Tell me about the “residents” and “nonresident” statuses in Japan.
★ Explanation ★
1. Treatment under domestic (Japanese) laws
Under Japan’s Income Tax Act, a “resident” is defined as an individual who has domicile or has had a residence continuously for one year or more in Japan. Any individual who is not a resident is automatically considered a “nonresident”.
The term “domicile” refers to the “base and center of one’s life”; that is, regardless of prolonged absence in the said area, they will “eventually return home” to that location. On the other hand, the term “residence” refers to a location that “is not the base and center of one’s life, but is currently where one resides”. While the difference between the two terminologies may be difficult to grasp, comprehensively speaking, one is classified as either a “residence” or a “nonresident”.
A corporate entity therefore is judged whether it is a domestic corporation entity or a foreign corporate entity depending on the location of its head office. This is generally referred to as the principle of head office location.
2. Treatment under tax treaties
The aim of tax treaties is to resolve issues involving double taxation due to difference in laws between Japan and a different country. A method has been established to determine whether or not an individual or corporate entity is a resident or nonresident of Japan. Generally, entities judged according to the following:
① The location of a permanent residence;
② Central location of interest
③ A place of daily dwelling
For a corporate entity, depending on whether the counterpart country has substantial control over the concerned entity or not, when judging whether the entity is a domestic corporation or a foreign corporation (principle of place of management and control), as the principle of place of head office mentioned prior cannot be applied, there is the problem of the entity being considered a resident of both treaty countries. In such a case, it may be possible to solve this problem by applying the tax treaty by regarding it as a “resident” of the country where there is a place that substantially controls the corporation.