Just like residence tax in Japan, you might be wondering about the typical taxes that surround our daily lives. Together with financial planner Yukako Yamazaki, we are guiding you through several taxes that individuals often pay, as shown below.
- Consumption Tax
- Income Tax
- Residence Tax
- Capital gain Tax
- Tax when purchasing a car, house
- Bathing Tax and Accommodation Tax
Please jump to the relevant area for you from the table of contents.
Table of Contents
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If you are interested in investing in Japan with NISA, you might find this article helpful.
Chapter 1: What is Consumption Tax?
The Definition
Consumption tax is a tax applied when selling goods or providing services. It is included in the price of goods or services at each stage of the transaction, but ultimately, the person who consumes the goods or receives the services bears the tax.
To avoid double taxation, businesses deduct the consumption tax they paid on purchases from the consumption tax they collected before paying the remaining amount.
The standard tax rate is 10% (including 2.2% local consumption tax). For food (excluding eating out and alcoholic beverages), the reduced tax rate of 8% (including 1.76% local consumption tax) applies.
Example
If you buy 2,160 yen worth of rice and 220 yen worth of alcohol, the consumption tax amounts are as follows:
- Rice at 8% reduced tax rate: 2,160 yen – (2,160 yen ÷ 1.08) = 160 yen
- Alcohol at 10% standard tax rate: 220 yen – (220 yen ÷ 1.10) = 20 yen
Transactions Not Subject to Consumption Tax (Non-taxable Transactions, Tax-exempt)
Most transactions involving the sale of goods, transportation, services, and advertising are subject to consumption tax. However, certain transactions that are deemed inappropriate for taxation due to social policy considerations are not subject to consumption tax.
The example of Non-taxable transactions are as follows:
- Salaries and wages
- Donations, congratulatory money, and condolence money
- Subsidies and grants from the national or local government
- Insurance payouts and mutual aid payments
- Dividends from stocks and distributions from investments
- Compensation for damages to body or property
In addition, the example of tax-exempts transactions include as follows;
- Transfer or lease of land
- Transfer of securities such as government bonds and stock certificates
- Transfer of stamps, checks, and promissory notes
- Transfer of gift certificates and prepaid cards
- Issuance of registrations, licenses, permits, inspections, certifications, examinations, and official documents by the government
- Provision of services related to foreign exchange transactions
- Provision of social insurance medical benefits
- Provision of nursing care insurance services
- Provision of services through social welfare projects
- Midwifery services
- Cremation and burial fees
- Certain transfers or leases of goods for persons with physical disabilities
- School education and the transfer of textbooks
- Lease of residential housing
Source: National Tax Agency
Chapter 2: What is Income Tax?
Income tax is a tax on an individual’s income. The amount of income is calculated by subtracting necessary expenses from the total annual income. Various deductions (basic deduction, spouse deduction, donation deduction, life insurance premium deduction, etc.) are then subtracted from the income to determine the taxable income.
Taxable Income = Income – Necessary Expenses – Income Deductions
Income tax is applied to this taxable income. The income tax system uses a progressive tax rate, meaning that the more taxable income you have, the higher the tax rate will be.
Income Tax Rate Table for Fiscal Year 2024 (Reiwa 6)
This table shows the income tax rates and corresponding deduction amounts for different ranges of taxable income for fiscal year 2024 (Reiwa 6).
Source: National Tax Agency
| Taxable Income Range (JPY) | Tax Rate | Deduction Amount (JPY) |
|---|---|---|
|
Up to 1,950,000 |
5% |
none |
|
1,950,001 – 3,300,000 |
10% |
97,500 |
|
3,300,001 – 6,950,000 |
20% |
427,500 |
|
6,950,001 – 9,000,000 |
23% |
636,000 |
|
9,000,001 – 18,000,000 |
33% |
1,536,000 |
|
18,000,001 – 40,000,000 |
40% |
2,796,000 |
|
Over 40,000,000 |
45% |
4,796,000 |
Calculation Example
For example, if the taxable income is 6,000,000 yen, the income tax is calculated as follows according to the table:
6,000,000 yen × 20% – 427,500 yen = 772,500 yen (Income Tax)
If there are tax credits such as the mortgage loan deduction or donation deduction, these are subtracted from the calculated income tax.
Differences in Taxable Income Range for Permanent Residents and Non-Permanent Residents
Foreigners living in Japan may have both domestic and foreign income.
Under the Income Tax Act, individuals who have an address in Japan or have lived in Japan for more than one year are classified as “residents,” while individuals who do not meet these criteria are classified as “non-residents.” The scope of taxable income differs for each category.
Additionally, residents are further divided into “permanent residents” and “non-permanent residents,” with distinctions made in the range of taxable income.
| Classification | Definition | Scope of Taxable Income | |
|---|---|---|---|
|
Residents |
Permanent residents |
A person who
Has an address in Japan, or
Has lived in Japan continuously for more than one year. |
All Income Earned Domestically and Abroad |
|
Non-Permanent residents |
Person who do not have Japanese nationality, and lived in Japan for a total of 5 years or less within the past 10 years. |
Income earned in Japan, Foreign income that is paid in Japan or remitted to Japan |
|
|
Non-residents |
Individuals who do not meet the criteria for being classified as residents. |
Subject to tax only on income earned in Japan. |
|
So, overall,
- Permanent Residents: All income earned domestically and abroad is subject to income tax.
- Non-Permanent Residents and Non-Residents: Generally, only income earned in Japan is subject to income tax. However, for non-permanent residents, foreign income received in Japan is also taxable.
Methods of Paying Income Tax
The method of paying income tax varies depending on the employment status:
Employees (Withholding Tax)
- Employees, typically earning up to 20 million yen annually, have income tax withheld by their employers from their salaries.
- Any discrepancies are adjusted through year-end adjustments (nenmatsu chousei).
Employees Earning Over 20 Million Yen (Tax Return)
- Employees earning over 20 million yen annually must file a tax return and pay income tax themselves.
Self-Employed Individuals and Freelancers (Tax Return)
- Self-employed individuals and freelancers, who do not have withholding tax, calculate their annual income and income tax, filing a tax return for payment.
Individuals with Side Jobs or Additional Income
- Individuals earning a certain amount from side jobs or other sources apart from their main income must also settle their income tax through tax returns.
Chapter 3: What is Residence Tax in Japan?
Resident tax is a tax paid to the municipality where one resides. Individuals with certain income levels are required to pay this tax in the following fiscal year.
Resident tax includes prefectural taxes, which are paid together to the municipality.
Breakdown of Individual Residence Tax in Japan
Resident tax consists of two components: the “per capita rate,” which is paid regardless of income level, and the “income rate,” which varies based on income.
The per capita rate varies by municipality but generally ranges from 5,000 yen to 6,000 yen annually.
The income rate is set at 10%.
Example breakdown of the per capita rate (annual 5,000 yen):
- Municipal tax (市町村民税 / Shichōsonminzei): 3,000円
- Prefectural tax (都道府県民税 / Todōfukenminzei): 1,000円
- Forest environment tax (森林環境税 / Shinrin Kankyōzei): 1,000円 from the Reiwa 6 fiscal year
Example breakdown of the income rate (standard tax rate 10%):
- Municipal tax (市町村民税 / Shichōsonminzei): 6%
- Prefectural tax (都道府県民税 / Todōfukenminzei): 4%
Calculation example for residence tax (taxable income 6 million yen): The total amount of the per capita rate and income rate determines the resident tax amount. Similar to income tax calculation, the standard tax rate is applied to the taxable income after various income deductions, and then the per capita rate is added.
6,000,000 yen (taxable income) × 10% – (tax deduction amount*) = 600,000 yen (income rate amount)
600,000 yen (income rate amount) + 5,000 yen (per capita rate amount) = 650,000 yen (annual resident tax)
Methods of Paying Residence Tax in Japan
Residence tax payments are handled through two methods: “normal collection” and “special collection,” depending on one’s employment status.
Self-employed individuals and freelancers use “normal collection.” Local municipalities send tax payment notifications detailing the tax amount to taxpayers. Taxpayers then pay using methods such as bank transfers, convenience stores, or mobile payments.
Employees generally use “special collection.” Companies deduct taxes directly from employees’ salaries and remit them on behalf of the employees.
Chapter 4: Other Tax in Japan
In addition to the taxes mentioned above, here are other taxes that you may encounter.
Capital gains Tax
Capital gains tax applies to profits earned from selling assets such as land, buildings, or stocks. For example, if you bought stocks for 200,000 yen and sold them for 300,000 yen, the 100,000 yen difference is subject to taxation.
For land or buildings, the capital gain is taxable after deducting acquisition costs, transfer expenses, special deduction amounts, and so on from the selling price.
The tax rate on capital gains varies depending on the type of asset sold. For instance, capital gains from stocks are taxed at 20.315%, while for land or buildings, if held for over 5 years, the tax rate is 15%, and if held for 5 years or less, it’s 30%.
When purchasing a car
- Automobile Tax (自動車税 / Jidōsha-zei): Taxed annually based on engine displacement. Owners as of April 1st each year are obligated to pay.
- Automobile Weight Tax (自動車重量税 / Jidōsha jūryōzei): Taxed upon initial registration and at the time of vehicle inspection, based on the vehicle’s weight.
- Environmental Performance Levy (環境性能割 / Kankyō seinō-wari): Taxed based on fuel efficiency. Vehicles with better fuel efficiency have lower tax rates.
- Consumption Tax (消費税 / Shōhizei): A 10% tax applied to the vehicle’s base price plus accessories.
When purchasing a house
When purchasing a house, there are two types of taxes involved: one-time taxes incurred at the time of purchase and annual taxes incurred after purchase.
Taxes incurred at the time of purchase:
- Stamp Duty (印紙税 / Inshi-zei)
- Real Estate Acquisition Tax (不動産取得税 / Fudōsan Shutokuzei)
- Registration and License Tax (登録免許税 / Tōroku Menkyozei)
- Consumption Tax (消費税 / Shōhizei)
Annual taxes incurred after purchase:
- Property Tax (Fixed Asset Tax) (固定資産税 / Kotei Shisanzei)
- City Planning Tax (都市計画税 / Toshi Keikakzei)
Bathing Tax and Accommodation Tax
- Bathing Tax (入湯税 / nyūtozei)
The bathing tax is a levy imposed by municipalities on bathers to support the maintenance of environmental hygiene facilities, protective management facilities, and to promote tourism. The standard tax rate is 150 yen per person per day.
- Accommodation Tax (宿泊税 / Shukuhakuzei)
The accommodation tax is introduced to cover costs promoting regional tourism and is levied on guests staying in certain areas such as Tokyo, Osaka, and Fukuoka. Rates vary by region; for instance, in Tokyo, the tax is 100 yen per person per night for stays costing between 10,000 yen and less than 15,000 yen, and 200 yen for stays costing 15,000 yen or more. Stays costing less than 10,000 yen per person per night are exempt from taxation. (As of June 2024)
