Gross income consists of all forms of taxable income (e.g. income from employment, investment, rental real estate).
Salary, bonuses, stock or share-based income, foreign-service premiums, cost-of-living allowances, tax reimbursements, and other benefits in kind (except for certain tax-exempt items) are classified as taxable remuneration (employment income). Japan-source employment income is remuneration earned for services rendered in Japan, regardless of where or when the remuneration is paid.
Reasonable relocation expenses, including expenses for a spouse and children, that are borne by the employer do not constitute taxable income. A reasonable amount of airfare for home leave, including airfare for family members travelling together with the employee, is generally not taxable.
Where an employer provides housing, the amount of the taxable benefit is determined based on a formula, and, provided the housing arrangements are structured properly, generally, only a percentage of the rent paid is treated as taxable.
In the case of housing provided for a director (a board member) of a domestic or foreign company, the taxable value would generally be 50% (35% if it can be substantiated that the house is also used for business purposes by the employer) of the actual rent. However, if the housing provided by the company is considered unnecessarily luxurious, the market rent may be deemed to be the taxable value.
Retirement or severance income is treated preferentially under the current Japan tax law. However, retirement payments that are approved by a company’s shareholders and are to be made to a director of the company are only eligible for preferential tax treatment if the individual has served as a director for a period of more than five years. This five-year service period must have been with the same company.
For directors and employees, income arising from the exercise of stock options is generally taxed at the date of exercise (fair market value at exercise - grant price) while income from restricted stock units is taxable at the point of vesting. Income arising from certain qualified stock options (qualified for Japan tax purposes) is not taxable at exercise but is taxed instead as a capital gain when the stocks received at exercise are sold, if certain conditions are met. The point of taxation of equity compensation will depend on the specifics of the plan.
In general, income derived from the exercise of an employee stock option issued by a non-Japanese company is treated as employment income and subject to Japanese national and local inhabitant’s tax at the graduated income tax rates. In addition, gains from the sale of the equity acquired are subject to income tax at 15.315% national and 5% local (if the individual is a permanent tax resident or if remittances to the country exceed Japan-source income). A non-permanent resident taxpayer will only be taxed on Japan-source income arising from the exercise and not on any capital gain as long as the sales transaction is made outside Japan and remittances to the country do not exceed Japan-source income.
If taxpayers engage in their own business, a business enterprise tax will be levied on their business income by the local prefectural government. Business enterprise tax is deductible for the calculation of business income. In general, business enterprise tax is assessed on business income in excess of JPY 2.9 million at a rate of 3%, 4%, or 5%, depending on the type of business.
Capital gains are, in principle, aggregated with other income after deductions for necessary expenses and after a statutory deduction of a maximum of JPY 500,000.
If the transferred assets were owned for more than five years, the gain is regarded as a long-term capital gain, and the taxable basis is reduced to 50% of the net capital gain.
Capital gains from sales of real property (land, building and structures) are taxed separately from other sources of income.
Capital gains from sales of certain securities (including shares/equity interest in corporations, warrant bonds, etc.) are taxed separately from other sources of income at a flat rate of 20.315% (i.e. 15.315% national tax and 5% local inhabitant’s tax).
Listed shares are shares listed on Japanese or foreign stock exchanges and transacted through a financial institution licensed in Japan. Unlisted shares are shares other than listed shares indicated above, including shares listed on Japanese or foreign stock exchanges that are not transacted through a financial institution licensed in Japan.
While capital gains/losses arising from the sale of listed shares can currently be offset against capital losses/gains arising from the sale of non-listed shares, this will no longer be possible under the 2013 Tax Reforms. From 1 January 2016, capital gains/losses arising from the sale of listed shares cannot be used to offset capital losses/gains arising from the sale of non-listed shares.
In principle, dividends are either taxed at (i) graduated rates after being aggregated with other sources of income or (ii) separately from other sources of income; however, certain capital losses may be used to absorb dividend income (see Losses in the Deductions section for more information). If paid onshore, dividends are subject to withholding tax (WHT). Dividends paid by corporations listed on an exchange qualify for the separate taxation treatment.
Interest on domestic bank deposits and/or certain designated financial instruments is taxed separately from other income and is subject to 20.315% WHT (i.e. 15.315% national tax and 5% local inhabitant’s tax) if paid onshore. Interest paid by offshore financial institutions is taxed at graduated rates.
Rental income consists of gross rents received in connection with the letting of real estate to either an individual or commercial tenant. To arrive at the taxable amount, any allowable expenses and depreciation are deducted from the gross income. To the extent a taxpayer has a net rental loss, this loss can be used to offset other types of income. Note that mortgage interest payments allocable to the ownership of land can’t be used to offset other types of non-rental income.
Assuming the non-resident does not have a permanent establishment (PE) in Japan, a non-resident’s income from Japan-source interest, dividends, rental income, and royalties is generally subject to tax at a rate of 20.242% (15.315% in the case of interest on bank deposits and/or certain designated financial instruments) or lower treaty rates through WHT at source. A tax return is subsequently required to be filed to report rental income and determine the final tax liability.