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A Brief Overview of Japanese Taxation

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This article provides a brief summary as to how individual and corporate taxes are determined in Japan.

Individual Taxation

Nonresident individual taxpayers are taxed only on their Japan-source income. A permanent resident taxpayer is taxed on his or her worldwide income. A resident taxpayer is an individual who is either a resident of Japan or who maintains a temporary place of abode in Japan for a period of one year or more. A nonpermanent resident taxpayer is taxed on Japan-source income plus that part of non-Japan-source income that is paid in or remitted to Japan. Individuals are generally classified as nonpermanent resident taxpayers for the initial 60 months of residency unless they reside in Japan for less than 12 months. If an individual resides in Japan for less than 12 months, they are classified as a nonresident for Japanese tax purposes.

Taxable Employment Income

Salary, bonuses, cost-of-living allowances, housing provided to an employer (in certain limited cases), tax reimbursements, and foreign-service premiums is considered employee taxable income.

Capital Gains

Japan has a favorable capital gains tax rate. Capital gains in Japan refers to profits made from the sale of real property, stocks, and other types of investments. If assets were owned for more than five years, the gain is regarded as long-term capital gain, and the taxable basis is reduced to 50% of the net capital gain.

Inheritance Tax

Japan has an inheritance tax. The tax rate starts at 10% but can go as high as 55%. The inheritance tax is allocated to each beneficiary of an estate based on the amount he or she received. Lifetime gifts made by the decedent within three years of death are added back to the taxable estate.

Corporate Tax

Japanese resident corporations are subject to Japanese corporate tax on their worldwide income. Any domestic corporation registered in Japan, both for domestic and subsidiaries of foreign companies, a corporate tax on national level is levied by the National Tax Agency. The present national corporate taxation level varies from 15% to 23.2% on the annual net business income of the company. Japan also has a special inhabitant tax that ranges from 1.624% to 2.413% and local enterprise tax that ranges from 3.600% to 3.780%. Taking into consideration the national corporate tax, local inhabitant tax, and enterprise tax, the resulting effective corporate income tax rate for Japanese companies is approximately 35%.

Japan has enacted a tax exemption for dividends paid by foreign subsidiaries. This provision is designed to encourage repatriation of profits earned by foreign subsidiaries of Japanese domestic corporations. In calculating its Japanese corporate taxable income, a Japanese corporation may exclude from such calculation 95% of dividends received from its foreign subsidiaries. For purposes of this exemption, a foreign subsidiary means a foreign corporation, other than those in a tax haven country, where at least 25% of the outstanding stock is owned by a Japanese domestic corporation for at least six months before the dividend declaration date. Foreign withholding taxes on these dividends are nondeductible expenses, and the direct foreign tax credit does not apply to exempt dividends.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. Anthony focuses his practice on providing tax planning domestic and international tax planning for multinational companies, closely held businesses, and individuals. In addition to providing tax planning advice, Anthony Diosdi frequently represents taxpayers nationally in controversies before the Internal Revenue Service, United States Tax Court, United States Court of Federal Claims, Federal District Courts, and the Circuit Courts of Appeal. In addition, Anthony Diosdi has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals. Anthony Diosdi is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.

Anthony Diosdi

Written By Anthony Diosdi

Partner

Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.

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