Introduction
In Japan, a residency status called "Designated Activities (Digital Nomad)" has been established for individuals working remotely in Japan while employed by foreign companies. The residency period is set at six months and is not renewable, with requirements including nationality from certain eligible countries/regions, an annual income of over 10 million yen at the time of application, and enrollment in certain health insurance. Additionally, employment activities based on contracts with Japanese companies are not permitted under this residency status.
However, the issues of "staying in Japan as a digital nomad for less than six months" and "not being subject to income tax in Japan" are separate matters.
Even if you receive your salary from a foreign company to an overseas account, the portion of work actually performed in Japan may be considered domestic source income in Japan. It is important to confirm whether tax exemptions under tax treaties apply, and if Japanese taxation remains despite not being withheld in Japan, the issue arises under Article 172 of the Income Tax Act regarding "preliminary tax returns."
Japanese Taxation of Digital Nomads Starts with Tax Residency and Place of Work
Immigration status and tax residency must first be considered separately.
Under Japanese income tax law, individuals who have a residence in Japan or have had a residence for more than one year continuously are classified as "residents," while others are classified as "non-residents." "Residence" refers to the primary place of living and is determined by objective facts such as housing, occupation, family, and assets. Therefore, simply obtaining a residency status as a digital nomad does not automatically make one a non-resident for tax purposes.
However, Japan's digital nomad residency status is for six months and is not renewable, and in typical cases where one temporarily stays without moving their primary place of living to Japan, it is often considered that they are non-residents under income tax law.
In the case of being a non-resident, the income subject to taxation in Japan is generally domestic-source income. Regarding salary, it is not where the salary is received in a bank account, but rather, where the work is performed that is important. If a non-resident works both domestically and internationally and receives a salary, the portion corresponding to the work performed in Japan will generally be considered domestic-source income.
For example, if a person working for a U.S. company stays in Tokyo for three months and conducts regular business online from their accommodation in Tokyo, the fact that their salary is paid from the U.S. company to a U.S. account does not automatically exempt them from Japanese taxation. It is necessary to first consider the salary corresponding to work performed in Japan as domestic-source income. The National Tax Agency also clarifies that even if the salary is paid abroad, the salary based on work performed in Japan is considered domestic-source income.
When Does an Article 172 Tax Return Become Relevant?
The preliminary tax return under Article 172 of the Income Tax Act is not a tax return system used by general non-residents.
The National Tax Agency has established the preliminary tax return under Article 172 for cases where a non-resident has salary income, retirement income, or income from the provision of personal services with a source in Japan, but has not been subject to the 20.42% withholding tax due to reasons such as the payment location being abroad.
This is a tax return form for the individual to file and pay taxes instead of withholding. Regarding the salary income of digital nomads, it is typically examined in the following order.
For a salaried digital nomad, the analysis can generally be organized as follows:
| Question | Main Issue |
|---|---|
| 1. Resident or non-resident? | Whether the individual has a domicile or residence in Japan |
| 2. Is the salary Japan-source income | Whether employment services were physically performed in Japan |
| 3. Was Japanese tax withheld? | Whether the payment was subject to Japanese withholding |
| 4. Does a tax treaty exemption apply? | 183-day test, employer condition, PE cost-bearing condition, etc. |
| 5. Is an Article 172 filing required? | 183-day test, employer condition, PE cost-bearing condition, etc. |
For example, consider a non-resident working remotely from Japan for a foreign corporation and receiving their salary directly into an overseas account from that foreign corporation. If the foreign corporation does not have an office or similar establishment in Japan, no withholding tax is applied in Japan, and furthermore, no tax exemption under a tax treaty is applicable, then the issue of the provisional tax return under Article 172 will arise.
On the other hand, even if the payment is made abroad, if the payer of salaries, etc. has an address, residence, or office in Japan, the domestic source income is considered to have been paid domestically, and the payer may have withholding tax obligations. Therefore, it cannot be simply judged that "salary to overseas accounts = Article 172 tax return filing."
Additionally, freelance digital nomads need to be even more cautious. Japan's digital nomad residency status applies not only to employees of foreign companies but also to certain activities that provide services to clients abroad using ICT. However, not all freelance income is classified as "income from the provision of personal services" under Article 172 for tax purposes. It is necessary to individually confirm the classification of business income and income from personal services, whether there is a permanent establishment (PE) in Japan, and which provisions of applicable tax treaties apply. For non-residents conducting business with a certain business base in Japan, the National Tax Agency may also use a general tax return instead of the Article 172 specific return.
Staying Less Than 183 Days Does Not Automatically Mean No Japanese Tax
Under Japanese domestic law, even if the salary corresponding to work in Japan is considered domestic source income, there may be cases where taxation in Japan is exempted by tax treaties.
Many tax treaties recognize tax exemptions for short-term residents under conditions such as the number of days stayed in the country of employment being within the specified 183 days, the salary being paid by an employer who is not a resident of the country of employment, and the salary not being borne by a PE of the employer in the country of employment. However, specific conditions and the period for determining the 183 days vary by tax treaty.
What is important here is that the digital nomad residency status of "6 months " and the tax treaty's "183 days" are not based on the same criteria. The 6 calendar months and 183 days do not necessarily match. Additionally, the determination of 183 days under the treaty generally relies on actual physical presence, including the dates of entry and exit.
Furthermore, being within 183 days does not automatically grant tax exemption. Other requirements, such as those related to the employer and salary burden, must also be met.
For countries and regions eligible for digital nomad residency status, one of the requirements is that Japan has implemented visa exemption measures and is a country or region with which a tax treaty is concluded. However, the ability to obtain that residency status does not itself mean that the individual is recognized for tax treaty short-term resident exemptions. It is necessary to separately confirm the actual application of the treaty, including which country's tax treaty the individual is a resident of.
Therefore, the consideration of the Article 172 declaration should not be concluded solely based on the determination of domestic source income under domestic law, but should be conducted after confirming whether Japan's taxing rights remain under the tax treaty.
Leaving Japan — Article 172 Tax Return Filing Deadlines and Departure Procedures
What to be particularly cautious about regarding the relationship between digital nomads and Article 172 tax return is the timing of leaving Japan.
The preliminary tax return under Article 172 tax return must be filed and paid by March 15 of the year following the year in which the income was generated. However, if it is determined that the individual will not have a residence in Japan before that date, they must file and pay by the date they no longer have that residence. This deadline is also specified in the National Tax Agency's explanation of the Article 172 tax return.
The National Tax Agency's guide on final tax returns also states that if certain non-residents have not been subject to withholding tax for work or remuneration for personal services in Japan, they must submit a preliminary tax return and pay taxes by the time of departure when they "leave the country" for tax purposes without notifying a tax representative.
Therefore, for example, in the case of a non-resident who was working remotely in Japan while receiving salary payments from a foreign company abroad, if there is no tax exemption under the tax treaty and a declaration under Article 172 is required, it is not necessarily the case that "you can file from overseas by March 15 of the following year." Before leaving Japan, it is necessary to confirm the filing deadline, including the appointment of a tax representative.
On the other hand, conversely, when a resident of Japan leaves Japan to start working overseas as a digital nomad, the issue will be the final declaration at the time of departure when changing from resident to non-resident, rather than Article 172 tax return. There is no general standard in Japanese domestic law stating that "if you are overseas for more than 183 days, you are a non-resident"; the resident status is determined based on the center of living, etc. If a person who has a duty to file a tax return becomes a non-resident without appointing a tax representative, they are generally required to file a tax return, known as a provisional final return, by the time of departure.
If there are real estate income or other sources remaining in Japan after departure, it may be necessary to appoint a tax representative and continue the subsequent tax return in Japan. Additionally, if certain residency period requirements are met and securities worth over 100 million yen are held when leaving the country, it is also necessary to confirm taxation at the time of leaving the country separately from the usual departure declaration.
Summary
Even if you stay in Japan for a short period as a digital nomad, you cannot uniformly think that "there is no income tax in Japan because it is within 6 months" or "there is no need to declare in Japan because it is within 183 days."
If a non-resident working for a foreign company performs remote work in Japan, the salary corresponding to work in Japan may be considered domestic source income. In that case, if the short-term stay exemption under the tax treaty is confirmed and there is still Japanese taxation, but withholding has not been received due to payments made abroad, the provisional tax return under Article 172 of the Income Tax Act becomes an issue.
Furthermore, if a non-resident with a residence in Japan leaves Japan before the filing deadline, the deadline for the Article 172 tax return may be moved forward to the time of leaving Japan. Therefore, in the Japanese taxation of digital nomads, it is important to confirm the series of processes from the resident status at the time of entry, work and income during the stay in Japan, to the declaration procedures at the time of leaving Japan. On the other hand, when a resident of Japan moves overseas and becomes a digital nomad, the focus will be on the tax return at the time of departure and the appointment of a tax representative, rather than Article 172 tax return.
Mochizuki & Associates provides support for digital nomads, overseas workers, and other cross-border individuals regarding the determination of resident/non-resident status, application of tax treaties, provisional final returns under Article 172 of the Income Tax Act, final declarations at the time of departure, and tax representative procedures in Japan.
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