Residency for tax purposes

From RetireWiki.jp
Jump to navigation Jump to search

There are three residency categories for Japanese tax purposes:

1. Resident other than non-permanent resident (previously 'permanent resident') (a) A Japanese resident of Japan

OR

(b) a non-Japanese resident of Japan who has had a domicile in Japan for five or more years in the last ten year period

2. Non-permanent resident A non-Japanese national who has resided/maintained a domicile/residence status in Japan for less than five years in the last ten year period
3. Non-resident An individual who is not classified as resident

NB It appears that from 2020, the Japanese tax authorities have changed the wording from 'permanent resident' to 'resident other than non-permanent resident'. In any case, 'resident other than non-permanent resident', or 'permanent resident' for tax purposes should not be confused with the residency status of permanent residency).

See here (PDF) for more detailed information directly from the National Tax Agency (in English) regarding determination of tax residency, including more in-depth definitions than provided in the table above.

Scope of taxation

The scope of taxation for the different residency classes is summarised below, in written form and in table form:

Resident other than non-permanent resident: all worldwide income is taxable.

Non-permanent resident: the only untaxed income is foreign source income which is not remitted to Japan. However, the definition of foreign source income is such that capital gains arising abroad are likely to be excluded from the classification of foreign source income, meaning they are taxable in Japan.

Non-resident: domestic source income is taxable in principle; income other than domestic source income is not taxable.

Scope of taxation for residents
Classification Income other than foreign source income Foreign source income
Paid in Japan Paid abroad
Remitted to Japan Not remitted to Japan
Resident other than non-permanent resident Taxable
Non-permanent resident Taxable Not taxable
Scope of taxation for non-residents
Domestic source income Income other than domestic source income
Taxable in principle Not taxable

Section 1-3 of the 2020 Guide to Income Tax (PDF) provides further detail.

This article (PDF) explains how some sources of income, such as capital gains abroad, fall outside the definition of foreign source income, and thus are taxable for non-permanent residents irrespective of whether the income is remitted to Japan.

Tax filing

Foreign nationals filing tax returns in Japan may be asked to submit a copy of the form ‘Confirmation of the type of resident status, etc.’ (居住形態等に関する確認書).

You can see on the 2020 version of this form (PDF) that the term ‘permanent resident’ was still used as a status of residency for tax purposes.

Double Tax Conventions

Double tax conventions exist to minimise the effects of being doubly taxed on the same income.

It is possible that articles and clauses of a double tax convention could supersede Japan's domestic determination of the type of taxpayer and scope of taxation.

Extended absences from Japan

Japan follows a basic policy of residence-based taxation. Unless a nonresident owns property in Japan or benefits from income-producing assets located in Japan, there will normally be no need to file a Japanese income-tax return or pay Japanese taxes. The question of how tax residency is established, maintained and terminated is thus central to determining an individual's tax liability and various social-insurance obligations in Japan. See the tables at the top of the page for definitions of tax residency and scope of taxation.

This section focuses on certain issues involved when established residents of Japan -- both Japanese nationals and those with "resident other than non-permanent resident" status -- leave the country for an extended period of time. Chief among such issues is continued responsibility for residence tax (juuminzei 住民税; also translated as "inhabitant tax") and payments for such social-insurance (shakai hoshou 社会保障) programs as the National Pension (Kokumin Nenkin 国民年金) and National Health Insurance (Kokumin Kenkou Hoken 国民健康保険). There is some overlap with the case of non-citizens leaving the country permanently, but the individual's intention to return to Japan is assumed, even if specific plans to do so have not yet been made, and differences between tax status and immigration status that might complicate matters further are largely ignored.

Those with permanent-resident status can leverage that status to remain out of the country continuously for up to five years as long as they have received a standard reentry permit from the immigration office. This period can be extended a further year by applying directly to a Japanese embassy or consulate. Note that your residence card must be kept up-to-date during an extended stay abroad. For PR holders, it may be possible to pay an administrative scrivener (gyouseishoshi 行政書士), for example, to renew the card in your place -- even if it has expired -- as long as the reentry permit itself remains valid and you are able to send both your passport and residence card to Japan (this Japanese site offers that service for an estimated fee of ¥22,000). One should keep in mind, however, that overseas renewal is likely to prove troublesome at the very least, and it is best not to let the problem arise in the first place. Those who know in advance that their residence card will expire while they are overseas would do well to look into the possibility of renewing it before departure.

Deregistering a Japanese domicile

The first tax decision an individual with a Japanese domicile (juusho 住所) must make when planning to leave the country for an extended period is whether or not to notify the municipality of that intent by submitting the appropriate form (kaigai tenshutsu todoke 海外転出届). In English, this is often referred to as "deregistering" one's address. The procedure is nominally required by law, and the taxpayer's intention to be out of the country for at least a year is used as the standard rule of thumb for implementing it. A penalty of ¥50,000 can be imposed at the discretion of the municipality for violating the requirement, but given the vagueness of determining intent and the obvious practical difficulties involved in enforcement, it seems safe to say that fines are an extremely rare occurrence.

The chief advantage to be gained by deregistering one's address is that as long as an individual has no registered address on January 1 -- meaning in practice that before January 1, the taxpayer has both submitted official notification and actually left the country -- no residence tax is assessed for the preceding calendar year. This results in a substantial financial benefit, even if it is predicated on the somewhat dubious assumption that overseas residents will be paying an equivalent tax in their country of residence. For company employees being transferred abroad or university teachers going on sabbatical, the appeal is enormous, so most affected taxpayers probably submit the required notification and, if employees, submit paperwork to their employer that makes a year-end adjustment possible, eliminating the need for a separate income-tax return unless they have other sources of income to report.

Other consequences that ensue from deregistering one's address: 1) coverage under the various national social-insurance programs is lost (the National Pension account remains active, and the period spent overseas is counted toward pension eligibility, but further payments are not allowed except in the case of Japanese citizens, who can continue to pay on a voluntary basis; Japanese company employees sent abroad may also be able to continue enrollment in some programs); 2) some banks may ask you to close your account (if you tell them); 3) new credit cards cannot be applied for; 4) new life-insurance and health-insurance policies cannot be taken out; 5) your My Number card will be invalidated (the card itself, not the number), and a My Number cannot be issued to a former resident who doesn't already have one; 6) you will need official certification of residence overseas (zairyū shōmei 在留証明) -- essentially the equivalent of an overseas juuminhyou, obtained from a Japanese embassy or consulate -- in order to remotely manage pension and inheritance matters, real-estate registration, sales of vehicles, and school transfers and entrance-exam applications. For noncitizens, being unable to contribute to the National Pension may count as a disadvantage of sorts, and citizens and noncitizens alike will have to provide their own health insurance while overseas, although companies typically arrange that for their employees.

If a long-established taxpayer leaves the country without officially declaring the intention to reside overseas for more than a year, 1) liability continues in principle for paying income tax and residence tax on all income, both Japan-sourced and foreign-sourced, regardless of the taxpayer's physical presence on January 1; 2) the obligation continues to make both National Pension and National Health Insurance payments, as well as payments for long-term care insurance (kaigo hoken 介護保険) if the taxpayer is over 40 years old; 3) the individual will in principle be unable to receive certification of residence overseas, possibly resulting in considerable inconvenience. It is possible to retroactively submit notification of leaving the country by returning to Japan temporarily and documenting one's departure to the satisfaction of municipal officials; it is also often possible to submit notification by mail after leaving the country (after all, short-termers probably become long-termers pretty frequently), although such notification would presumably not be considered retroactive.

As with other matters relating to taxation, some wrinkles may arise with regard to tax-resident status. For instance, the National Tax Agency (NTA) will presume non-residence if:

  1. You are in an occupation that requires a continuous period of residence overseas for more than one year as part of normal business operations.
  2. You are a national of another country or have received permission to reside in Japan permanently and no objective basis exists for assuming a return to Japan, taking into account such factors as having a dependent spouse or other household members living in Japan.

One normally loses tax residence in Japan the day after leaving the country if one intends to be away for over a year, so in that case, even those who haven't deregistered their address qualify for non-residential tax status immediately upon their departure, despite continuing responsibility for paying social-insurance premiums and any remaining residence tax from the previous year and despite the possibility that the intention to stay away for over a year may not be fully formed. It is not clear what problems might result from such a situation. But if those individuals are company employees, regulations may be in place to allow them to satisfy tax and social-insurance obligations more conveniently than non-employees.

Satisfying tax responsibilities

Although it's not impossible to handle one's existing income-tax reporting obligation by, say, filing a "quasi-final" tax return (jun kakutei shinkokusho 準確定申告書) before leaving the country, prepaying (estimated) tax, and then filing a final return (kakutei shinkokusho 確定申告書) at the usual time, it makes more sense to designate someone with Japanese residence as one's tax agent (nōzei kanrinin 納税管理人). The tax agent can then follow the standard tax calendar and deal with income-tax matters in timely fashion, filing returns, making tax payments, and collecting tax refunds or pension refunds on the former resident's behalf. Designating a tax agent is required if you want to continue to be able to make income-tax payments by bank transfer from your own account. See the Japanese National Tax Agency website for details on designating a tax agent, including the form to be used and instructions. The same person may be also designated as one's tax agent for residence-tax purposes (this requires a separate application to the municipality). The NTA requests that its form designating a tax agent be submitted by the day of the prospective nonresident's departure. Starting on January 1, 2022, nonresidents who do not designate a tax agent before their departure can be sent written notification to do so within a period of up to 60 days. If the form is not submitted by that deadline, the NTA can designate a tax agent in the nonresident's place.

Because residence tax is assessed based on the previous year's income and normally paid in monthly or (near-)quarterly instalments from June through the following May (January for quarterly billing), it is quite possible that some tax will remain unpaid at the time of the taxpayer's departure. This is why it is highly recommended to designate a tax agent, although company employees who have their salaries paid in Japan simply continue to pay through monthly withholding. Employees who actually retire before moving overseas have a couple of options for paying their remaining residence tax that may obviate the need for a designated tax agent, but questions of timing and personal circumstances (family members remaining in Japan, for example) mean that some serious planning is in order before a taxpayer actually leaves the country. This is especially true for those with complex tax situations, who would benefit from consulting a qualified tax professional.

Addresses on the final tax return

Current residents are expected to enter their officially registered domicile on their final income-tax return (kakutei shinkokusho 確定申告書). The return actually has spaces for two addresses: the first space is for the taxpayer's address at the time the return is submitted; the second space, below that, is for the taxpayer's address on January 1, if different from the first address.

The first space provides options for specifying a tax address other than one's official domicile, including a residence address (a residence, or kyosho 居所, is less permanent than a domicile) or a business-office address (for sole proprietors). Doing so requires the submission of a separate form in advance. See the Japanese National Tax agency website for details, including the form to be used and instructions. Former residents who maintain a business office in Japan and are required to file a return can enter that address.

The second space is important because the taxpayer's registered address on January 1 forms the basis for determining which municipality has claim on the taxpayer's residence tax for the preceding calendar year. If this address is the same as the first, the taxpayer simply enters 同上 (doujou, or "as above") into the space.

See Also