In terms of repatriating branch profits earned in Japan to the office’s home country, between a Japan subsidiary company and a Japan branch office, which would be better?
★ Explanation ★
1. Tax treatment on transfer of funds
For a Japan branch office, when it remits its branch profits from its Japan office to its overseas head office, as it is considered the same entity as its head office, the transfer of profit is treated simply as a transfer of funds, making it a non-taxable transaction. Also, the process of transferring funds from the home country (head office) to the Japan branch office is relatively easy.
On the other hand, a Japan subsidiary company cannot do a simple transfer of funds. Instead, they are treated as dividends, interest, and royalties. As a general rule, withheld income tax and special income tax for reconstruction needs to be levied.
It is not uncommon for profit transfers from subsidiary company to foreign company to be taxed, so this makes a branch office more favorable.
2. Tax conventions
Tax conventions are bilateral agreements designed to resolve issues that involve double taxation of passive and active income. As of June 2017, Japan has 68 conventions, etc. applicable to 128 jurisdictions. Japan has conventions with many of what we refer to as developed countries (e.g. the United States, Canada, the United Kingdom, etc.). However, there are parts of Asia and Latin America where there is no current convention with Japan.
Among the countries in Africa, Japan only has conventions with 11 jurisdictions, including Egypt, South Africa, and Zambia. As for Taiwan, a framework equivalent to a tax convention was established, which consists of (1) a private-sector tax agreement with Japan’s Interchange Association and Taiwan’s Association of East Asian Relations, and (2) Japanese domestic legislation to implement the provisions of the private-sector tax arrangement in Japan.
Japan’s Tax Convention Network (Ministry of Finance home page)
Also, you may refer to Q114 (Chapter 7, 3-6)