Taxation concerning expatriate employees in Japan

Monday, November 7, 2011. 13:12

The taxes that the expatriates who enter Japan with an employment contract of one year or longer or who have had a domicile in Japan are subject to three categories of taxes: income tax, inhabitant tax and social insurances.

1. Income tax

Progressive tax rates effective from year 2007 as follows:

Taxable income bracket

Tax Rate

0 ≦ Income ≦ JPY 1,950,000

5%

JPY 1,950,000 < Income ≦ JPY 3,300,000

10%

JPY 3,300,000 < Income ≦ JPY 6,950,000

20%

JPY 6,950,000 < Income ≦ JPY 9,000,000

23%

JPY 9,000,000 < Income ≦ JPY 18,000,000

33%

JPY 18,000,000 < Income

40%

Besides the salary income, all other fringe benefits of the employment package that the expatriate enjoy are treated as salary income, which typically are: allowance for accommodation, taxes, school fees, utility expenses, medical expenses, etc.

In general, taxable income is calculated by deducting the following items if the expatriate meet the requirements of the allowance or deduction:

- Basic allowance (JPY380,000)
- Allowance for spouse or special allowance for spouse for who is not eligible to claim the allowance for spouse due to the income earned by the spouse over JPY380,000.
- Allowance for dependants (JPY380,000 for dependants aged between 0 and 15years old or between 23 and 70 years old; JPY630,000 for dependants aged between 16 and 22 years old.
- Allowance for widow or widower
- Deduction for social insurance premiums
- Deduction for students
- Deduction for accidental loss
- Allowance for Disability

Normally, a portion of the expatriate’s income is withheld as income tax, inhabitant tax and social insurances by the employer to pay to the related tax offices later on a monthly basis. There for the expatriate need not to file an income tax return unless the expatriate falls within one of the following requirements of filing the tax return:

- His/her income is greater than JPY20,000,000
- His/her foreign source income either paid or remitted to Japan
- S/he has an intention to claim for a medical expense deduction
- His/her other income totals more than JPY200,000

2. Inhabitant Tax

Inhabitant tax rate effective from year 2007 is 10% levied on the taxable income. 4% for prefectural tax and 6% for municipal tax make up 10% of the inhabitant tax which the expatriates have to pay to the local government where his or her residence is registered. The inhabitant tax is levied on the income earned a year ago by the individuals who have his/her domicile in Japan as of 1 January of the current year.

3. Social insurances

Social insurances rate in the table below is the rate for Tokyo applied from payroll made from September 2011. The rates for other prefectures are just a little bit smaller or greater than Tokyo. For adequate information of the rates of the insurance required to contribute, you can search Japan Health Insurance Association’s homepage.

Social insurance

Insurance Rate

Health insurance

4.74%

Nursing care insurance (aged 40 -64)

0.755%

Welfare pension insurance

8.206%

Employment insurance (note 1)

0.6%

Note 1: employment insurance rate is 0.7% for the construction, agriculture, forest and fishery.

An employer who pays salary regularly in Japan or has five or more employees is obliged to join Japan’s social security scheme. The employer has to make payment to the Japan health insurance association every month at the same rate as the employee does along with the withholding from the employee.

Conclusion

So far, there is no specific tax concession for expatriates whatever industrial field s/he is engaging in. However, an expatriate can enjoy a significant tax saving if his/her fringe benefits as part of the compensation package is well structured.

Disclaimer
The publication contains information in summary form and is therefore intended for general guidance only.  This publication is not intended as legal, accounting or other professional advice and should not be relied upon as such.  If legal, accounting or other professional advice or expert assistance is required, the services of a competent professional should be sought.  Neither Reanda nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication.