Murata Sogo Tax Accounting Office, specializing in inheritance and international taxation, is located in Miyakojima Ward, Osaka City.

In this article, we will explain the taxation of foreign nationals residing in Japan who receive salaries from foreign companies, which has been a frequent topic of inquiry recently, in a Q&A format.

1. Case Study

I am an American living in Japan. I have been in Japan for less than five years, so I am classified as a non-permanent resident. Since arriving in Japan, I have been working remotely. His monthly salary is paid by the American company into his American bank account. In this case, if he does not transfer the funds to Japan, will he be subject to taxation in Japan?  

2. Answer  

The salary received from the American company qualifies as foreign-sourced income. However, the portion earned while working in Japan qualifies as domestic-sourced income, so it is subject to taxation in Japan regardless of whether the funds are transferred to Japan, and a tax return must be filed (Article 7, Item 2 of the Income Tax Act).
On the other hand, for days worked while on business trips abroad or while returning to the United States, the income is considered foreign-sourced income, so it is not subject to taxation in Japan unless transferred to Japan.  

Additionally, the portion classified as domestic-sourced income is eligible for the foreign tax credit in Japan, but the portion classified as foreign-sourced income and not subject to transfer taxation is not eligible for the foreign tax credit (National Tax Agency Interpretation 95-29).

3. Key Points

① Are wages received from a U.S. company considered domestic-source income or foreign-source income?

Under Japanese income tax law, wages derived from work performed or services provided within Japan are considered domestic-source income. Therefore, work performed in Japan after arriving in Japan is considered domestic-source income, while work performed during overseas business trips or upon returning to the United States is considered foreign-source income.

② Considerations regarding remittance taxation

“Remittance taxation,” one of the tax rules for non-permanent residents, is well-known among foreign nationals. However, remittance taxation applies only to foreign-source income and does not apply to domestic-source income. Therefore, regardless of whether a remittance is made, domestic-source income (in this case, wages corresponding to the number of days worked in Japan) is subject to taxation in Japan.

③ When tax treaties have different provisions

If tax treaties have provisions that differ from the Income Tax Act, the provisions of the tax treaty take precedence. However, in most cases, the tax treatment of salary income under the Income Tax Act and tax treaties is consistent.

In this article, we have summarized the taxation of remittances by non-residents, which is often misunderstood even among foreign customers. Since the classification of domestic-source income and foreign-source income varies depending on the type of income, it is important to confirm the provisions of the Income Tax Act and the tax treaty.

If you have any questions regarding this matter, please feel free to contact us via the inquiry form.