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An individual may either be a permanent resident or a non-permanent resident when the individual has a domicile in Japan. Permanent residents are subject to tax on their worldwide income; non-permanent residents are taxed only on Japanese-source income as long as the foreign-source income is not remitted into Japan or it is not paid in Japan.

An individual who is domiciled or who has a residence in Japan for one year or more is a resident. A non-Japanese national individual who has spent five years or less in Japan in the preceding 10-year period is regarded as a non-permanent resident. A resident other than a non-permanent resident is regarded as a permanent resident. A non-permanent resident must report Japanese-source income and foreign-source income paid in or remitted to Japan as taxable income.

An individual who does not qualify as a permanent or non-permanent resident is a nonresident. A nonresident pays tax only on Japanese-source income. Salaries, wages, bonuses and other allowances are viewed as income from sources in Japan if services are performed in Japan.

Individuals entering Japan as employees are presumed to be residents on the day after entry, unless evidence shows that their stay in Japan is to be for less than one year. A nonresident who is a resident of another country may be exempt from Japanese tax under an applicable tax treaty.

A resident who is domiciled in Japan as of 1 January of the following year is subject to the local inhabitants tax. Unlike national income tax, the local inhabitants tax is levied on income derived in the previous year.

Taxable income and rates
Taxable individual income is based on the calendar year. Income tax is levied on a self assessment basis, with the income tax liability determined by the taxpayer's declaration based on proper records of the tax base and the tax amount due. National income tax on employment income is withheld at source according to various tax tables based on a taxpayer's income and personal deductions. There are separate tables on salary for withholding national income tax for periodic employment income, bonuses and other special payments. Taxable income for the local inhabitants tax is calculated under rules in the Income Tax Law, unless otherwise specified by local tax laws.

Employment income includes salaries, wages, bonuses and other allowances (such as cost of living, housing, tax, children's education or medical) received as compensation for services provided as an employee. Some allowances (such as for commuting expenses, whichever is lower than the actual monthly expense or JPY 100,000 per month) are not taxable, but low¬interest loans provided by an employer for an employee's purchase of a home and other expenditure may be taxable as employment income.

Exemptions and deductions
In computing taxable income, an individual is entitled to certain allowances and deductions for national income tax purposes. A resident taxpayer is entitled to a basic personal deduction, exemptions for a dependent spouse, children younger than 16 and children aged 16-22 years. Special exemptions exist for the disabled. Similar exemptions and deductions are available for purposes of the local inhabitants tax.

In addition, a cumulative employment income deduction may be taken according to the applicable case in the following schedule: 40% of gross employment income up to JPY 1.8 million, with a minimum of JPY 650,000; 30% on income exceeding JPY 1.8 million and up to JPY 3.6 million; 20% on income exceeding JPY 3.6 million and up to JPY 6.6 million; 10% on income exceeding JPY 6.6 million and up to JPY 10 million; and 5% on income exceeding JPY 10 million.

Social insurance premiums paid to the Japanese government are fully deductible, and life insurance premiums paid to Japanese companies may be deducted up to JPY 50,000. Taxpayers also may deduct earthquake insurance premiums of up to JPY 50,000. Medical expenses and contributions to charities recognised by the MOF are partially deductible.

The first JPY 5,000 in qualifying contributions is not deductible; amounts exceeding that amount may be deducted up to a maximum of 40% of gross taxable income. Qualifying contributions include those made to governments, municipalities, organisations, corporations, the Japanese Red Cross and foundations for educational, social welfare, scientific or similar purposes. Qualified medical expenses are deductible up to JPY 2 million, after deducting the lower of 5% of gross income or JPY 100,000.

A tax credit on housing loans may be available for 10 years under certain conditions. The amount of the credit is determined by the year in which a taxpayer began residing on the property and the mortgage balance at the end of the year.

Foreign income taxes paid by residents may be credited against their Japanese tax.

Investment income
A 20% withholding tax is imposed on dividends. This rate is reduced to 10% on dividends from a listed company paid through a domestic financial entity from 2004 to March 2009. The withholding tax may be reduced under an applicable tax treaty.

A 20% withholding tax is levied on interest paid to individual resident taxpayers. The normal withholding tax on interest paid to non-resident is 15%, but the rate may be lowered under an applicable tax treaty.

Share options
The NTA generally treats share option gains as employment income rather than as occasional income, which is taxed at about one-half of the normal rate. The difference between the grant price and fair market value at the exercise is taxed at the time the share options are exercised. In practice, the NTA accepts a time-apportionment basis for the timing of gain recognition of share-options recognised by an individual who was resident in Japan at any time during the period between grant and exercise. Share options are not taxable on the full amount due to either being a nonresident or non-permanent resident at the time of exercise as long as the overseas stocks are used for the plan.

There are generally no withholding requirements on the exercise of shares of non-Japanese companies, and the individual is required to report the income on an annual personal national income tax return. Compliance requirements for companies using approved Japanese stock option plans can be onerous when option holders travel outside of Japan and trigger reporting obligations in a host location.

Progressive income tax rates are imposed up to 50%; the rates are uniform and are not dependent on marital or other status.

Individuals are taxed on gains from the sale of shares at 20% (10% through December 2009 on listed shares, subject to certain conditions). Long-term gains of individuals from the sale of land are taxed at 20%. Short-term gains are generally taxed at 39%.

Income derived from employment, dividends, interest and retirement is taxed at source at the time of payment. When salaries, wages and other allowances are paid, the employer withholds national income tax at source. Because the employer also makes year-end adjustments of withholding tax in final payments for the year, taxpayers generally are not required to file final tax returns. There are a few exceptions, however, when an employee must individually report earned income (i.e. when total employment income receipts exceed JPY 20 million or the individual earns employment income from abroad). The Income Tax Law provides the rules for individual income on a withholding or self-assessment basis.

Special expatriate tax regime
There is no special expatriate tax regime in Japan. However, most expatriates fall into the non permanent resident category discussed above. A non-permanent resident is taxed on all income from Japanese sources and non-Japanese source income to the extent such non-Japanese source income is remitted into or paid in Japan

Japanese-source employment income is determined by a ratio calculated as follows: 365 days (or the number of days worked if less than 365) minus home leave and foreign working days divided by 365 days (or the number of days worked if less than 365) minus home leave days.

Capital taxes
Inheritances and gifts that exceed basic exempt amounts are taxable at steeply graduated rates (generally 10%-50%). Fixed-assets tax is levied, at a municipality level, at an annual rate of 1.4% to 2.1 %. City-planning tax is levied on land and buildings in certain urban areas as a surtax to fixed-asset taxes. Real property acquisition tax is levied on purchases of land or buildings at 4% (3% until 31 March 2009) of the assessed value at the time of acquisition. A real estate registration tax of 0.4% to 2% is also levied at the time of registering the acquisition.


Source: Deloitte

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