese company.


However, Japan applies a remittance exception whereby an expatriate is taxable on compensation paid in Japan and/or remitted to Japan, if such amount exceeds the amount of income attributed to services in Japan.


Therefore, it is necessary for a non-permanent resident taxpayer to keep record of remittances to Japan in cases where of his/her compensation is paid outside Japan.


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Taxation of investment income and capital gains

Are investment income and capital gains taxed in Japan? If so, how?


Capital gains representing income derived from the sale or transfer of land or buildings (including the right to use land) are divided into two categories: short-term gains from land and buildings held for no longer than five years as of 1 January of the transaction year, and long-term gains from those held over five years as of 1 January of the transaction year.


Long-term gains are taxed at a flat rate of 15 percent of national income tax plus 5 percent of local inhabitant tax.


Short-term gains are taxed at a flat rate of 30 percent of national income tax plus 9 percent of local inhabitant tax.


The sale of land or buildings held by non-residents is subject to 10 percent withholding tax except if the property has been purchased by individuals for residential use and the sales value is no more than JPY100 million.


Please note that the changes below are generally applicable for the listed stocks sold through a broker registered in Japan.


The rate of the separate assessment tax of capital gain of stocks is 20 percent (15 percent national and 5 percent local). Under some conditions, until 31 December 2013, the 10 percent tax rate (7 percent national and 3 percent local) is available.


Dividends, interests, and rental incomes


In principle, these should be reported on an individual income tax return.


Gains from stock option exercises


In general, stock options are taxed in Japan at the time of exercise. Gains from stock option exercises are taxable as an employment income.


Residency status Taxable at:
Grant Vest Exercise
Resident N N Y
Non-resident N N Y
Other (if applicable) N/A N/A N/A

Foreign exchange gains and losses


Technically, gains and losses on foreign exchange should be included as miscellaneous income on the individual tax return.


Principal residence gains and losses


Gains on the sale of residential property held for more than 10 years are taxed at 10 percent (plus 4 percent local inhabitant tax) of taxable gains up to JPY60 million and 15 percent (plus 5 percent local inhabitant tax) on the excess over JPY60 million. A special deduction of JPY30 million is available on gains from the sale of residential property if specified conditions are met. Under some conditions, the carry over of the capital loss is applicable for up to 3 years.


Capital losses


From 1 January 2009, under some conditions, capital loss from listed stock transaction can be offset with listed stock dividend income.


From 1 January 2003, the carryover of capital loss of listed stocks through a broker registered in Japan is applicable for up to 3 years.


Personal use items


Not applicable in Japan.


Gifts


See Gift, Wealth, Estate, and/or Inheritance Tax Section.


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Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Japan? If so, please discuss?


Retirement income


Retirement income is taxed separately from other income, and the payer of retirement income in Japan is required to withhold both national income and local inhabitant taxes at source.


The taxable retirement income is 50 percent of the net of the gross receipts less the retirement deduction based on the length of service:


Length of service Retirement deduction (JPY)
Up to 20 years of service 400,000 per year of service or 800,000 (whichever is greater)
Over 20 years of service 700,000 per year of service

Are there capital gains tax exceptions in Japan? If so, please discuss?


Pre-CGT assets


Not applicable.


Deemed disposal and acquisition


Not applicable.


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General deductions from income

What are the general deductions from income allowed in Japan?


The following deductions and allowances are available to permanent and non-permanent residents:


Employment income deduction: The deduction is taken against employment income only. The deduction amount is calculated as the higher of specific employment-related expenditure and the standard employment income deduction. The standard income deduction is found from the following table:


From JPY To JPY Employment deduction JPY
0 1,800,000 The greater of (Gross income x 40%) or 650,000
1,800,001 3,600,000 (Gross income x 30%) + 180,000
3,600,001 6,600,000 (Gross income x 20%) + 540,000
6,600,001 10,000,000 (Gross income x 10%) + 1,200,000
10,000,001 No limit (Gross income x 5%) + 1,700,000

If the aggregate amount of specific employment-related expenditures incurred but not reimbursed by the employer during a year exceeds the amount of the employment income deduction, the excess may be deducted in addition to the employment income deduction. Specific expenditures include the following:


  • commuting expenses
  • moving expenses on transfer
  • training expenses incurred in gaining technology or knowledge directly required for performing duties.

The expenditures must be documented and certified by the employer. The deduction of specific expenditures may only be claimed by filing a tax return as follows.


  • Capital gains deduction: A special deduction of JPY500,000 is allowed against capital gains, which is subject to aggregate taxation. The deduction is applied first against short-term gains and then the remainder is applied against long-term gains.
  • Occasional income deduction: A special deduction of JPY500,000 is allowed against net occasional income.
  • Casualty losses: The amount deductible against ordinary income is equivalent to the excess of the loss not covered by insurance proceeds over the smaller of JPY50,000 or 10 percent of adjusted total income.
  • Medical expenses: The deductible amount is equivalent to the excess of medical expenses not covered by insurance proceeds over the smaller of JPY100,000 or 5 percent of adjusted total income. The maximum deductible amount is JPY2 million.
  • Social insurance premiums: The full amount of premiums paid by the employee under Japanese plans is deductible. In general, foreign social insurance premiums are not deductible.
  • Life insurance premiums: For policies entered into after 31 December 2011 (new policies), the maximum deductible amount is JPY40,000 and JPY28,000 for national tax and local inhabitant tax respectively. An additional JPY40,000 (maximum for national tax) and JPY28,000 (maximum for local inhabitant tax) deductions are available if the premiums are paid under an individual pension plan / nursing incurance respectively. Foreign (non-Japanese) policies are not deductible. For policies entered into on or before 31 December 2011, the maximum deductible amount is JPY50,000 and JPY35,000 for national tax and local inhabitant tax respectively. If an individual applies for both old and new policies, the maximum deductible amount in total is JPY120,000 for income tax purpose and JPY70,000 for local inhabitant tax purpose.
  • Earthquake insurance and/or long-term casualty insurance premiums: Earthquake insurance premiums up to the value of JPY50,000 can be deducted from income for income tax purposes, and a half of the premiums for local inhabitant tax purposes (up to JPY25,000). Although the income deduction for casualty insurance premiums is basically abolished from 2007, the deduction for long-term casualty insurance premiums will remain available provided that the policies are entered into before 31 December 2006. The maximum deduction for long-term casualty insurance premiums is JPY15,000 and JPY10,000 for income tax purposes and for inhabitant tax purposes respectively. If an individual applies for both a deduction for earthquake insurance premiums and a deduction for long-term casualty premiums, the maximum deductible amount in total is JPY50,000 for income tax purposes and JPY25,000 for inhabitant tax purposes.
  • Contributions and donations: Contributions or donations made to qualified government or local authorities, institutions for education, scientific, or other public purposes as designated by the Minister of Finance, and institutions for scientific study or research specifically provided for in the regulations are deductible. The deductible amount is equivalent to all qualified contributions exceeding JPY2,000 with some limitations based on income level. As for local inhabitant tax, not deduction but tax credit is available for contributions or donations qualified under local tax law.

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Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Japan?


Current year gross-up, current year reimbursement, and one-year rollover (under certain conditions) are allowed. If compensation is paid in Japan, it is subject to withholding tax and a gross up would be required.


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Calculation of estimates/prepayments/withholding

How are estimates/prepayments/withholding of tax handled in Japan? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.


Pay-as-you-go (PAYG) withholding


If compensation is paid to a resident or Japanese-sourced compensation is paid to a non-resident through onshore payroll, the employer is required to withhold income tax on the payments. If the employer of non-residents has an office or place of business in Japan and Japanese-sourced compensation is paid to non-residents outside of Japan, the office or place of business in Japan is required to withhold income tax on the payments.


PAYG installments


Not applicable.


When are estimates/prepayments/withholding of tax due in Japan? For example: monthly, annually, both, and so on.


Provisional national tax payments are determined based on the prior year's tax liability. In general, provisional tax is calculated as two-thirds of the preceding year's tax liability and is payable in two equal installments; 31 July and 30 November. In early July, the tax office will send taxpayers a notice with the relevant provisional tax amounts and due date.


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Relief for foreign taxes

Is there any Relief for Foreign Taxes in Japan? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?


A tax credit can be applicable to resident taxpayers who have foreign-source income on which both foreign and Japanese taxes have been paid. The credit is calculated by the following formula:


Type Credit calculation
Japanese income tax (A)
Foreign-sourced income (B)
Entire income taxable in Japan (C)
Credit amount: (A) x {(B) / (C)}

The excess of the foreign tax over the amount to be credited against income tax calculated as above can be carried forward for three successive years.


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General tax credits

What are the general tax credits that may be claimed in your country? Please list below.


There is a host of credits that may be claimed against the taxpayer's regular tax liability, such as:


  • tax credit for dividends from Japanese companies
  • special tax credit for mortgage loan interest
  • special tax credit for contributions to political parties
  • special tax credit for anti-earthquake improvement
  • foreign tax credit
  • special tax credit for contributions to tax qualified non-profit organization.

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Sample tax calculation

This calculation assumes a married taxpayer resident in Japan with two children whose three-year assignment begins 1 January 2011 and ends 31 December 2013. The taxpayer’s base salary is USD100,000 and the calculation covers three years.


2011
USD
2012
USD
2013
USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving allowance 20,000 0 0
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = JPY80.00.


Other assumptions


  • All earned income is attributable to local sources.
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
  • Interest income is not remitted to Japan.
  • The company car is used for private purposes.
  • The employee is deemed resident throughout the assignment.
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.

Additional assumptions


  • spouse: no income
  • children: age 10 years old/age 8 years old
  • taxpayer is not a Japanese national and resided in Japan for more than one year and less than five years in the last 10 years
  • taxpayer leaves Japan on 31 December 2013
  • taxpayer lives in Tokyo during Japan assignment.

Calculation of taxable income


Year-ended 2011
JPY
2012
JPY
2013
JPY
Days in Japan during year 365 366 365
Earned income subject to income tax
Salary 8,000,000 8,000,000 8,000,000
Bonus 1,600,000 1,600,000 1,600,000
Cost-of-living allowance 800,000 800,000 800,000
Net housing allowance 960,000 960,000 960,000
Company car 480,000 480,000 480,000
Moving allowance 1,600,000 0 0
Home leave 0 400,000 0
Education allowance 240,000 240,000 240,000
Tax reimbursement (national tax) 0 3,234,600 3,560,200
Tax reimbursement (inhabitant tax) 0 1,065,000 1,359,500
Total earned income 13,680,000 16,779,600 16,999,700
Other income 0 0 0
Total income 13,680,000 16,779,600 16,999,700
Employment Income Deduction 2,384,000 2,538,980 2,450,000
Deductions: 760,000 760,000 760,000
Total taxable income 10,536,000 13,480,000 13,789,000

Calculation of tax liability


2011
JPY
2012
JPY
2013
JPY
Taxable income as above 10,536,000 13,480,000 13,789,000
Japanese tax thereon 1,940,880 2,912,400 3,014,300
Less:
Domestic tax rebates (dependent spouse rebate)
Foreign tax credits
Provisional tax 0 (1,293,800) (1,941,600)
Final tax due (national) 1,940,800 1,618,600 1,072,700
Inhabitant tax 1,065,000 1,359,500 0
Total Japanese tax 3,005,800 2,978,100 1,072,700

Due to a change of Japanese tax law, dependent deductions for children aged under 16 were abolished in 2011.




1Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee's salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.


2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.


3Gross compensation includes salaries, wages, bonuses, and other allowances of a similar nature. Benefits-in-kind provided by the employer are also included in employment income. Compensation earned outside Japan is treated differently depending on an employee’s residency: Non-permanent resident: Since employment income accrues from the place where employment services are rendered, income corresponding to services rendered while a non-permanent resident is traveling outside Japan is treated as income from sources abroad. The amount of such income is required to be calculated based on the number of days spent on business outside Japan, and in connection therewith, the day of departure from Japan is not counted as absence from Japan while the day of return to Japan is counted as absence from Japan. Moreover, when an expatriate takes home leave, the number of such days spent outside Japan is required to be completely eliminated from the computation of allocation of employment income to sources abroad and in Japan. Non-resident: A non-resident is not taxed on any earnings from non-Japanese sources, regardless of where paid or remitted.

4Interest expenses on the acquisition of land included in a loss in connection with calculation of rental income from real estate cannot be deducted from other income.


5Property held five years or less is considered short-term; all other property is long-term.



© 2013 KPMG Tax Corporation, a tax corporation incorporated under the Japanese CPTA Law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

 

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Taxation of international executives