As the old saying goes, “The only constants are death and taxes.” If you plan to live and work in Japan, be prepared to pay your fair share of taxes.
Japan’s income tax rates are relatively low for middle-income earners compared to other developed nations, especially when Social Security deductions are considered. However, for high earners, the tax system becomes more progressive.
Disclaimer: This article, based on information available as of April 2024, is for general purposes only and is not intended as tax advice. Each individual’s tax situation is unique, and you should consult a qualified tax professional for guidance on your specific circumstances. We make no warranties about the accuracy or completeness of this information and accept no liability for actions taken based on its content.
Residents of Japan can expect to pay three main types of taxes:
Income Tax
This is divided into national income tax, which is called shotokuzei (所得税) in Japanese, and resident tax, which is called juminzei (住民税). National income tax is levied on worldwide income, while resident tax is levied by your local municipality and prefecture based on your income from the previous year.
Resident’s tax is a flat rate of around 10% on top of your national income tax.
Japan’s national income tax is progressive, meaning that the tax rate increases as your taxable income increases. Here’s a breakdown of typical tax rates:
- Less than ¥1,950,000 (approximately US $12,900): 5% of your taxable income
- ¥1,950,000 to ¥3,300,000 ($12,900 ~ $21,800): 10% of your taxable income, minus ¥97,500 ($650)
- ¥3,300,000 to ¥6,950,000 ($21,800 ~ $45,900): 20% of your taxable income, minus ¥427,500 ($2,900)
- ¥6,950,000 to ¥9,000,000 ($45,900 ~ $59,400): 23% of your taxable income, minus ¥636,000 ($4,200)
- ¥9,000,000 to ¥18,000,000 ($59,400 ~ $118,800): 33% of your taxable income, minus ¥1,536,000 ($10,100)
- ¥18,000,000 to ¥40,000,000 ($118,800 ~ $264,000): 40% of your taxable income, minus ¥2,796,000 ($18,500)
- Over ¥40,000,000 ($264,000): 45% of your taxable income, minus ¥4,796,000 ($31,700)
Additionally, a 2.1% surtax, known as the Reconstruction Special Income Tax, is applied to the income tax you owe.
This tax funds recovery projects from the Great East Japan Earthquake. It was initially set to expire in 2037; however, there are now government proposals to extend this period.
Consumption Tax
In Japan, the national sales tax, known as Shohizei (消費税), is generally set at 10% and applies to a wide range of goods and services, including dining at restaurants.
However, essential items like groceries, non-alcoholic beverages, and take-out food benefit from a reduced tax rate of 8%. Newspapers published more than twice a week are also eligible for this lower rate.
Social Security Tax
Social Security Tax: Japan’s robust social security system is funded through a combination of mandatory social insurance contributions, usually split equally between the employee and the employer. Here’s an overview of the major contributions:
- Health Insurance: The rate is currently around 9.98% for employees, but it may vary slightly depending on your location. This is split equally between the employee and the employer.
- Social Pension: The employee contribution rate is currently 18.30%, with a cap on the amount paid for higher salaries. Employers contribute an equal amount.
- Nursing Care Insurance: This tax applies to individuals between the ages of 40 and 64, with a fixed rate of 0.91% for the employee portion.
- Other: There may also be contributions for unemployment insurance (about 0.60% for employees).
Other types of taxes that you may encounter in Japan include the following:
Capital Gains Tax
Capital gains tax, known as Joto Shotokuzei (譲渡所得税), varies based on the type of asset and the residency of the seller.
- Assets: Capital gains taxes apply to the sale of various assets, including stocks, real estate, and other investments.
- Residency: The tax treatment can differ for Japanese residents and non-permanent residents.
There are two main methods for taxing capital gains in Japan:
- General Taxation: This method applies to a range of non-real estate assets such as stocks, gold bullion, jewels, paintings, antiques, boats, and machinery, along with intellectual properties like patents and copyrights. The method of calculating capital gains varies depending on the duration of asset ownership.
For an ownership period of 5 years or less:
Formula (A): Taxable Capital Gains = Sale Price − (Acquisition Cost + Sale Expenses) − Special Deduction of ¥500,000
For an ownership period over 5 years:
Formula (B): Taxable Capital Gains = (Sale Price − (Acquisition Cost + Sale Expenses) − (Special Deduction of ¥500,000)) × 1/2
- Separate Taxation: This method is specifically for real estate and publicly traded stocks, where capital gains are taxed at a flat rate, independent of other income. The rates vary based on the asset type and ownership duration:
- Real Estate:
- Short-term Gains (held for less than 5 years): 39.63%
- Long-term Gains (held for more than 5 years): 20.315%, with potential for special deductions.
- Listed Stocks: Gains are uniformly taxed at 20.315%, irrespective of the holding period.
Property Tax
If you own land or buildings, you’re subject to an annual property tax based on the property’s appraised value as of January 1 each year. There are two main types:
- Fixed Asset Tax: This is the primary property tax, known as kotei shizansei (固定資産税), with rates typically ranging from 1.4% to 4% depending on the property type and location. Land and buildings are assessed separately.
- City Planning Tax: An additional tax, called toshi kekakuzei (都市計画税), is calculated as a percentage of the fixed asset tax, usually between 0.2% and 0.4% of the appraised value.
The property owner as of January 1 is liable for the full year’s property taxes. Properties acquired mid-year are taxed on a pro rata basis for the remaining months.
Local authorities assess values using standardized procedures considering factors like location, size, and usage, with reassessments typically occurring every three years, potentially altering tax liabilities.
Inheritance Tax
Inheritance tax, which is called sozokuzei (相続税) in Japanese, is charged to beneficiaries who inherit assets rather than the estate itself. The tax covers a variety of assets, including real estate, cash and bank deposits, investments, life insurance payouts, and valuable personal belongings.
The tax system is progressive, meaning rates increase with the total value of inherited assets and vary based on the beneficiary’s relationship to the deceased. Here are key points to understand:
- Basic Exemption: Each inheritance benefits from a basic exemption of ¥30 million ($200,000) plus an additional ¥6 million ($40,000) per statutory heir. No tax is due if the net value of the inheritance (after deducting debts and funeral expenses) falls below this threshold.
- Progressive Rates: Tax rates range from 10% to 55% on amounts exceeding the exemption, with higher values attracting higher rates.
- Spousal Credit: A significant tax relief is available for surviving spouses, usually the greater of ¥160 million ($1 million) or 50% of the tax due.
Gift Tax
Gift Tax, which is called zoyozei (贈与税) in Japanese, follows a similar structure to inheritance taxes, with some key differences. Gift tax applies when you receive a gift exceeding a certain value from another person. This includes:
- Cash and bank deposits
- Stocks, bonds, and other investments
- Real estate (land and buildings)
- Life insurance payouts (depending on beneficiary relationship)
- Other valuable assets
In Japan, there is an annual gift tax exemption per recipient. Individuals can receive gifts valued up to ¥1.1 million (approximately $7,300) without incurring gift tax. Any amount exceeding this threshold may be subject to taxation. Additionally, there is a special tax deduction for gifts made between certain family members (such as from parents or grandparents to their children or grandchildren).
If the donor is aged 60 or older, and the recipient is aged 20 or older, a special deduction of up to ¥25 million (around $165,000 USD) can be claimed. This is in addition to the regular exemption, but a tax return must be filed within a specific timeframe.
Similar to inheritance tax, gift tax uses a progressive tax rate system. The tax rate you pay depends on the total value of the gift you receive after subtracting the exemption and any applicable deductions. The rates typically range from 10% to 55%, with higher rates applied to larger gifts.
Strategies like spreading out gifts over multiple years or utilizing the special deduction for family gifts can help minimize gift tax liability.
Conclusion
For foreigners living in Japan, understanding the local tax system is crucial. While the consumption tax may seem high, it is instrumental in financing essential public services and infrastructure that enhance daily life.
Whether these taxes feel “worthwhile” ultimately depends on the value you place on Japan’s comprehensive social safety net and the quality of public services.
