How is the salary taxation handled when an director of a foreign corporation works in Japan?

In principle, the salary of an officer of a domestic corporation working as an officer overseas is taxed in Japan as domestic source income.

Conversely, how is salary tax handled when an officer of a foreign corporation works in Japan?

There are cases where tax is levied both domestically and abroad

Salaries earned working in Japan are considered domestic source income.

Therefore, even if you are an officer of a foreign corporation, your salary earned working in Japan is considered domestic source income.

This salary is subject to income tax.

On the other hand, if the foreign corporation is in the United States, for example, and an officer of an American corporation works in Japan, you will also be subject to tax in the United States.

Officer remuneration and other similar payments earned by a resident of one contracting country (Japan in this case) in the capacity of an officer of a corporation that is a resident of the other contracting country (the United States in this case) should be taxed in the other contracting country (Article 15 of the Japan-US Tax Convention).

In that case, the salary of this officer will be subject to income tax in both Japan and the United States.

How to deal with double taxation?

This is where the problem of double taxation arises.

Usually, double taxation can be avoided by applying foreign tax credit.

But there is a problem.

When a resident of Japan tries to apply foreign tax credit,

the limit of foreign tax credit is set as "income tax amount × total amount of foreign source income / total income amount",

so in effect, foreign tax credit cannot be applied unless the executive salary falls under foreign source income.

As mentioned above, executive salary when working in Japan is domestic source income.

However, under the foreign tax credit law, income taxed in a foreign country is treated as foreign source income in the calculation of foreign tax credit.

The foreign source income stipulated in the foreign tax credit is as follows:
Income that should be taxed in a contracting country or a contracting party other than Japan under the provisions of a tax treaty, as specified by government ordinance (Article 95, Paragraph 4, Item 16 of the Income Tax Act)

The income specified by government ordinance under Article 95, Paragraph 4, Item 16 of the Act (foreign tax credit) is income that is subject to foreign income tax in the other country as specified in the same item. (Article 225-13 of the Enforcement Order)

Therefore, foreign tax credit is applicable to the foreign income tax levied on this executive salary.

Conclusion

This time, we have provided a simple explanation of how salary tax is handled when a director (resident) of a foreign corporation works in Japan.

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

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都築太郎税理士事務所/Tsuzuki Taro Tax Accountant Office

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