Tax treaty and reduction of and exemption from Tax in Japan

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Assumed a non resident of Japan ( including a person who has residence in Japan for less than one year )
or legal entity who does not have head office in Japan receives fee or salary in Japan.
(hereinafter “non resident”)

In this case, non resident can reduce of or exempt from income tax by submission of “notification paper relating to tax treaty”.

According to Japan tax law, non resident needs to pay tax based on domestic source income.

In the case non resident has branch office or sales office in Japan, it can submit tax filing in the same way as resident company.

In other case, non resident pays tax by withholding. So, a person or company (employer. resident) pays fee or salary to non resident, employer withholds certain amount of money (assumed “10 yen”) and employer pays the 10 yen to tax office by 10th of next month.

Percentage of withholding tax differs depending on category of transaction.

1) In the case non resident sells real estate and receives selling price, she (buyer) deducts 10.21% of selling price.

2) In the case non resident works in Japan and receives salary, his employer deducts 20.42% of his salary.

However this process may cause double taxation. Ms.N engages in interpretation work in Japan and receives fee in Japan (assumed “30th,October, 2017”). At the time Ms.N receives fee, her employer has deducted some amount. On the other hand, in Ms.N’s home country (assumed “America”), even if she receives fee in Japan, she needs to pay tax for America. In order to avoid this double taxation, Japanese government has concluded tax treaty (sozei jouyaku = 租税条約) with several nations.

According to this tax treaty, in the event Ms.N submits “Notification paper relating to Tax treaty”,she can reduce or exempt from amount of withholding tax.
Then, Her employer does not need to conduct tax withholding.

Ms.N needs to submit this notification paper to tax office via her employer by 29th,October, 2017.

If she has not submitted this notification paper by date of payment 29th,October, 2017, her employer needs to conduct tax withholding. And later (within five years) Mr.N can submit this notification paper relating to tax treaty and application form for refund of withholding tax related to tax treaty via her employer. And she can reduce or exempt from income tax in Japan.

There are several kinds of notification paper relating to Tax Treaty.

And amount of refund and possible or impossible of refund differs depending on each country and reason of payment ( salary, software royalties, dividend ).

For example. Resident company pays software royalties for American company and performs tax withholding of 20.24%. If this American company applies for exemption from corporation tax according to tax treaty, this American company does not need to pay income tax in Japan.

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