For example, let’s say a person from the United States works for a company headquartered in the U.S. and is temporarily assigned to the company’s Japan branch for five months. During this period, the person’s salary is paid by the Japan branch. In this case, is the salary earned during the five-month assignment taxable in Japan? Is the individual eligible for the treaty exemption for short-term business travelers?
This article explains the Japanese tax treatment of employment income paid to non-residents by Japanese companies and outlines the conditions for the treaty exemption for short-term business travelers.
1. Tax Treatment in Japan
In the current case, where the individual resides in the United States and works for a U.S.-based company but is temporarily assigned to Japan for five months, the individual is classified as a non-resident for Japanese tax purposes.
(For more details about the definition of non-residents and the scope of their taxable income, please refer to the following article:
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Under Japanese tax law, non-residents are taxed only on Japan-sourced income. Since the salary in question is paid for services performed in Japan, it qualifies as Japan-sourced income and is therefore taxable in Japan.
2. What is the Treaty Exemption for Short-Term Business Travelers?
When employment income is taxed in the country where the work is performed, and the country of residence is different, there is a risk of double taxation. To prevent this, tax treaties may allow income to be exempt from tax in the host country if certain conditions are met.
In general, to qualify for the treaty exemption for short-term business travelers in Japan, the following three conditions must be satisfied:
- The individual’s stay in Japan does not exceed 183 days within a 12-month period.
- The salary is paid by an employer outside Japan (e.g., the head office abroad)
- The salary is not borne by a permanent establishment (such as a branch) in Japan.
※ Please note that specific requirements may vary depending on the applicable tax treaty. Always refer to the relevant treaty when reviewing eligibility.
In the present case, because the salary is paid by the Japan branch, the exemption does not apply. Since the salary is considered Japan-sourced income, it will be subject to withholding tax in Japan. The individual may then claim a foreign tax credit in their home country.
3. Application Procedures for Treaty Exemption
If the salary is subject to withholding tax in Japan, the individual can apply for the treaty exemption by submitting an “Application Form for Income Tax Convention” to the district director of the local tax office that has jurisdiction over the Japan branch. This form must be submitted through the Japan branch before the payment date.
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