Non-resident and foreign corporation Japan can tax such persons only ondomestic source income. The statute lists what constitutes domestic-source income.

Income Tax and Corporation Tax Have Separate Provisions.

Individuals (Non-Residents): Article 161, Paragraph (1), of the Income Tax Act

Items (i) through (xvii) provide the list. The main categories are below.

Corporations (Foreign Corporations): Article 138, Paragraph (1), of the Corporation Tax Act

This List Contains Items (i) Through (vi).

(i) Where a foreign corporation conducts business through a permanent establishment, … income attributable to that establishment, including income from its transfer

(ii) Income arising from use or holding of assets in Japan, excluding income under Article 161, paragraph (1), items (viii)–(xi) and (xiii)–(xvi), of the Income Tax Act

(iii) Income prescribed by Cabinet Order as arising from transfers of assets in Japan

(iv) Consideration for personal services received by a corporation conducting a business in Japan primarily involving such services, as prescribed by Cabinet Order

(v) Consideration for leasing real estate in Japan, rights over real estate in Japan, or quarrying rights under the Quarrying Act …

(vi) Other income prescribed by Cabinet Order as having its source in Japan

Item Numbers Differ Between the Income Tax Act and the Corporation Tax Act.For example, Article 161(1)(vii) and Article 138(1)(v) both concern real estate rental consideration. The correspondence is easy to confuse. Always check whether the provision concerns individuals or corporations when citing it.

Treatment Depends on Whether a Permanent Establishment Exists

Even if income falls within a listed category,the method of taxation changes depending on whether there is a PE.

For individuals, Article 164 of the Income Tax Act divides income intoaggregate taxation under paragraph (1) and separate taxation under paragraph (2). The provision rearranges the income categories according to whether a PE exists.

Two Points Deserve Attention.

First, PE status determines the inclusion of item (i), income attributable to a PE, and item (iv), distributions of partnership profits from a business conducted through a PE.The Other Items Fall into the Same Categories Regardless of PE Status.

Second, for non-residents with a PE, even income under items (viii)–(xvi) is removed from paragraph (2) and included in paragraph (1) if attributable to the PE under item (i).Interest, Dividends, and Royalties Are Not Necessarily Always Separately Taxed.

There is alsoEven for Non-Residents Without a PE, Items (ii), (iii), (v)–(vii), and (xvii) Are Subject to Aggregate Taxation and Tax Return Filing Under Paragraph (1), Item (ii).This includes rent from Japanese real estate (item (vii)) and consideration for land transfers (item (v)).“No PE” Does Not Mean “Withholding Settles Everything.”

For corporations, Article 141 of the Corporation Tax Act determines which categories form the tax base according to PE status.

What to Check First

Even where income falls within a listed category, tax treaty may restrict Japanese taxation.

That Is Not All.A Treaty Can Replace the Definition of Domestic-Source Income Itself.

Article 162, paragraph (1), of the Income Tax Act.

Where a tax treaty … contains provisions on domestic-source income differing from the preceding Article, for persons entitled to that treaty, notwithstanding that Article, domestic-source income is determined under the treaty to the extent of those differences.

Article 139, paragraph (1), of the Corporation Tax Act follows the same structure. The latter part of Article 162, paragraph (1), of the Income Tax Act contains deeming provisions where a treaty specifies domestic-source income replacing items (vi) through (xvi).

Thus, even after identifying the applicable item of Article 161 under domestic law, if the treaty differs,the source determination itself is replaced.A Typical Example Is a Difference Between Domestic Law and a Treaty in Determining the Source of Royalties.Do not determine withholding requirements or rates solely from domestic law.

Points that require care in practice

• Must Fees Paid to an Overseas Service Provider Be Withheld From?Treatment depends on whether they are consideration for personal services, royalties, or another category.
• Are Software or Cloud Service Fees Royalties?The issue is whether they fall within royalties under item (xi).
• What About Management Fees Paid to an Overseas Parent?The location and nature of the services matter.
• What About Director Remuneration Paid to a Non-Resident?The employment income provision and treaty rules must be examined.
• What About Consideration for Services Performed Abroad?The question is how to apply the requirement that services be performed in Japan.
• What If the Treaty Notification Was Not Filed?Separate procedural issues arise.

The Contract's Title Does Not Decide the Classification.After identifying the category under domestic law, check whether the treaty replaces that treatment.

If withholding is omitted,The payer bears the tax payment obligation.non-payment penalties and delinquency tax may also arise.Consult us before beginning overseas payments.

Legal basis

• Article 161, Paragraph (1), of the Income Tax Act (Domestic-Source Income)
• Articles 281-3 (Consideration for Transfers of Land and Similar Property in Japan) and 282 (Scope of Businesses Primarily Providing Personal Services) of the Income Tax Act Enforcement Order
• Income Tax Act, Article 164 (Methods of Taxation of Nonresidents)
• Article 138, Paragraph (1), of the Corporation Tax Act (Domestic-Source Income)
• Article 162 of the Income Tax Act and Article 139 of the Corporation Tax Act (Domestic-Source Income Where a Tax Treaty Contains Different Provisions）
• Article 141 of the Corporation Tax Act (Corporation Tax Base for Each Fiscal Year's Income of Foreign Corporations)
• Provisions allocating taxing rights in the relevant tax treaties

An individual determination requires confirmation of the transaction details.