For Japanese income tax, whether a person isresident a resident or non-residentfundamentally changes the scope of taxable income. This is the first classification to establish for anyone leaving or coming to Japan.

Statutory definition

Article 2, Paragraph (1), of the Income Tax Act Contains Three Categories.

(iii) Resident: an individual domiciled in Japan or who has continuously maintained a residence in Japan for at least one year up to the present.

(iv)Nonpermanent residents: A resident without Japanese nationality whose aggregate period of domicile or residence in Japan within the preceding ten years is five years or less.

(v) Non-resident: an individual other than a resident.

A Non-Resident Is Defined Only as Someone Who Is Not a Resident.The analysis therefore begins by determining whether the person qualifies as a resident.

Scope of Taxable Income

Article 7, Paragraph (1), Defines the Scope of Taxable Income for Each Category.

Upon becoming a non-resident,income taxis limited to domestic-source income. This is the starting point for understanding why moving abroad can change tax burdens.

However, the Analysis Does Not End There.Certain residents are deemed to dispose of securities and similar assets when departing Japan(Article 60-2 of the Income Tax Act; Exit tax). Paragraph (5) specifies exclusions, including residents whose covered assets total less than JPY 100 million or whose aggregate domicile or residence in Japan during the preceding ten years is five years or less. Inheritance tax, gift tax, and inhabitant tax each use separate criteria to determine liability.Becoming a Non-Resident Does Not Mean All Japanese Taxes Are Limited to Domestic-Source Income.

Presumptions Concerning Domicile

The central question is whether the person is domiciled in Japan. The Income Tax Act Enforcement Order sets out presumptions.

Article 14, paragraph (1), concerns cases presumed to have a domicile in Japan. Its opening wording states:an individual who has come to reside in Japanis presumed domiciled in Japan if any of the following conditions applies.

(i) The person has an occupation in Japan that ordinarily requires continuous residence there for at least one year.

(ii) The person has Japanese nationality and facts sufficiently support an expectation of continuous residence in Japan for at least one year, considering a spouse or other relatives sharing their livelihood in Japan, their occupation and assets in Japan, and other circumstances.

Article 15, paragraph (1), concerns cases presumed not to have a domicile in Japan. Its opening wording states:“An individual who comes to reside overseas... is presumed not to have a domicile in Japan.”

(i) The person has an occupation abroad that ordinarily requires continuous residence there for at least one year.

(ii) The person has foreign nationality or permission to reside permanently in that country under its laws, and has no spouse or other relatives sharing a livelihood in Japan...

Both Articles containparagraph (2)provisions concerning spouses sharing the individual's livelihood and other relativessupported by that individualthat presume the family members' own domicile.Paragraph (2) Is Where the Family Members' Status Is Determined,whereas the family's location affects the individual's own determination underparagraph (1)(ii)It is.

What to Check First

These Are Presumptions, Not Conclusive Deeming Rules.

A presumption can be rebutted by contrary facts. Formal steps such as changing resident registration or filing a departure notice do not conclusively establish non-resident status.Occupation, Family and Asset Locations, Days of Presence, and Actual Living Circumstances Are Considered Together.

Many tax disputes over overseas relocation arise here.Do Not Assume Formalities Alone Are Enough.

Points that require care in practice

• Does removing resident registration make me a nonresident?The framework is in Articles 14 and 15 of the Enforcement Order. Changes in resident registration are not specified there.
• Does an Overseas Assignment of at Least One Year Make You a Non-Resident?The question is whether it meets Article 15(1)(i): an occupation ordinarily requiring continuous residence abroad for at least one year.
• What If Your Family Remains in Japan?Articles 14(1)(ii) and 15(1)(ii) refer to the location of relatives sharing your livelihood.
• What Happens in a Year When You Leave Partway Through?The treatment of the resident and non-resident periods becomes relevant.
• What If Both Japan and Another Country Treat You as Resident?tax treaty contains tie-breaker provisions.
• How Are Director Remuneration and Retirement Benefits Treated?Taxation of non-residents depends on the scope of domestic-source income.

Each of theseDetermined by the Full Set of Facts: formal documents alone cannot establish the answer.

If You Leave and Are Later Found to Have Remained Resident, Worldwide Income May Be Taxed Retroactively.Consult us before acting if you plan to relocate or take a long-term overseas assignment.

Legal basis

• Article 2(1)(iii) of the Income Tax Act (Residents), item (iv) (Nonpermanent Residents), and item (v) (Nonresidents)
• Article 7, Paragraph (1), of the Income Tax Act (Scope of Taxable Income)
• Articles 14 and 15 of the Income Tax Act Enforcement Order (Presumptions Concerning Domicile)
• Article 60-2 of the Income Tax Act (Special Provisions for Capital Gains, etc., in the Case of Departure from Japan)
• Article 95 of the Income Tax Act (foreign tax credit), foreign-source income referred to in paragraph (1)
• Article 161(1) of the Income Tax Act (Domestic-Source Income) and Article 164 (Methods of Taxation of Non-Residents)
• Resident provisions of the relevant tax treaties

An individual determination requires verification of the facts.