
Understanding Taxation for Employees Returning to Japan
Yoshio YamaguchiShare
This article addresses whether employees returning to Japan from overseas assignments must file a tax return for the year they become residents after their return. This article focuses solely on Japanese tax laws; separate confirmation is necessary for foreign tax laws.
Residency Status, Taxable Income, and Tax Amount
Employees returning to Japan are generally considered residents from the day after their arrival, as they are expected to reside in Japan for at least one year (Income Tax Act, Article 2, Paragraph 1, Item 3).
In the year of return, the employee will have both a non-resident period before returning and a resident period after returning. Even within the same fiscal year (e.g., 2020), the scope of taxation differs between the salary received as a non-resident and a resident.
1. Salary Income During the Non-Resident Period
Non-residents are taxed on Japan-source income, while foreign-source income is not subject to Japanese taxation. If the employee worked both abroad and in Japan (e.g., during business trips), only salary corresponding to the period worked in Japan is treated as Japan-source income and taxed in Japan (Income Tax Act, Article 161, Paragraph 1, Item 12(i)).
Even if the work was for a foreign subsidiary, if the employee physically worked in Japan (e.g., during a business trip), it is considered Japan-source income.
Japan-source income is taxed based on salary income multiplied by the applicable tax rate. However, suppose the stay in Japan is less than 183 days. In that case, Japanese income tax may be exempt under tax treaties (short-term visitor exemption).
2. Salary Income After Becoming a Resident
Residents are taxed on worldwide income, regardless of whether it is Japan-source or foreign-source income (Income Tax Act, Article 7). After deducting a certain amount (employment income deduction), various other deductions (such as social insurance, life insurance, and spousal deductions) are applied to calculate taxable income. Income tax is then calculated using a progressive tax rate ranging from 5% to 45%, depending on the amount (Income Tax Act, Article 89).

Tax Calculation Method
When a non-resident becomes a resident mid-year, the tax is calculated by combining the income subject to comprehensive taxation (*1) for both the resident and non-resident periods and then adding the tax for income subject to separate taxation during the non-resident period (*2) (Income Tax Act, Article 102; Enforcement Order, Article 258).
- Add income subject to comprehensive taxation for resident and non-resident periods.
- Calculate the tax amount based on the combined income.
- Add the tax on income subject to separate taxation for the non-resident period to the result in step 2.
(*1) Income such as salary and real estate income earned during the resident period.
(*2) Domestic real estate income earned during the non-resident period.
(*3) Salary income earned during the non-resident period subject to Japanese source income tax.
1. Salary Income Earned During the Non-Resident Period (Japanese Source Income Only)
As mentioned earlier, non-residents are only taxed on Japan-source income. For example, suppose an employee works in Japan during a business trip. However, the short-term visitor exemption does not apply. In that case, the corresponding salary income is taxed in Japan.
A salary that qualifies as Japan-source income may be taxed differently depending on whether it was paid by a foreign subsidiary or the Japanese parent company (e.g., as a home-leave allowance).
Suppose the Japanese parent company pays the salary. In that case, the parent company will withhold the tax at 20.34%, and no tax return is necessary (Income Tax Act, Article 212, Paragraph 1).
Suppose the foreign subsidiary pays the salary. In that case, the employee must file a tax return by March 15 of the following year (or by the date they leave Japan if they will no longer have a residence in Japan). The tax is calculated at 20.42% (separate taxation) (Income Tax Act, Article 172).
2. Salary Income Received During the Period of Residence
For residents, worldwide income (both domestic-source and foreign-source) is subject to taxation (Income Tax Act, Article 102; Enforcement Order of the Income Tax Act, Article 258). Salary earned after returning to Japan is subject to withholding tax (Article 183 of the same act), and year-end tax adjustments apply (Article 190 of the same act), so there is no need to file a tax return. However, a tax return is required in the following cases (Article 121 of the same act):
- When the total salary income exceeds 20 million yen.
- When real estate income exceeds 200,000 yen (*).
- When there is income earned from domestic work during the non-resident period (e.g., salary received during a business trip to Japan or a temporary return to Japan during the COVID-19 pandemic) that an overseas subsidiary pays as foreign compensation.
(*) This includes real estate income from domestic property during the non-resident period (as referenced in "Taxation, Social Insurance, and Salary Q&A for Overseas Workers" by Megumi Fujii).

When calculating the tax amount, it's crucial to understand that different tax rates apply to salary income during the resident and non-resident periods. Salary income for the resident period is combined with other income to determine the total taxable income, and a progressive tax rate is applied.
On the other hand, salary income for the non-resident period is calculated separately from other income, and a fixed tax rate of 20.42% is applied. The tax amount on the salary income for the resident period and the tax amount on the salary income for the non-resident period are then combined (Article 258 of the Enforcement Order of the same law).
In practice, since there is no form for declaring the combined tax amounts for the resident and non-resident periods, separate tax returns must be filed: one for the resident period and another for the separate taxation of the non-resident period (such as the return under Article 172) (Shingo Iizuka, Monthly International Taxation, February 2020 issue).
Salary and Bonuses Paid After Returning to Japan
For example, consider a bonus calculation period from October 1 to March 31, with a return date of February 1 and a bonus payment date of June 1. This process is designed to provide clarity.
In this case, the portion from October 1 to the return date of February 1 corresponds to the period of overseas work before returning to Japan (foreign-source income), and the portion from February 2 to March 31 corresponds to the period of work in Japan after returning (domestic-source income).

The employee was a resident at the time of the bonus payment on June 1, which was after the employee's return to Japan (when the income was finalized). Since residents are taxed on their worldwide income (Article 7, Paragraph 1, Item 1 of the Income Tax Act), both the foreign-source income and the domestic-source income are subject to taxation in Japan. Therefore, the company must withhold tax on the entire amount of the bonus (Article 183, Paragraph 1 of the Income Tax Act).
From the perspective of a foreign national working during the bonus calculation period, since they were a resident of that foreign country, they would generally be subject to income tax in the country where they were employed. However, this can vary depending on the country. Many countries do not allow tax bonuses to be paid after an employee has returned to Japan, as long as the bonus was not incurred by the foreign subsidiary or company to which they were assigned.
As we discussed in my article on Taxation for Expats Leaving Japan, in cases where a resident becomes a non-resident in the middle of the fiscal year, there is a notification stating that for salary payments made after the individual becomes a non-resident and covering a calculation period of one month or less, the entire salary does not need to be considered domestic-source income (Income Tax Notification 212-5). However, in cases like the current article, where a non-resident becomes a resident in the middle of the fiscal year, no such provision exists, and the entire amount of the paid salary and bonus is subject to taxation.
Who Owns the Tax Refund from Foreign Tax Credits?
During overseas assignments, income tax is typically levied by the country where the employee is stationed on the portion of the bonus corresponding to the period of overseas service. In many cases, the company (either the Japanese parent company or the local subsidiary) bears this income tax burden in the country of assignment.
Since the employee is effectively taxed twice on this income — once in Japan and once abroad — the employee may apply for the foreign tax credit in Japan (the country of residence) to reduce or claim a refund for the foreign tax paid. If the employee receives a refund of income tax through the foreign tax credit and the company has borne the foreign income tax, it is fair to attribute the refunded tax to the company. This point should be stipulated in advance in the company’s salary regulations and adequately communicated to employees.
While there is no legal requirement for employees to hand over the refund obtained through the foreign tax credit to the company, doing so is considered fairer.