Taxes on Real Estate Income of Non-residents

●RealEstate Lease Income
A foreign corporation is subject to Japanese income tax only on the income it derives from sources in Japan.
The value of the loan of the real estate in Japan falls under domestic source income, and becomes the item of the aggregate taxation of the income. (In case a non-resident is an individual person, individual income tax rate shall be applied, and in case a foreign corporation , corporation tax rate shall be applied)
As a general rule, it is necessary to collect 20% of the domestic source income from the amount paid by the persons paying value by the loan, and the withholding tax of 20% shall be paid by the 10thof the next month.
However, the withholding tax is not required to be collected when the loan is paid by the individual who rents the land/house for residential use of him(her)self or his(her) relatives.

●Capital Gains from Sales of Real Estate
The income arising from the transfer of the real estate in Japan becomes the domestic source income. The capital gains derived from the transfer of the real estate, depending on the possession period, shall be returned and paid at 15% (long-term (over 5 years) capital gains) and 30% (short-term (less than 5 years ) capital gains ) as the
capital gain tax.
The person who pays value by the transfer of the real estate in Japan for a foreign corporation, as a general rule, shall collect a withholding tax of 10%, and pay it by the 10thof next month. However, the withholding is not required when the value of the transfer is equal to or less than 100 mil yen and the payment is made by the individual who obtained the real estate for residential use of him (her) self or his (her) relatives.

Taxes on Capital Gains from Transfer of Stocks ｂy Non-residents

(1) No PE (Permanent Establishment) in Japan
In principle, no tax shall be levied on the transfer of a Japanese domestic corporation’s stocks. However, when the following conditions are met, it shall be taxable (self-assessed separate taxation ). The tax rate is 30% in case a non-resident is a foreign corporation, and 15% in case it is a individual person.
●income by the transfer of stocks resembling the transfer of the business.
①When a foreign corporation owns more than 25% of a domestic corporation’s issued stocks at anytime during a three-yearperiod before the end of the business year in which the foreign corporation transfers them.
②When a foreign corporation transfers more than 5% of the domestic corporation’s issued stocks during the business year in which it transfers them.
In addition, following items shall be taxable as well:
●income from the accumulation of stocks of the same brands.
●income from the transfer of stocks of the real estate-related juridical person or income from the transfer of the beneficiary certificate of the real estate-related specific trust.
●income from the transfer of stocks acquired by the application for the qualified tax system of stock option.

(2) PE available in Japan
The capital gains of foreign corporations are treated in the same manner as those of domestic corporations, assuming that the foreign corporationhave a permanent establishment (such as a branch office) inJapan, and that their income is fromsources in Japan. The self-assessed separate taxation of 15% shall be applied.Local Inhabitant Tax on the capital gains by non-residents shall beexempted.

(3) Tax Treaty
If a tax treaty concluded between Japan and the foreign corporation’s country has regulations relating to capital gains, those regulations are given precedence. Take, for example, the case of Japan’s tax treaty with the US. and Germany. When the foreign corporation with no PE in Japan obtains capital gains from the transfer of a domestic corporation’s stock, the transaction is not subject to tax even if it meets the conditions above. Moreover, even if the foreign corporation owns a PEin Japan, its capital gains (except for those accruing from the transfer of securities of its Japanese branch) are not subject to taxation.

Tax Reforms to Encourage Investments through Funds

●SpecialTreatmentfor Direct PE Taxation
A non-resident individual/foreign corporation member (“specified foreign member “) of an Investment Business Limited Liability Partnership (LPS), that invests in shares of Japanese companies through the LPS’ general partners and other business bases inJapan, is now deemed not to have a permanent establishment (PE) in Japan (i.e., exempt from capital gains tax in Japan ), if such investor:
1. is a limited liability member of an investment business LPS or other similar foreign partnership (“Investment Partnership“);
2. is not involved in the business of the partnership;
3. holds less than 25% of the partnership assets;
4. does not have a special relationship with the general partners (not either family relationships or at least 50 %shareholding); and
5. does not have a permanent establishment in Japan other than the one related to investment partnership business

●Exception to 25/5 rule
Under the so-called “25/5 rule “, a foreign investor who invests in a Japanese firm through a fund that has no PE in Japan, and holds a total of 25% or more shares in the company, is taxed on capital gains from disposals of 5% or more of such shares.
An exception to this rule was introduced, and capital gains tax is not levied only when an investor (and not the fund ) 1) holds less than 25% of shares in a company, 2) has held the share for at least one year, and 3) the shares are not those in a failed or distressed financial institution. The investor must also be:
A) a specified foreign member; or
B) a non-resident individual / foreign company member that satisfies the following conditions:
1. the investor is a limited liability member or an Investment Partnership;
2. the investor does not execute partnership operation;
3. share holding ratio at each investor level is less than 25%; and
4. the investor does not have a PE in Japan

(source: METI, JETRO, TaiyoASGInternational)

-Related Links

“Taxes on Real Property”

“Taxes on Real Estate Income of Non-residents”

“Countries with Tax Treaties with Japan”

“Taxes on Trust Beneficiary Right of Real Estate”