TAX PLANNING FOR FOREIGNERS WORKING IN JAPAN
{The following is based on an article originally prepared for the Journal of the Japan Foreign Lawyers Association (RBA)}
With the number of foreigners undertaking Japan assignments likely to increase in coming years, the issue of how to compensate those employees in a tax efficient manner has never been more important.
The purpose of this article is to provide an outline of some of the most important issues in structuring expatriate compensation in Japan.
1. Location of Payroll for Foreign Expatriate Employees
An important consideration is location of payroll. This means payment onshore (i.e., in Japan) vs. offshore payment (i.e. outside Japan). Often, it will be most efficient if an expats salary is paid outside Japan. Important implications of offshore payment include the following:
- Ability to Apportion Taxable Income Based on Days In / Days Out
A general benefit to a regular (i.e., non-permanent resident, non-director) expatriate employee receiving salary off-shore is that a portion of salary may be excluded from Japan-source income. Non-Japan source salary is usually not subject to Japanese individual income tax. The amount excluded from Japan source income is based on the number of days that the employee was absent from Japan on business during the year.
The Days In / Days Out benefit is not available to directors or individuals who have lived in Japan in excess of five out of the past 10 years (i.e., permanent residents of Japan for tax purposes). Also, non-Japan source funds remitted to Japan will be subject to Japanese tax. - Withholding Income Tax
Japanese withholding income tax is generally not applied if an expatriate’s salary is paid offshore. As a result, expats paid off-shore must submit a Japanese individual income tax return and pay Japanese individual income tax by the 15th of March each year with respect to the previous calendar year. - Japanese Social Insurance
In principle, anyone working in Japan must join the Japanese social insurance system. This consists of a number of programs including national health insurance and welfare pension insurance. Social insurance contributions are shared equally by the employee and employer.
Although in principle all employees in Japan are required to join the social insurance system, the Japanese authorities have historically accepted that expatriate employees do not join the system if:- The expat employee is paid outside Japan, and
- Equivalent private arrangements are made.
– Note that the Japanese authorities may change their position in the future. It is therefore important to assess the risk associated with any position taken regarding the enrollment of expatriates in the Japanese social insurance scheme.
- Labor Insurance
Workers in Japan are generally covered by Japanese labor insurance through their employer. The scheme consists of Japanese worker’s accident insurance and Japanese unemployment insurance. Premiums are shared (though not equally) between the employer and employee (via monthly withholding in the case of the employee).
Foreign expatriates may not be able to obtain coverage under the Japanese labor insurance system if their salary is paid offshore. As a result, foreign expats may need to consider private insurance arrangements in respect of accident or unemployment. - Location of Payroll for Japanese Employees
It is generally agreed that payroll for Japanese employees should be located in Japan.
This allows for the deduction of social insurance, labor insurance, and income tax withholding.
2. Structuring Specific Items of Compensation
The following is an overview of the treatment of some common items found in Japan expat compensation packages:
- Housing
If the employee’s housing qualifies as Company Housing (i.e., the lease is in the name of the company and the non-director employee reimburses the company approximately 5-10% of the rent each month), then approximately 90-95% of the rent value would NOT constitute a taxable benefit to the employee.
In the case of a director, the company housing benefit is less tax effective. The following article discusses Issues in Structuring Compensation for Directors of Japanese Companies. The highly detrimental tax treatment associated with Japanese directors are a factor in the use of Nominee Directors in Japan.
As a practical matter, the expatriate’s monthly reimbursement to the company (5-10% of the rent value) will be handled through the Japan payroll. This means that even expatriates being paid via an offshore payroll will receive a small portion of their salary (slightly more than 5-10% of the rent value) in Japan. See the following article for an Overview of Japan Payroll. - One-time Settling-in Payments
Such payments generally constitute a taxable benefit from a Japan tax viewpoint. - Commodities and Services Differential Payments
Such payments generally constitute a taxable benefit from a Japan tax viewpoint. - Furniture Rental Payments
Such payments generally constitute a taxable benefit from a Japan tax viewpoint. - Offshore Retirement Benefits
Where the employer makes contributions on the employee’s behalf, this may constitute a taxable benefit for Japanese individual income tax purposes. - Health Coverage
If the company pays for the employee’s offshore health insurance coverage, such payments may constitute a taxable benefit for Japanese individual income tax purposes. - Club Membership (e.g., Tokyo American Club)
If the membership is for business purposes, the membership fee would generally not constitute a taxable benefit to expatriates. - Home Leave
In general, reimbursement of an expatriate’s home leave expenses will not constitute a taxable benefit in Japan. However, certain conditions need to be met. These conditions include, using only the most economical route to and from Japan. Usually, only one (non-taxable) reimbursement of home leave per year is permitted. - Personal Vehicle Use
Reimbursement of an employee’s private car, would generally constitute a taxable benefit. - Relocation Expenses
If the company pays or reimburses actual relocation expenses, such reimbursement generally does not constitute a taxable benefit for Japan tax purposes. - Commuting Allowance
Companies in Japan customarily reimburse employees for the cost of daily travel from their home to the office. This is usually done by reimbursing the cost of a monthly commuter pass for trains and buses. Such reimbursement is a non-taxable benefit to the employee up to JPY100,000 per month. - Language Lessons
In general, if an employer pays for language lessons, this would be considered a non-taxable benefit to the employee.
Japan offers numerous opportunities for foreign expatriate workers to conservatively structure their compensation. To maximize this opportunity, compensation structuring should be considered well in advance of a Japan assignment and, if possible, in advance of the commencement of the visa application process.
Additional planning (for both the individual and the company) needs to be undertaken if the foreign expatriate employee will become the director of a Japanese company.
Contact JAPAN VISA™ to learn how we can assist you to self-sponsor a visa in Japan.
The above is provided for general information purposes only and does not constitute advice to undertake or refrain from undertaking any action. Only qualified Japanese professionals are able to advise on Japan immigration, legal, and tax matters.