Residency status of the individual under Individual Income Tax Law

The first step in considering the Individual Income Tax (IIT) implications of an individual is to determine his/her residency status under IIT law. It is divided into three categories: Permanent Resident, Non-Permanent Resident and Non-Resident. All the individuals fall into one of these categories. The flow of classification is shown in the table below.

A domicile is the base of living and it is judged by the presence of objective facts, for example, an individual has an occupation in Japan, an individual lives together with his/her spouse or any other relatives, or an individual owns a place of business.
According to the IIT Directives, a kind of tax rules published by Japan National Tax Agency, the IIT residency status of the individuals who have been transferred to Japan from overseas to work for a Japanese company is treated as follows.

1. If it is clear that the expected period of living in Japan is one year or more due to employment contract, etc.
   > Presumed as having a domicile
2. If it is clear that the expected period of living in Japan is less than one year due to employment contract, etc.
   > Presumed as not having a domicile
3. If the expected period of living in Japan is not clear due to employment contract, etc.:
   > Presumed as having a domicile

Therefore, a non-Japanese who has been transferred to Japan from overseas to work for a Japanese company will be classified as either a Permanent Resident or a Non-Permanent Resident (i.e., not be classified as Non-Resident), unless it is clear from documents that the non-Japanese will return his/her home country within one year from the date of entry into Japan. If a person who has never been to Japan works for a Japanese company for the first time, he/she will be basically treated as a Non-Permanent Resident for five years from the date of entry into Japan.

Scope of Taxable Income

The scope of taxable income according to the IIT status is as follows

(*1) Japan Source Income and Foreign Source Income

Japan Source Income is income whose source is Japan, for example, the following types of income.

(1)Rental income from real estate located in Japan
(2)Dividends received from Japanese companies
(3)Salaries and bonuses for the work performed in Japan

Conversely, Foreign Source Income is income whose source is outside of Japan, for example, the following types of income.

(4)Rental income from real estate located outside Japan
(5)Dividends received from foreign companies
(6)Salaries and bonuses for the work performed outside Japan

(*2) Foreign Source Income Paid in Japan

If the Foreign Source Income such as (4), (5), (6) are paid into a Japanses bank account of the taxpayer, they are treated as “Paid in Japan”.

(*3) Remittance to Japan

The exact calculation of the “Portion remitted to Japan” is complicated, but basically the smaller of (a) and (b) below is treated as the “Portion remitted to Japan”.

1. “The amount of money remitted from the taxpayer’s foreign bank account to his/her Japanese bank account in the year” minus “the amount of Japan Source Income paid outside Japan in the year”.
2. The amount of Foreign Source Income paid outside Japan in the year

In conclusion, the scope of taxable income of each status can be summarized as follows.

• Permanent Residents: Worldwide taxation regardless of income source
• Non-Permanent Residents: In principle, taxed only on Japan Source Income, but may also be taxed on Foreign Source Income if the Foreign Source Income is paid/remitted to the taxpayer’s Japanses bank account.
• Non-Resident: Taxed only on Japan Source Income.

In the event that the Foreign Source Income of Permanent Resident and Non-Permanent Resident is also taxed in his/her home country, the application of Foreign Tax Credit system, which allows a credit against Japanese IIT for the individual income tax in his/her home country, will be considered.