Tax Residency in Japan
1. Criteria for Determining Tax Residency in Japan
According to Article 2 of the Japanese Income Tax Law, an individual is considered a tax resident of Japan if they meet any of the following criteria:
- Domicile in Japan: An individual is considered domiciled in Japan if they have their permanent home or principal place of residence in Japan.
- Residence in Japan for more than 183 days: An individual is considered a resident of Japan if they reside in Japan for more than 183 days in a calendar year.
- Center of life in Japan: An individual is considered to have their center of life in Japan if their personal and economic interests are primarily centered in Japan.
2. Impact of International Tax Treaties on Tax Residency
Japan has entered into numerous tax treaties with other countries to prevent double taxation and promote cross-border trade and investment. These treaties may modify or provide exceptions to the standard criteria for tax residency as defined in domestic law.
Key Provisions in Tax Treaties Relating to Tax Residency
- Article 4 of the Japan-US Tax Treaty: This article provides a tie-breaker rule for individuals who are considered residents of both Japan and the US under each country's domestic law. The tie-breaker rule considers factors such as the individual's permanent home, habitual abode, and economic interests.
- Article 5 of the Japan-UK Tax Treaty: This article provides an exception to the 183-day rule for individuals who are employed in Japan for less than 183 days in a calendar year. These individuals are not considered residents of Japan for tax purposes.
Rationale for Treaty-Specific Modifications
The treaty-specific modifications to the criteria for tax residency aim to provide clarity and prevent double taxation by establishing clear rules for determining tax residency in cases involving cross-border activities. They reflect the mutual agreement between Japan and the other treaty partner to facilitate tax compliance and enhance economic cooperation between the two countries.
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