For athletes and entertainers based overseas,the applicable tax provision differs depending on whether the income is consideration for a business or remuneration for services.

Confusing the two changes both the applicable treaty article and whether a return is required after withholding.

Even Nonresidents Are Taxed in Japan on Activities in Japan

Non-resident Taxation of nonresidents domestic source income is limited to domestic-source income (Income Tax Act, Articles 5(2), 7(1)(iii), and 164).Matches, performances, and appearances in Japan fall within the categories listed in Article 161(1).

Two items are principally relevant.

The businesses “specified by Cabinet Order” in item (vi) are defined in Article 282 of the Income Tax Order. Item (i) states:

(i)Services of film or theater actors, musicians, other entertainers, or professional athletes,a business primarily involving the provision of such services.

(Item (ii) covers independent professionals; item (iii) covers businesses of persons with specialized knowledge or skills, subject to a parenthetical exclusion.)

Withholding and What Follows

Article 212(1) of the Income Tax Act requires withholding on payments to nonresidents of domestic-source income under Article 161(1)(iv)–(xvi). The standard rate under Article 213(1)(i) is20%(including the special income tax for reconstruction,20.42%), as a general rule.

However, Article 212(1) contains the parenthetical exclusion “excluding those specified by Cabinet Order.”Article 328(i) of the Income Tax Order provides thatconsideration or remuneration under item (vi) or (xii)(a) for services of entertainers or professional athletes, paid by an unspecified large number of persons,is domestic-source income not requiring withholding.

The treatment after withholding also differs.

• Item (vi)Under Article 164(1) of the Income Tax Act, this income is subject toaggregate taxation.A return is therefore required in addition to withholding.
• Item (xii)(a)Under paragraph (2) of that article, this income falls underseparate taxation.However, both paragraph (1)(i)(b) and paragraph (2)(i) contain the parenthetical exclusion “excluding income falling within domestic-source income listed in item (i) of that paragraph.”Any portion that constitutes PE-attributable income under item (i) is treated under that category.

Assuming that withholding of 20.42% always ends the matter can result in failure to file for income under item (vi).

A Critical Point: Treaty Exemption Does Not Always Mean Zero Withholding

Many tax treaty tax treaties containspecial articles on entertainers and athletes.Their wording differs between treaties.

Article 41-22 of the Act on Special Measures Concerning Taxation (Special Withholding Provisions for Remuneration for Services of Entertainers and Similar Persons Paid by Exempt Entertainment Corporations and Similar Entities) then establishes a two-stage rule.

• Paragraph (3) of that article — Substitutes the tax rate when an exempt entertainment corporation or similar entity receives consideration under item (vi). The provision states: “In Articles 179(i) and 213(1)(i) of that Act, ‘twenty percent’ shall be replaced by ‘fifteen percent’.”Article 179 (Income Tax Rates for Foreign Corporations) is also subject to this substitution.Where a foreign corporation, such as an overseas management company, receives the payment, Article 179 applies rather than Article 213.
• Paragraph (1) of that article — If that exempt entertainment corporation or similar entityoutside Japanpays remuneration to athletes, entertainers, or similar persons out of the exempt consideration,the exempt entertainment corporation or similar entity itself must withhold tax.The income tax withheld must be paid by“the last day of the month following the month in which it was withheld,”which differs from the usual deadline of the tenth day of the following month.

Even payments to a corporation exempt under a treaty do not necessarily result in zero withholding at payment.

Points that require care in practice

• Which item covers prize money or fight purses?In addition to items (vi) and (xii)(a),prize money for business advertising or promotionfalls under item (xiii). Under Article 213(1)(i)(b), the tax rate applies to the balance after deducting JPY 500,000. Item (xiii) refers to “prizes for advertising or promotionspecified by Cabinet Order,”, with their scope defined by Article 286 of the Income Tax Order (excluding travel or other services where the recipient cannot elect to receive money or goods instead).
• What about sponsorship fees or image rights payments?There is a separate question of whether they constitute royalties under item (xi).
• What if a lump sum is paid to an overseas management company?The scope of item (vi) and the applicability of Article 41-22 of the Special Measures Act must be considered.
• What if an athlete moves to an overseas team during the year?resident The change between resident and nonresident status and the treatment of retirement allowances under item (xii)(c) are relevant.
• How are transfer fees treated?This depends on the nature of the contract.
• What if foreign tax is imposed on prize money earned overseas?foreign tax credit Both the foreign tax credit and the treaty must be considered.

Before drafting the contract, decide who will receive the payment and in what capacity.Once the payment has been received, the applicable statutory treatment cannot be changed.

Legal basis

• Income Tax Act, Articles 5(2) and 7(1)(iii) (Scope of Taxable Income of Nonresidents)
• Income Tax Act, Article 161(1)(vi), (xi), (xii), and (xiii) (Domestic-Source Income)
• Income Tax Order, Article 282 (Scope of Businesses Primarily Providing Personal Services) and Article 286 (Prizes for Business Advertising or Promotion)
• Income Tax Act, Article 164 (Methods of Taxation of Nonresidents)
• Income Tax Act, Article 179 (Income Tax Rates for Foreign Corporations), Article 212 (Withholding Obligations), and Article 213 (Amount of Tax Withheld)
• Income Tax Order, Article 328 (Domestic-Source Income Not Requiring Withholding)
• Act on Special Measures Concerning Taxation, Article 41-22 (Special Withholding Provisions for Remuneration for Services of Entertainers and Similar Persons Paid by Exempt Entertainment Corporations and Similar Entities)
• Provisions on entertainers and athletes in the applicable tax treaty

Individual assessments require review of the contract terms and the treaty with the other country.