Part 2: The Non-Permanent Resident Taxation System (2)
Scope of Taxation for Non-Permanent Residents
As explained in the last installment, a “non-permanent resident” is an individual who (i) is a resident; (ii) does not hold Japanese nationality; and (iii) has had a domicile or residence in Japan for an aggregate period of five years or less within the past ten years (Article 2, Paragraph 1, Item 4 of the Income Tax Act), and the taxable income of non-permanent residents consists of: (a) income other than foreign-source income (“Non-foreign-source income”); and (b) such foreign-source income that is either paid in Japan or remitted to Japan (Article 7, Paragraph 1, Item 2 of the Income Tax Act).
In this installment, the scope of taxation for non-permanent residents will be explained using a hypothetical case.
Hypothetical Case
U.S. citizen Alex was seconded to a Japanese subsidiary on a fixed-term assignment of three years, took up the post alone without family, and in the current year, which is the year following his arrival:
(1) received a total salary of 30 million yen from the Japanese subsidiary for work performed in Japan; of which 20 million yen was paid in Japan; and
(2) 10 million yen was paid to his bank account in the United States;
(3) received 3 million yen in dividends from a Hong Kong corporation into a bank account in Japan;
(4) received 7.5 million yen in rental income from real estate owned in the United States into a bank account in the United States; and
(5) for a large purchase, remitted 15 million yen from the bank account in the United States, which included his previously accumulated savings, to Japan.
Tax Treatment
(1) and (2) (salary) are for “work performed in Japan,” so whether paid domestically or paid abroad, they are Non-foreign-source income. Therefore, they are subject to Japanese taxation.
(3) (dividends from a Hong Kong corporation) is foreign-source income paid in Japan, so it falls within the scope of Japanese taxation.
(4) (rental income from real estate owned in the U.S.) is foreign-source income paid abroad, so it falls within the scope of Japanese taxation only if there is a remittance to Japan.
Remittances from abroad are deemed to have been remitted from foreign-source income paid abroad (Article 17, Paragraph 4, Item 1 of the Order for Enforcement of the Income Tax Act). However, if there is Non-foreign-source income paid abroad, it is deemed to have been remitted first (See the proviso of the same Item). Therefore, regarding the remitted amount of 15 million yen in (5), above, it is deemed that 10 million yen of the salary in (2), which is Non-foreign-source income paid abroad, was remitted first, and the remaining 5 million yen was remitted from the real estate income in the U.S. in (4).
Non-foreign-source income
Foreign-source income
Paid in Japan
(1) Salary: 20 million yen
(3) Dividends: 3 million yen
Paid abroad
(2) Salary: 10 million yen
(4) Real estate income: 7.5 million yen
(5) Remittance from abroad: 15 million yen
Summary of Tax Treatment
Therefore, the scope of Japanese taxation for U.S. citizen Alex as a non-permanent resident is:
(A) the total of 30 million yen from (1) and (2), which is Non-foreign-source income;
(B) the 3 million yen from (3), which is foreign-source income paid within Japan; and
(C) the 5 million yen which is deemed to have been remitted from foreign-source income paid abroad,
