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Explanation of taxes for foreign workers (income tax & resident tax)

Explanation of taxes for foreign workers (income tax & resident tax)

日本語記事は → https://company.enjin.world/internship/tax-commentary-01/

Classification of residents and non-residents

Japan’s Income Tax Law classifies individuals according to their “form of residence,” and the scope of taxation varies depending on the classification.

Foreigners need to know which of the following categories they fall under.

Resident (permanent residence)

Foreigners who have Japanese nationality or have lived in Japan for a total of five years or more in the past 10 years.

Resident (non-permanent residence)

Foreigners who do not have Japanese nationality and have lived in Japan for less than 5 years in the past 10 years, and who are not non-residents.

Non-resident

Foreigners who do not have an address in Japan and who have not resided in Japan for more than one year.

Income tax for foreign workers

What is income tax?

Income tax is a tax that you pay when you earn money.

In Japan, anyone who has an income is obligated to pay income tax. This tax is levied on income earned during the year from January 1 to December 31.

Scope and amount of income tax to be paid

Residents (permanent residence)

  • All income generated in Japan and overseas.

Residents (non-permanent residence)

  • Income generated in Japan
  • Income generated overseas that is paid in Japan or remitted from overseas to Japan

Residents (permanent residents and non-permanent residents) are required to collect the withholding income tax according to the withholding tax table for employment income and the annual tax amount will be settled by year-end adjustment.

Non-residents 

  • Only income generated in Japan

As a general rule, nonresidents are subject to tax withholding at a rate of 20.42%. However, foreign nationals coming from countries that have contracted tax treaties with Japan may be subject to the tax treaties. Tax exemption may be granted by submitting a notification regarding the tax treaty to the jurisdiction tax office.

Treatment under tax treaties

If a nonresident who receives domestic source income subject to withholding tax in Japan wishes to obtain a reduction or exemption of income tax and special income tax for reconstruction based on tax treaties, the nonresident is required to submit an “Application form for income tax convention” by the day before the payment of salary.

EX: Japan-China Tax Agreement Article 21

Students residing in Japan for the sole purpose of receiving education, who were formerly residents of China, shall be exempt from Japanese taxes on benefits or income received for livelihood or education.

EX: Japan-Vietnam Tax Agreement Article 20

Students residing in Japan for the sole purpose of receiving education, who were formerly residents of Vietnam, shall be exempt from Japanese taxes on income received for livelihood or education.

However, the payment must be made from outside Japan.

*“Students residing in Japan for the sole purpose of receiving education” refers to students of schools (high school, university, graduate school etc.) specified in the first article of the School Education Law. The tax treaty does not apply to students who attend Japanese language schools or vocational schools. 

In the above two examples of tax treaties, Chinese nationals are exempt from taxation on salaries received from Japanese companies, while Vietnamese nationals are not exempt from taxation on salaries paid by companies in Japan, so they will be charged 20.42% of their income for withholding tax.

Resident tax for foreign workers

What is resident tax?

The resident tax is a tax paid to the municipality in which you live, and consists of prefectural tax and municipal tax.

Scope and amount of income tax to be paid

Residents (permanent and non-permanent)

Resident tax is imposed on the paid income. The tax rate is the same with Japanese employees.

Non-residents

No resident tax will be imposed.

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