We are Murata Sogo Tax & Accounting Office, specializing in inheritance and international taxation, with an office in Miyakojima-ku, Osaka.

Recently, we often receive the following questions.

1. Question

I am a foreigner who is a resident (permanent resident) of Japan. I have established a company in a foreign country and I am the only shareholder and director. I am currently working from my home in Japan via the Internet. What are the tax issues in this case?

2. Answer

This is a case where you have a company in Hong Kong, Singapore, or the U.S., but it has no office, no employees, and is a paper company, so to speak, and you yourself are working while in Japan.

In this case, you need to pay attention to the concept of Permanent Establishment (PE).

A Permanent Establishment (PE) is a fixed location where a business is conducted. According to international rules, if there is no PE, there is no taxation, and if there is no PE, there is no taxation of business income.
In this case, you are working from your home in Japan, so there is a possibility that your home will be recognized as a PE.

If it is recognized as a PE, the income attributable to the PE will be treated as domestic source income subject to reporting in Japan. Considering that you are a one-person company, all of your income will be attributed to Japan.

Therefore, even if the company files its corporate income tax return in the foreign country where its head office is located, the income attributable to the PE in Japan is required to be reported in Japan. In such a case, double taxation would occur. Therefore, a foreign tax credit could be considered for the corporate tax paid in Japan when filing a tax return in the foreign country.

3. Proposal

When filing a corporate tax return in Japan for a one-person company overseas, in addition to the PE issues, there are many other issues such as executive compensation, withholding tax, and foreign tax credits on the overseas side.
Therefore, it is simpler from a tax perspective to take the following approach.

- Establish a new company in Japan and bill overseas clients from the Japanese company.

- As a sole proprietor, charge your overseas clients under your own name.

 

In this article, we focus on the taxation of foreigners who own companies overseas, a topic we are often asked about.
If you have any questions, please contact us using the inquiry form.