How Foreign Residents Are Taxed in Their First Year in Japan

This article explains the tax treatment during the first year when foreign employees from overseas parent companies are assigned to their Japanese subsidiaries. We will examine both periods - before the assignment when they were non-residents and after becoming residents following their arrival. We will also cover how to prepare their tax returns.

Salary Income Earned During Non-Resident Period (Before Assignment to Japan)

Before being assigned to Japan, a foreign national is considered a non-resident under Japanese income tax law. Non-residents are taxed in Japan only on their Japan-source income, not on their foreign-source income.

If a non-resident comes to Japan on business trips before their formal assignment, the portion of their salary corresponding to work performed in Japan is considered Japan-source income and is subject to Japanese income tax (Income Tax Act Article 161(1)(xii)(a)).

This Japan-source portion is calculated by prorating the total salary paid by the overseas parent company based on the number of days spent in Japan.

However, if the business trip period is 183 days or less, the income is tax-exempt in Japan under the short-term visitor exemption in tax treaties. If the stay exceeds 183 days, this exemption does not apply, and the individual must file a tax return in Japan. The income tax amount is calculated as: salary income × 20.43%.

Income Earned After Becoming a Resident

When a foreign national is assigned to Japan and is expected to reside there for over one year, they assume the status of a Japanese resident (non-permanent resident) starting from the day after their arrival in Japan (Article 2, Paragraph 1, Item 3 of the Income Tax Act). A non-permanent resident is defined as a Japanese resident who does not hold Japanese nationality and who, in the past 10 years, has lived in Japan for five years or less in total (Article 2, Paragraph 1, Item 4 of the Income Tax Act).

The scope of taxable income for non-permanent residents after their assignment to Japan is as follows:

1. Income other than foreign-sourced income (i.e., Japan-sourced income).

2. The portion of foreign-sourced income that is either paid in Japan or remitted to Japan.

For further details on the taxation scope for non-permanent residents in Japan, please refer to my article, Taxation Rules for Non-Permanent Residents in Japan.

Salary Payments to Foreign Employees from Japanese Companies

For non-permanent residents, any salary earned after their assignment to Japan is considered Japan-source income. The Japanese company must withhold income tax from monthly salary payments.

Generally, since year-end tax adjustment (nenmatsu chosei) applies, filing an individual tax return is not required.

However, a tax return must be filed in the following cases:

• Annual salary exceeds 20 million yen
• Income from sources other than salary (such as real estate income) exceeds 200,000 yen*
• The employee received salary for work performed in Japan during their non-resident period from an overseas parent company

*Note: Real estate income includes income from properties located in Japan that was earned during the non-resident period (Reference: "Taxation, Social Insurance and Salary Q&A for Overseas Workers" by Kei Fujii).

How to File Your Tax Return

When you need to file a tax return, you must declare:

1. Domestic-source income earned during your resident period after arriving in Japan (including salary from Japanese companies and overseas parent companies)
2. Foreign-source income that was either paid in Japan or remitted to Japan
3. Domestic-source income earned during your non-resident period

Tax calculation is done by:

• Adding together taxable income from your resident period (*1) and your non-resident period (*2)
• Applying progressive tax rates to this total
• Adding separately calculated tax (*3) from your non-resident period (Based on Article 102 of the Tax Law and Article 258-1 of its Enforcement Order)

Notes:

• (*1) Income earned during resident status, such as salary and real estate income
• (*2) Income earned during non-resident status, such as rental income from Japanese properties
• (*3) Salary earned during non-resident status is taxed separately at 20.42%

Practical note: Since there is no single tax form that combines resident and non-resident period taxes, you must submit separate forms: one for your resident period and another for your non-resident period's separately calculated tax (Form 172 and related documents). (Reference: Shingo Iizuka, "International Taxation Monthly," February 2020)

Final Notes

The tax procedures for foreign nationals in their first year of assignment to Japan follow basically the same taxation rules as those for Japanese employees returning from overseas assignments, which I covered in my article, Understanding Taxation for Employees Returning to Japan.

One key difference to note: While Japanese returnees are classified as "permanent residents" for tax purposes, foreign nationals are categorized as "non-permanent residents."

Japanese companies must handle salary payments to non-permanent resident foreigners the same way they do for Japanese employees. This means withholding income tax, performing year-end tax adjustments, and when necessary, filing tax returns.

For any salary paid by the overseas parent company to these foreign employees, since it qualifies as Japan-source income, it must be declared on Japanese tax returns regardless of whether the money is remitted to Japan.