Introduction: Understanding Japan’s Non-Permanent Resident Tax Rules
Under Japan’s tax system, individuals are classified as Permanent Residents, Non-Permanent Residents, or Non-Residents. Foreign nationals who have resided in Japan for less than five of the past ten years, and who do not have Japanese nationality, are generally considered Non-Permanent Residents. This classification significantly affects the scope of taxable income in Japan, especially for inbound executives and expatriates. Correctly determining your tax residency status is essential for compliance and tax efficiency.
1. Who Qualifies as a Non-Permanent Resident?
A Non-Permanent Resident is defined as an individual who:
・Does not possess Japanese nationality, and
・Has resided in Japan for less than five years within the last ten years
Even if you have a long-term work visa, you may still be classified as a Non-Permanent Resident for tax purposes during your initial years in Japan. Your status may change over time, so periodic reassessment is crucial.
2. Taxable Scope for Non-Permanent Residents
Japan applies different tax rules based on residency classification: Permanent Resident, Non-Permanent Resident, and Non-Resident.
Residents who are not non-permanent residents are taxed on all their income, regardless of whether it is generated inside or outside of Japan. Generally, most Japanese people fall into this category.
Whereas, for Non-Permanent Residents taxable income includes:
- Income other than foreign-source income (all Japan-sourced income)
- Foreign-source income paid in Japan
- Foreign-source income remitted to Japan
Under this system, non-permanent residents can avoid Japanese taxation on income earned overseas that is not brought into Japan.
Non-residents are taxed only on Japan-source income.
3. Practical Scenarios
The most significant characteristic of non-permanent residents is that the scope of taxable income is narrower than that of "permanent residents." Permanent residents are subject to tax on their worldwide income (regardless of whether it is domestic or foreign-source), while non-permanent residents are limited to the following types of income (based on the application of Article 7 of the Income Tax Act).
-
Japan-source income
All income sourced within Japan (such as salaries from Japanese companies, rental income from domestic real estate, profits from domestic businesses, etc.). -
Income sourced from abroad that was paid within Japan
Example: When compensation from a foreign company is paid through the Japan branch. -
Income sourced from abroad that was paid outside of Japan and remitted to Japan
For example, if you transfer investment earnings saved in an overseas account to Japan, the amount transferred is subject to taxation.
The rules of "remittance taxation" are key, and you can reduce your tax burden by not bringing foreign income into Japan. However, the definition of remittance is broad, and domestic use of credit cards or purchasing assets in Japan may be considered as remittance.
The tax rate is the same as that for residents, with income tax (5% to 45%) and resident tax (approximately 10%) applied, resulting in a maximum of about 55%. Deductions are also available. To avoid double taxation, it is important to utilize international treaties and foreign tax credits.
Case example: If a U.S. expatriate retains dividends from foreign stocks without remitting them to Japan, they are tax-exempt in Japan, but must be reported in the U.S.
4. Comparison Table: Tax Scope by Residency Type
| Status | Nationality | Number of years of domestic stay in the past 10 years | Taxable Scope |
|---|---|---|---|
| Permanent resident | No restrictions | No restrictions | Worldwide Income |
| Non-permanent resident | Foreign nationals only | 5 years or less | Japan-source income + Foreign-source income es paid in or remitted to Japan |
| Non-resident | No restrictions | Less than 1 year (no address) | Japan-source income |
5. Key Points for Compliance & Risk Management
Here, understanding the remitted foreign-source income is important.
"Paid in Japan"means payments made directly to non-permanent residents in the country from a third party, and"remitted to Japan" refers to remittance into Japan of the fund originally paid outside Japan by a third party. It is necessary to pay attention to the following points.
- Save evidence of remittance determination (bank statements, fund transfer records, etc.)
- Clarification of the source classification of income (domestic/foreign) and payment location
- Preliminary examination of the treaty and the eligibility for foreign tax credits
6. Conclusion: Positioning Non-Permanent Status in Global Tax Planning
For inbound executives and foreign corporate managers, Non-Permanent Resident status offers an important tax planning opportunity in Japan. By leveraging this status correctly, companies can structure remuneration packages more efficiently, and individuals can legitimately minimize Japanese tax exposure while ensuring compliance. Our firm specializes in advising foreign corporations and executives in Japan, offering tailored solutions to navigate these rules with confidence and precision.