Introduction
For companies employing employees in Japan, one of the most important tax procedures related to payroll is the handling of "residential tax (individual residential tax)." Unlike income tax, residential tax is levied based on the previous year's income, making it a difficult system to understand for foreign companies and newly established foreign-affiliated companies in Japan.
In practice, a system called "special collection" is adopted, where companies deduct taxes from employees' salaries and pay them to the local government. In Japan, this special collection is the principle, and companies are required to fulfill certain administrative obligations as salary payers.
At foreign-affiliated companies' bases in Japan, misunderstandings about the collection methods and payment procedures for residential tax often arise due to differences in the headquarters' salary systems and overseas tax systems. This article organizes the basic structure of Japan's residential tax system, the mechanism of special collection, practical procedures, and points for practical response, keeping in mind foreign-affiliated companies' bases in Japan.
1. Basic Structure of Japan's Residential Tax System
Japan's individual residential tax is a local tax that combines prefectural tax and municipal tax, and the principle of "previous year's income taxation" is adopted. In other words, residential tax is levied for the period from June 2026 to May 2027 based on income from 2025.
The taxing authority for residential tax is the municipality where the individual resides as of January 1 each year. Therefore, even if an employee moves during the year, the residential tax for that year is generally paid to the municipality where they lived on January 1.
Residential tax consists of two main elements.
・Income portion (taxed based on previous year's income)
・Flat rate portion (fixed amount taxation)
As a general guideline for tax rates, the income portion is about 10% (4% for prefectures + 6% for municipalities), and the flat rate portion varies slightly by municipality but is generally a few thousand yen per year.
What is important for foreign-affiliated companies is that the resident tax is not calculated by the company like income tax, but rather each municipality determines the tax amount and notifies the company of the result.
2. What is special collection?
There are two types of collection methods for resident tax: "special collection" and "ordinary collection."
Special collection is a system where the company, as the salary payer, deducts resident tax from employees' salaries and pays it to the municipality. In Japan, salary earners are generally required to use special collection.
On the other hand, ordinary collection is a method where the employee themselves pays the resident tax using a payment slip sent by the municipality. This method is usually adopted by self-employed individuals.
For salary earners, special collection by companies is the principle according to local tax law, and companies cannot generally change to ordinary collection at the request of employees. In recent years, municipalities have been promoting the thorough implementation of special collection, and even foreign-affiliated companies are required to comply with special collection when paying salaries in Japan.
3. Annual schedule for special collection
The special collection of resident tax is operated on a fixed schedule throughout the year.
First, by the end of January each year, companies must submit a "salary payment report" to the municipality where each employee resides. Based on this information, the municipality calculates the resident tax amount.
Subsequently, usually around May to June, the following documents are sent from the municipality to the company.
・Notification of special collection tax amount determination
・Payment slip
・Tax amount list
Based on this notification, the company deducts resident tax from salaries in 12 installments from the June salary to the following May salary.
The deducted resident tax must be paid to the municipality by the 10th of the following month, in principle. For example, the resident tax deducted from the June salary must be paid by July 10.
Additionally, companies with a certain number of employees may be able to utilize a "special exception for payment deadlines" to consolidate payments into two times a year upon application.
4. Practical issues commonly arising in foreign-affiliated companies
In foreign-affiliated companies' Japan offices, several unique issues arise regarding the special collection of resident tax.
First, foreign employees who arrive in Japan immediately often do not have any previous year's income in Japan, so they are frequently not taxed on resident tax in their first year. As a result, resident tax deductions may suddenly begin in the second year of their assignment, reducing their take-home pay. It is advisable for companies to provide prior explanations to foreign employees.
Next, even if the overseas headquarters bears the salary, employees working in Japan are subject to Japanese resident tax. Even if the salary is paid from overseas, if the Japan office is responsible for payroll calculations or expense processing, there may be an obligation for special collection.
Additionally, for dispatched employees or expatriates, the structure of salary payment and cost burden becomes complex, necessitating clarification not only of withholding income tax but also of the entity responsible for collecting resident tax.
5. Handling of resident tax when employees resign or change jobs
When an employee resigns partway through the year, the handling of uncollected resident tax becomes an issue.
Generally, the following methods are adopted.
A method of collecting the remaining resident tax in a lump sum at the time of resignation
A method of switching to ordinary collection after resignation
If the resignation occurs between January and May, it is generally common practice to collect the remaining amount in a lump sum from the final salary or retirement allowance. On the other hand, if the resignation occurs between June and December, it is also possible to switch to ordinary collection.
Additionally, if an employee transfers to another company, it is possible to continue special collection at the new workplace by following certain procedures.
As a company, it is necessary to explain the processing of resident tax at the time of resignation to employees and to appropriately submit the notification of transfer to the local government.
6. Compliance and Practical Systems in Foreign Companies
In recent years, local governments in Japan have been strengthening the enforcement of special collection, and companies are strongly required to implement special collection. Particularly for foreign companies, even if the number of employees at the Japan base is small, the obligation as a salary payer is generally not exempted.
In practice, it is important to establish the following systems.
Management of resident tax in the payroll system
Management of notifications by municipality
System for submitting salary payment reports
Management of transfers for retirees and job changers
Additionally, since Japan's resident tax is managed by each municipality, if employees' residences are spread across multiple municipalities, the payment destinations may also be dispersed. Many companies aim to streamline procedures through outsourcing payroll calculations and collaborating with tax professionals.
7. Summary
Japan's special collection system for resident tax is a mechanism where companies deduct employees' taxes from their salaries and pay them to the local government, making it a fundamental and important compliance area for companies paying salaries in Japan.
For foreign companies, there are many characteristics that differ from overseas tax systems, such as the previous year's income taxation system, management by municipality, and processing at the time of resignation. Additionally, while resident tax does not arise in the first year of assignment for foreign employees, tax burdens begin in the second year, which is also a practical point of caution.
For companies operating a base in Japan, it is important to understand the various systems such as payroll calculation, withholding income tax, social insurance, and resident tax in an integrated manner and to establish an appropriate internal management system. Especially for international companies, complex issues arise regarding secondments and overseas salaries, so it is advisable to develop practical systems in collaboration with tax professionals.
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