The 2014 edition of The Japan Visa Handbook includes a new section on Japan tax planning, as visa and tax issues are often intertwined.
It is crucial that Japan tax planning be carried out before a work assignment to Japan begins. Without proper tax planning, the scope of income subject to tax in Japan may be greatly expanded.
The key issues discussed in the Japan tax planning section include:
Location of Payroll
Often, it is most tax efficient if salary is paid outside Japan. Some important implications of off-shore payment include:
1. Ability to exclude some income based on business days spent outside Japan
It may be possible to exclude a portion of annual compensation from Japanese taxable income. The excluded amount is based on the number of days that the employee was absent from Japan on business during the year. That income is considered non-Japan source income and therefore not subject to Japanese individual income tax.
Important conditions include:
- The individual is a regular employee, NOT a director.
- The benefit is only available to individuals classified as non-permanent residents for Japan individual tax purposes. This means individuals who have resided in Japan for less than five out of the past 10 years.
- It will not be possible to exclude amounts that are remitted (or deemed remitted) to Japan.
2. Withholding Income Tax
If an employee’s salary is paid offshore, it is not possible to utilize the regular monthly Japanese withholding tax. As a result, employees paid off-shore must submit a Japanese individual income tax return by the 15th of March each year.
Company Provided Housing
If structured correctly, company provided housing is a highly tax efficient benefit.
The basic requirements are as follows:
- The housing lease should be in the name of the company.
- The employee is required to reimburse a certain amount to the company each month. Typically the amount to be reimbursed is approximately 10% of the rental value.
Tax is payable only on the monthly reimbursement to the company, and the remainder of the housing benefit is tax free in Japan. In contrast, receiving a housing “allowance” would be fully taxable in Japan.
It should be noted that company provided housing benefits are significantly less tax efficient for anyone with director status.
The book also discusses some specific benefits commonly found in expatriate tax packages, such as:
- One time settling in payments.
- Furniture rental payments.
- Club memberships.
- Home leave.
- Commuting allowance.