1. Introduction
The progress of globalization makes even small and medium-sized Japanese companies expand business abroad. It also increases the opportunities for Japanese employees to be dispatched to overseas subsidiaries or branches. The employment income taxation on outbound employees is rather complicated, compared with local employees. In this News, we will mention outbound employees’ taxation in Japan.

2. Classification of residency and scope of taxation
Under the Japanese Income Tax Law, a resident is an individual who has a domicile or has resided in Japan for continuously one year or more, and a non-resident is an individual other than a resident. Thus, if an individual plans to leave Japan for one year or more, he/she is classified as a ‘non-resident’. On the other hand, if an individual plans to leave Japan for less than one year for the purpose of an overseas business trip or a short-term dispatch abroad, he/she is still classified as a ‘resident’ in Japan. As below, the classification of an individual’s residency determines the scope of taxation. Thus, it is crucial to judge precisely whether an outbound employee is categorized as a resident or non-resident.

◆Scope and method of salary / bonus taxation for residents (excluding non-permanent residents) and non-residents in Japan

Please note that the Japanese parent company might provide an outbound employee an allowance for his/her families living in Japan. Since this allowance derives from the outbound employee’s assignment abroad, it is foreign source income and not taxed in Japan. However, in the case where the outbound employee temporarily returns to Japan for joining a meeting or other events, the family allowance paid for the period his/her staying in Japan is considered domestic source income and subject to tax at the rate of 20.42% in Japan.

3. Tax treatments when leaving Japan
(1) The first salary payment after leaving Japan
Under the Income Tax Law Basic Regulation (212-5), if an individual becomes a non-resident during the payroll calculation period of one month or less, and the payment date comes after the day when he/she becomes a non-resident, the whole amount of the payment is treated as foreign source income except the case that the whole amount pertains to the assignment in Japan. Thus, with regard to a non-resident, tax treatments of the first salary or bonus payment after leaving Japan are as follows.

① The case of leaving Japan during the period of salary calculation

In this case, the whole amount of the salary paid on August 25 is treated as foreign source income and not taxable.

② The case of leaving Japan after the period of salary calculation

In this case, since the whole amount of the salary paid on August 25 pertains to the assignment in Japan, the whole amount is subject to a withholding tax at the rate of 20.42%. The taxation is completed by withholding at source, and the year-end adjustment is not required.

(2) The first bonus payment after leaving Japan
Since the calculation period of the first bonus payment after leaving Japan is more than one month, the above basic regulation is not applicable. So the portion of the bonus pertained to the assignment in Japan is withheld at source at the rate of 20.42%. The taxation is completed by withholding at source, and the year-end adjustment is not required. 

 (3) Year-end adjustment
In the case of leaving Japan for one year or more, an individual is a resident from the following day of the departure date, and the year-end adjustment is required when leaving Japan. The period eligible for the year-end adjustment is from January 1 to the departure date. The income deductions in this case are treated as follows.

①Deduction for social insurance premiums, deduction for life insurance premiums, deduction for earthquake insurance premiums and others are applicable, but limited to the amount paid during the period of being a resident in Japan.
②The application of exemption for a spouse, dependents, and others should be judged based on the condition of the departure date.

4. Tax treatments after returning to Japan
(1) The first salary payment after returning to Japan
An outbound employee is considered a resident from the day when he/she returns to Japan. A resident is taxed on the worldwide income, and so the whole amount of the first salary paid after repatriation to Japan is taxed even if it includes the portion earned in an assigned foreign country. Please note that this treatment differs from the taxation when leaving Japan.

(2) The first bonus payment after returning to Japan
Similarly, since an individual is a resident on the payment day of the first bonus after repatriation to Japan, the whole amount is taxed in Japan. Please note that this treatment also differs from the taxation when leaving Japan.

(3) Year-end adjustment
In the case where an individual finishes his/her assignment abroad and returns to Japan in the middle of the year, the year-end adjustment is required for salaries paid after the day when he/she becomes a resident. The income deductions in this case are treated as follows.

①Deduction for social insurance premiums, deduction for life insurance premiums,  deduction for earthquake insurance premiums, and others are applicable, but limited to the amount paid during the period of being a resident in Japan.
②The application of exemption for a spouse, dependents, and others should be judged based on the condition of the payment day of the last salary in the year of repatriation to Japan.

5. Conclusion
In this News, we have mentioned ‘Outbound Employees’ Taxation in Japan’.
Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually.

If you have any questions, please feel free to contact us.