Starting Up Your Business in Osaka: Introduction
Individual Income Tax
1. Monthly Salary
Monthly salary means the payments that are paid monthly at a fixed amount. Monthly salary includes base salary, commuting allowance, position allowance, etc.
Employment income refers to income relating to salary, compensation, wage, annual allowance, bonus or any other pay that has the nature of any of these.
Bonus is a payment which is paid separately from monthly salary, in the name of bonus, summer bonus, year-end bonus, etc., or any other payments similar to those.
When it is uncertain whether a payment has the nature of bonus, the payment is considered as bonus if (1) the amount or standards of payment are not predetermined and (2) it is an extra payment based on company profit.
3. Retirement Allowance
Retirement allowance is lump-sum poyment or pension which is paid to an employee upon retirement or employment termination
4. Withholding Income Tax
Employers have an obligation to withhold employees’ income tax from their monthly salary or bonus payments and pay it to the government. The amount of income tax is calculated in accordance with the statutory “Withholding Tax Amount Table for Employment Income”.
5. Year-End Adjustment of Income Tax
Year-end tax adjustment is the process whereby an employer settles the discrepancy between the total amount of income tax withheld from each salary and bonus payment made during the year and the tax amount to be paid for total salary and bonus paid during the year for each employee who has submitted “Application for (Change in) Exemption for Dependents” to the company. Employers are required to do this settlement when the last salary/bonus of the year is paid.
Individuals who received salary payments of 20 million yen or more during the year are not subject to year-end tax adjustment.
Usually, employees have year-end tax adjustment in December. However, if an employee leaves Japan during the year due to transfer, etc., they have year-end tax adjustment in their last salary paid in Japan.
6. Individual Inhabitant Tax
Individual inhabitant tax is a local tax, consisting of prefectural inhabitant tax and municipal inhabitant tax.
Employers are required to submit Salary Payment Report to the municipality of each employee’s residence by January 31 every year. Based on this report, the municipalities will determine the amount of inhabitant tax for the next tax year for each employee. Employers have an obligation to deduct inhabitant tax from employees’ salary on a monthly basis and pay it to the municipalities in accordance with the tax payment notice from the municipalities.
An inhabitant tax year runs from June through May the following year. If an individual leaves Japan during the tax year, they must pay all of the remaining balance of their inhabitant tax for that tax year (the balance up to May).
Inhabitant tax is imposed on an individual’s income earned during the previous year if they are registered on the Japanese “Basic Resident Registration (Jyumin Kihon Daicho)” as of January 1. It means, if an individual had registered address in Japan on January 1, they are liable to pay their inhabitant tax for the period from June that year to May the following year, even if they leave Japan between January and May. Employers should be careful when employees leave Japan.
7. Director’s Remuneration, Bonus and Retirement Allowance
(1) Determination of Directors’ Remuneration
Directors’ remuneration is to be determined in the article of incorporation or shareholders’ meeting.
(2) Definition of “Director” under the Corporate Tax Law
In addition to the director defined by the Companies Act, such as director, executive officer, and statutory auditor, a person who is substantially involved in the management of a company is deemed as director for tax purposes. As long as an individual is registered as director, this person is regarded as director for tax purposes regardless of the substance of involvement in the company.
The representative of a foreign corporation’s branch office in Japan, unless being a director of the head office, will not qualify as a director for tax purposes.
(3) Director Salaries which Qualify as Deductible Expense for Corporate Tax Purposes
Director salaries deductible for corporate tax purposes are broadly categorized into following three types.
- Fixed amount periodical compensation:
Fixed amount salary paid monthly throughout the fiscal year.
- Fixed compensation notified in advance:
Salary that is paid in accordance with advance notification of amount and time of payment filed to the tax office. If the amount and time of payment for director salary is fixed in advance, such salary can qualify as deductible expense for corporate tax purposes only by submission of notification.
- Profit-based compensation:
Salary that is calculated based on the corporation’s profit (applicable to listed companies)
(4) Retirement Allowance to Director
For the calculation of income tax imposed on retirement allowance, there is a tax benefit to squeeze the taxable income to half the amount of taxable income after retirement allowance deduction.
However, this tax treatment cannot be applied to taxable income calculation for retirement allowance paid to director who has worked for 5 years or less.
8. Difference in Salary by Types of Company
In principle, types of company of the employer will not affect the treatment of salary paid by a company in Japan. However, tax and social insurance treatment will be varied based on resident status of employees (resident or non-resident) and the location where salary is paid (paid in Japan or overseas).
9. Income Tax Applied to Foreigners Staying in Japan
Under the income tax system in Japan, individuals are classified into residents and non-residents. Residents are further classified into permanent and non-permanent residents. The scope of income subject to taxation in Japan is defined for each of these categories.
＜Resident Status and Tax Treatment＞
- Classification of Resident Status
|Individual||Resident||Permanent Resident||An individual who meets either of the following conditions:
*Has a domicile in Japan
*Has been residing in Japan for a period of one year or more and is not a non-permanent resident.
|Non-Permanent Resident||An individual who meets both of the following conditions:
*Does not have Japanese nationality.
*Has been residing in Japan for a period of 5 years or less in the last 10 years.
|Non-Resident||An individual other than a resident.|
- Permanent Resident
Permanent residents are subject to Japanese taxes not only on their income earned in Japan (domestic source income) but also on income earned outside Japan (foreign source income). In other words, permanent residents are subject to Japanese taxes on their worldwide income.
- Non-Permanent Resident
Non-permanent residents are subject to taxation in Japan with respect to all domestic source income and the portion of foreign source income that is paid in or remitted to Japan.
Non-residents are individuals who reside in Japan for a period of less than one year. Non-residents are subject to Japanese taxes only on their domestic source income.
＜Tax Exemption for Short-Term Visitors＞
Non-residents are liable for Japanese taxes on their domestic source income. However, such taxes may be exempt if certain requirements are satisfied, such as non-resident working in Japan for only a short period of time who is a resident of a country that has a tax treaty with Japan (123 countries/areas at 1st May, 2018). This is called tax exemption for short-term visitors.
＜Calculation of tax and taxable income＞
Once the scope of income subject to Japanese taxation is determined, income needs to be classified to certain types of income stated in the Income Tax Law. Then taxable income is calculated after applying certain deductions. Tax amount is calculated by multiplying the progressive tax rates shown in the below table to the taxable income.
|Taxable income||Applicable tax rates|
|1.95 million JPY or less||5%|
|Over 1.95 million JPY and 3.30 million JPY or less||10%|
|Over 3.30 million JPY and 6.95 million JPY or less||20%|
|Over 6.95 million JPY and 9 million JPY or less||23%|
|Over 9 million JPY and 18 million JPY or less||33%|
|Over 18 million JPY and 40 million JPY or less||40%|
|Over 40 million JPY||45%|