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Expatriates in Japan are subject to a 5-year rule for taxation
purposes. They have no liability to declare offshore affairs to
Japanese Revenue until they have been resident in Japan for a period
of 5 consecutive years. At this point, an individual becomes a permanent
resident and is liable to taxation on all assets and income, including
rental income, bank deposit interest income and equity and mutual
fund dividends.
It is normal practice for an employer to split remuneration prior
to employment in Japan. Only that portion paid in Japan will then
be declared as Japanese revenue. In doing so, only the income
and housing benefits received in Japan will be liable to taxation.
Assume that housing is provided and the cost of living is between
¥350,000 and ¥500,000 per month. It is suggested that
no more than this be drawn as a salary into Japan. Should further
sums be required, these can simply be remitted from overseas bank
accounts as and when required.
This type of arrangement is quite common, especially where an
employee has specific duties both inside and outside Japan, and
overseas remuneration relates specifically to services performed
outside Japan. If an individual is paid on a split basis, then
it is suggested that this income be received in either the Channel
Islands, the Isle of Man or Hong Kong, all of which are tax havens
to non-residents.
An investment structure popular with permanent residents in Japan
is the International Portfolio Bond (IPB). This is, in practice,
a holding structure administered by an insurance company into
which liquid assets can be transferred. As long as this transaction
is completed before the 5-year mark, then all future gains and
increases are exempt from Japanese taxation.
Japanese income taxation is separated simply into two parts,
"national income tax" and "inhabitants tax".
The table below provides simple working examples for varying salaries
drawn in Japan.
Japanese Taxation Example
| Assumptions: |
Example A |
Example B |
Example C |
| Annual Salary in Japan |
31,250,000 |
6,000,000 |
31,250,000 |
| Annual housing allowance in Japan |
6,750,000 |
3,600,000 |
6,750,000 |
| Single person moving to Tokyo |
| Declaration of Japanese source income
only |
| Taxable Employment Income |
| Salary in JPY |
31,250,000 |
6,000,000 |
31,250,000 |
| Company Housing (taxed at 10% of benefit provided) |
675,000 |
360,000 |
675,000 |
| (1) Total |
31,925,000 |
6,360,000 |
31,925,000 |
| Employment Deduction |
-6,925,000 |
-1,812,000 |
-4,392,500 |
| (2) Gross Taxable Income |
25,000,000 |
4,548,000 |
27,532,500 |
| TAX COMPUTATION |
| Assessable Employment Income as at (2) above |
25,000,000 |
4,548,000 |
27,532,500 |
| Personal Deductions |
| Basic (single person 380,000) |
-380,000 |
-380,000 |
-380,000 |
| (3) Net taxable Income |
24,620,000 |
4,168,000 |
27,152,500 |
| Income Tax |
-2,462,000 |
-503,600 |
-5,100,500 |
| Inhabitants Tax |
| Tax on first JPY2,000,000 at 5% |
-100,000 |
-100,000 |
-100,000 |
| Tax on excess up to JPY7,000,000 at 10% |
-2,262,000 |
-216,800 |
-2,515,250 |
| Per capita tax |
-1,000 |
-1,000 |
-1,000 |
| TOTAL TAX PAYABLE |
-4,825,000 |
-821,400 |
-7,716,750 |
| INCOME AFTER PAYMENT OF TAX |
26,425,000 |
5,178,600 |
23,533,250 |
| NET |
| Effective rate of tax paid (excl housing) |
15.4% |
13.7% |
24.7% |
| Effective rate of tax paid (incl housing) |
12.7% |
8.6% |
20.3% |
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A word of advice before moving to Japan:
Banking facilities in Japan are somewhat primitive. Very few cash
machines are open 24 hours, and banking transactions are generally
expensive. The establishment of monthly standing orders for transfers
overseas from Japan is prohibitively expensive and should be made
from Hong Kong or Channel Island accounts. Deposit rates for US$,
AUS$ and £ STG at all banks in Japan are usually much lower
than that which can be obtained elsewhere overseas. Therefore, it
makes sense to leave the majority of foreign currency overseas and
if a build up of capital occurs in Japan, to transfer it overseas
on a quarterly or 6 monthly basis.
Most expatriates bank with American or British banks in Tokyo
that offer an English help desk. Contact Inter-Alliance WorldNet
for referral of banks with English speaking services.
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