You send a monthly payment to an acquaintance in your home country who helps with administrative work. You outsource system development to an engineer back home. When business payments cross a border, a special obligation can arise in Japan on the paying side.
When 20.42% withholding applies
If the recipient is a non-resident of Japan (an individual who has no domicile or similar base in Japan) or a foreign corporation, then depending on the nature of the payment you may be required to withhold 20.42% of the amount and pay it to the Japanese tax office. The rate is higher than for payments that stay within Japan (see the separate article on the withholding obligation), and determining whether a payment is covered is also more complex.
Whether withholding applies is determined by the nature of the payment and by where the work was performed. Broadly speaking, remuneration for personal services performed within Japan, royalties for software or copyrights used in a business in Japan, and rent for real estate located in Japan are covered. Conversely, consideration for work that a non-resident performed outside Japan is in many cases not subject to Japanese withholding. Neither “the freelancer is overseas, so it is always 20.42%” nor “the payment goes overseas, so Japan is not involved” is correct: each payment has to be assessed on its own terms.
Treaty relief is not automatic
In addition, where Japan has a tax treaty with the other country, the withholding may be reduced or exempted. Treaty application, however, is not automatic. The relief belongs to the recipient of the payment (the non-resident or foreign corporation), but the procedure is carried out through you as the payer. In principle, before the payment is made, the “Application Form for Income Tax Convention” prepared by the recipient must be submitted by the payer to the payer’s tax office. If you pay without completing this procedure, you remain obliged to withhold and pay the 20.42% for the time being, even where the treaty provides for relief.
A common and costly error
In practice, errors like the following are common (assumptions: an individual interpreter living abroad comes to Japan and performs interpreting work within Japan for a fee of ¥1,000,000; the fee is subject to 20.42% withholding and no treaty relief applies). The payer should remit ¥795,800 after deducting ¥204,200 — but instead remits the full ¥1,000,000 as invoiced. The payer’s liability to pay the tax remains, so the payer later pays the ¥204,200 out of its own funds, potentially with additional tax for non-payment on top. Negotiating recovery from a recipient on the other side of a border is not easy.
Three checks before the money moves
There are three things to confirm before you start making payments abroad. Is the recipient a resident or a non-resident of Japan? Is the place where the work is actually carried out (the place where the services are provided) inside or outside Japan? Is a treaty notification required? If you sort out these three points before the money moves, most errors can be prevented. For precisely those payments you are unsure how to classify, seek advice before the funds are transferred.
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