This is Murata Sogo Tax and Accounting Office, a tax firm based in Miyakojima-ku, Osaka, specializing in inheritance and international taxation.
In this article, we will discuss whether the Shanghai Value-Added Tax (VAT) imposed on the sale of real estate located in Shanghai, China, can be credited against Japanese income tax as a foreign tax credit.

 
Q.　Inquiry

I am a Japanese national residing in Japan.
I recently sold real estate that I owned in Shanghai, China, and paid Shanghai Value-Added Tax (VAT) in connection with that sale.
Since I am required to report this capital gain in my Japanese income tax return and pay Japanese tax on it, can I apply a foreign tax credit in Japan for the VAT already paid in Shanghai?

 
A. Answer

1. Scope of Foreign Taxes Eligible for Foreign Tax Credit
For a foreign tax to qualify for Japan’s foreign tax credit, it must satisfy all of the following conditions:

The tax must be imposed under the laws of a foreign country and be equivalent in nature to Japanese income tax.
It must be levied by a foreign government or its local authorities based on foreign law.
It must be imposed on an individual’s income as the taxable base.
 
2. Does the Shanghai Value-Added Tax Qualify as Such a Foreign Income Tax?
The Shanghai VAT clearly satisfies the first two conditions above — it is imposed under Chinese law and collected by the Chinese government.

The key question is whether it qualifies as a tax “imposed on an individual’s income.”
In cases handled by our firm, the Shanghai VAT was calculated by applying the tax rate to the gain (selling price minus purchase price).
Since this is essentially the same calculation method as Japan’s capital gains tax, it can be reasonably considered a tax based on individual income.

Accordingly, the Shanghai VAT meets all three requirements listed in section 1 and thus falls within the scope of foreign income taxes eligible for the foreign tax credit in Japan.

 
3. Conclusion

Therefore, for a Japanese resident who has paid foreign income tax (in this case, the Shanghai VAT) during the year, the amount paid may be credited against Japanese income tax, subject to the foreign tax credit limitation under Japanese tax law.

 
We have summarized here a topic that has recently become a common area of inquiry — the foreign tax credit for taxes imposed overseas.
If you have questions about this issue or similar cross-border taxation matters, please feel free to contact us through our inquiry form.