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back to index backASIAtalk February,  2006

Japan: Review of Taxation of Long-Term Japanese Expatriates

The Ministry of Finance has confirmed that as part of the 2006 Income Tax Reforms outlined this month there will be a review of the beneficial taxation regime available for individuals considered non-permanent residents of Japan. The stated aim of the review is to make the taxation regime for income from sources outside of Japan more robust.

A non-permanent resident is an individual who has resided in Japan for 5 years or less, does not hold Japanese nationality or have a permanent intention to reside in Japan. Non-permanent residents are taxed on Japan sourced income, but are not taxable on income from overseas unless the income is effectively remitted to Japan.

Cited as reason for the review are the individuals who, although effectively residing permanently in Japan, are enjoying the benefits of this expatriate taxation regime by repeatedly departing from Japan only to return thereafter. Provided that at the point of the individual's departure, there is a expectation that the individual will be out of Japan for 1 year or more, then the individual may qualify as a non-permanent resident on return to Japan to take up residence.

The proposed changes in the income tax law is to be put through the Japanese Diet during 2006, and although not clear at this stage are expected to come into effect from 2007.

Beneficial tax rules for expatriates will remain, but application will be reduced in scope - only individuals who have not been resident for Japan for an aggregate of 5 years in the past 10 years are expected to qualify as non-permanent residents under the new regime.

Companies with expatriates in Japan should review their population to address if the proposed changes will increase tax protection/equalization costs as other income of long-term Japan-based expatriates is brought into the charge to tax.

Tax equalization policies should be reviewed to ensure that they address the treatment of noncompany income for Japan-based expatriates.

Source: Global Insight newsletter by Deloitte Touche Tohmatsu - GAI

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