The Withholding Tax System

Withholding Agents and Tax Rates

A person who pays incomes subject to withholding tax in Japan to a non-resident or foreign corporation (hereinafter referred to as a "non-resident") must, in principle, withhold income tax and special income tax for reconstruction from the payment.

When a person who has a domicile, residence, or office in Japan makes domestic-source-income payment outside Japan to a non-resident, the payment shall be deemed to be made within Japan, and withholding tax shall be imposed.

​Withholding tax is calculated by multiplying the amount of domestic source income paid by the tax rate. In some cases, such as public pensions, the amount of tax is calculated by multiplying the amount of payment by the tax rate after deducting a predetermined amount.

When payment is made in a foreign currency to a non-resident, tax withholding shall be made after converting the payment into yen. In general, the exchange rate is based on the telegraphic transfer rate on the due date, but unless there is a significant delay in payment, the telegraphic transfer rate on the date of actual payment may be applied.
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Domestic source income subject to withholding tax and the tax rates are as follows:
(1) Transfer of land, etc.: 10.21 percent
(However, tax withholding is not required if the consideration for the transfer of land, etc. is 100 million yen or less and is paid by an individual who acquires the land, etc. for his/her own use or for the use of his/her relatives as a residence.)
(2) Rent of real estate, etc.: 20.42 percent
(However, tax withholding is not required for the rent of real estate, etc., paid by an individual who rents such real estate, etc. for his/her own use or that of his/her relatives.)

Please note that when a tax treaty has been concluded between Japan and the country in which the non-resident resides, the aforementioned tax rate may be exempted or reduced in accordance with the provisions of the tax treaty.

In order for such exemption or reduction to be applied, a "Notification Concerning Tax Treaty" and other relevant forms must be submitted via the payer of the domestic source income to the district director of the tax office that has jurisdiction over the payer's place of tax payment  at least one day before the date of payment.

Please also note that special income tax for reconstruction does not need to be withheld if the tax rate stipulated in the applicable tax treaty is less than or equal to the aforementioned rate.​

Payment of Withheld Tax 

The income tax and special income tax for reconstruction collected at the source shall be paid, in principle, by the 10th day of the month following the month of collection, at the nearest financial institution, at the local tax office, or via e-Tax. The payer is to attach a "statement of income tax collection from non-residents and foreign corporations (payment form)" and for redemption gains of discount bonds (margin profit amounts) and  income from the transfer of listed shares, etc. in custody in a special account and dividends in an elective withholding account, a statement of income tax collection from such gains and profits (payment form).

In cases where payment of domestic source income is made outside Japan and tax withholding is deemed to be made in Japan because the payer has a domicile or residence in Japan or has an office, place of business, or other equivalent in Japan, the due date for payment of income tax and special income tax for reconstruction is the last day of the following month, not the 10th of the following month, in consideration of administrative procedures.

Classification of Residents and Non-Residents

Under Japan's Income Tax Law, a "resident" is defined as an individual who has a "domicile" in Japan or has continuously had a "residence" in Japan for at least one year, and an individual other than a "resident" is defined as a "non-resident."

​A "domicile" refers to "an individual's base of life," which is determined by objective facts. Therefore, a "domicile" is determined by where a person's activities are centered around.

In certain cases, a "presumption of domicile" will be made based on a person's occupation and other factors. Therefore, a "place of residence," which is defined as "a place where a person actually resides,  may differ from the person's "base of life."

As for a corporation, the location of its head office or main office determines whether it is a domestic or a foreign corporation, and such determination is based on its registration and the articles of incorporation (generally referred to as the "head office domicile principle").