25 Aug 2009

Income sourced within Japan

by Darren

The concept of source in Japan is dependent upon whether the company is domestic or foreign. A domestic Japanese company calculates its taxable income which is gross revenue less costs, expenses and losses. Japanese income tax is applied on the companies worldwide income. Tax credits are available for any taxes paid in foreign jurisdictions. Foreign companies are only taxed on income from business activities through the use of a permanent establishment in Japan. Japanese tax is imposed only on the profits that are allocated or attributed to the permanent establishment. If a foreign company has Japan sourced profits which are not attributed to the PE then these are not taxed in Japan. A Permanent Establishment (PE) can be through a branch, construction activity or agency relationship. A branch would need to have a fixed place of establishment in Japan such as an office or factory. An office for the purpose of holding inventory, conducting market research or providing information is not included in the PE Definition. A construction PE includes installations and constructions within Japan for a period of greater than 1 year. Agency PE is where your business has an agent in Japan who is authorized to conclude contracts and regularly exercises authority on behalf of your company. Note authorization to purchase on behalf of the company does not constitute a PE. Examples of income sourced in Japan would include: Interest income from a bank in Japan Dividends from shares listed one the Tokyo Stock Exchange Sale of goods or provision of services within Japan Salary and bonus received from employment contracts entered into in Japan

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