Japanese tax on rental income – about withholding tax and tax returns
Recently, the number of investors who purchase properties in Japan is rapidly increasing, since Tokyo will host the Olympic Games in 2020 and investors have a high expectation for it. Also, the number of foreign visitors are sharply increasing and they enjoy the Japanese culture during their stay. Some foreign visitors go to ski resorts like Niseko and Hakuba, which are renowned for its consistency and quality of powder snow throughout the winter, and investors regard such resort areas as invest opportunities as well. In this article, we will explain Japanese taxation related to investments to properties.
What is your taxpayer status in Japan?
Your Japanese resident status affects whether or not you need to pay tax in Japan on your foreign income. Non-residents only pay tax on their Japanese income – they don’t pay Japanese tax on their foreign income. Residents normally pay Japanese tax on all their worldwide income, so it is whether it’s from Japan or abroad.
Whether you are Japanese resident usually depends on several factors, such as how many days you spend in Japan, your address, your job, situation of your family, nationality, visa status, etc. Your resident status should be determined comprehensively. Click here for more information of taxpayer status.
Purchasing real estate in Japan
There is an increasing number of foreigners purchasing real estate here in Hakuba, Japan, ever since Hakuba became well-known for one of the greatest ski resorts in Asia. In the past, the most common investments are from Australia, but nowadays investments coming from Asia, such as China, Taiwan, Singapore are rapidly increasing. Some of them acquire a property for investment purposes and such non-resident owners consider leasing their properties.
Needless to say, non-Japanese living in Japan look for Hakuba/Niseko as investment opportunities, or purchase properties as their second home. Such Japanese resident owners may consider leasing their properties during their absence as well.
How to calculate profits on rental income
You may have to pay Japanese income tax even if your taxpayer status is non-resident, in case you rent out a property and your gains are above the tax-free allowance. Please be aware that for properties owned by a company, rental income should be treated as the same way as any other income from its business.
Rental income includes:
・Rent
・Key money
・Contract renewal fees
You must pay income tax on the profit you make from renting out the property, after deductions for “allowable expenses”. Allowable expenses are things you need to spend money on the day-to-day running of the property.
Costs you can claim to reduce tax:
・letting agents’ fees
・legal fees
・accountants’ fees
・buildings and contents insurance
・maintenance and repairs to the property (but not improvements)
・utility bills, like gas, water and electricity
・property tax
・services you pay for, like cleaning or gardening
・other direct costs of letting the property, like phone calls, stationery and advertising
Allowable expenses don’t include “capital expenditure” – like renovating it beyond repairs. Such costs should be depreciated over useful lives as fixed assets, and the depreciation costs will be treated as deductible expenses each year.
Withholding tax and tax returns for non-resident owners
If the tenant of your property is a company (e.g. a company renting the apartment for their employee), the tenant must withhold 20.42% of the monthly rent and pay it to the tax office by the 10th day of the following month. If the withholding tax paid is higher than the amount liable, the excess can be refunded. It means that if your property business is in deficit, you don’t need to pay tax and you can claim a tax refund. (Maintenance costs or depreciation expenses tend to be large for property business, and income tax can be often refunded.)
In that case, you will need to appoint a tax agent in Japan to file a tax return on your behalf to the tax office. We offer these services online, so even if you are an overseas resident, we can provide tax preparation services. Click here for more information about our taxation services. Please note that even if you cannot receive a refund, you have to file tax returns to the tax office, when taxable gains are above the tax-free allowance.
If an individual leases your property for residential purposes, he/she is not required to withhold any rent. However, even if your taxpayer status is non-resident and there’s no withholding tax, you are still subject to aggregate taxation and need to pay tax, when taxable gains are above the tax-free allowance. In that case, you will need to appoint a tax agent in Japan to file a tax return on your behalf to the tax office each year.
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