Leaving Japan or Managing Overseas Assets? 3 Japanese Tax Rules Global Executives Often Miss

For global executives and international investors, the most expensive Japanese tax problems are not always caused by high tax rates.

They are often caused by timing, legal status, and income classification.

A severance payment received shortly after leaving Japan may be taxed very differently from the same payment received before departure. An overseas property loss that appears deductible on a foreign tax return may be restricted in Japan. Even retaining a director title after relocating overseas can create continuing Japanese withholding tax.

Here are three technical Japanese tax rules that foreign executives, company owners, and internationally mobile investors should review before making a major financial or relocation decision.

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1. Receiving Severance Pay After Leaving Japan May Trigger 20.42% Withholding

Imagine that you resign from a Japanese company, leave Japan, and become a non-resident.

Several weeks or months later, your former employer pays your retirement allowance or severance package.

Many executives assume that the payment will receive Japan’s favorable retirement income treatment automatically. However, when qualifying retirement income is paid to a non-resident, the Japanese payer may generally be required to withhold 20.42% of the applicable gross payment.

This can create a surprisingly large cash-flow cost.

A JPY 30 million payment, for example, could result in more than JPY 6 million being withheld before the funds reach you.

A refund may be available—but it is not automatic

Japanese tax law provides a special procedure known as the optional taxation of retirement income for non-residents.

By filing the appropriate Japanese tax return, the recipient may elect to have the retirement income recalculated broadly as though it had been received while the individual was a Japanese tax resident.

Depending on the facts, this may allow the application of:

• The Japanese retirement income deduction
• Preferential retirement income calculations
• Progressive tax rates based on the recalculated retirement income
• A refund of part of the 20.42% tax previously withheld

The potential refund can be substantial, particularly where the executive has a long period of service.

However, the calculation may be affected by the length of service, the nature of the payment, the period attributable to Japanese employment, previous retirement payments, and whether special rules for directors or short-term employees apply.

Who should review this issue?

You should obtain advice before or immediately after departure if:

• You expect to receive severance pay after leaving Japan
• Part of your retirement package will be paid in a later tax year
• Your employer has already withheld 20.42%
• You held a director or executive position
• Your service period included both Japanese and overseas assignments

The departure date and payment date should not be decided independently of the tax analysis.

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2. Overseas Used-Property Depreciation May No Longer Reduce Your Japanese Salary Income

For many years, high-income residents of Japan invested in used overseas residential properties, particularly wooden properties in the United States.

Because Japan’s simplified useful-life rules could produce relatively large depreciation deductions, the property could generate a tax loss even when it produced positive cash flow.

That loss was then used to offset salary or other income subject to Japan’s progressive tax rates.

Since 2021, this strategy has been significantly restricted.

Where a loss from an overseas used building is attributable to depreciation calculated using the simplified useful-life method, the relevant portion of the loss is generally treated as though it had not arisen.

As a result, the restricted loss cannot generally be used to offset:

• Japanese salary income
• Business income
• Income from Japanese rental properties
• Other categories of income that would otherwise qualify for loss offset

The depreciation is not necessarily lost forever

This does not always mean that the restricted depreciation disappears permanently.

When the overseas property is eventually sold, the amount previously restricted may affect the calculation of the building’s adjusted tax basis. In practical terms, it may reduce the taxable gain calculated in Japan at the time of sale.

The tax benefit has therefore often been deferred and reclassified, rather than simply eliminated.

This makes the exit strategy just as important as the annual rental-income calculation.

Common reporting risks

Foreign property owners frequently encounter problems involving:

• Incorrect allocation of the purchase price between land and building
• Use of a depreciation period that is not accepted for Japanese tax purposes
• Failure to convert acquisition costs and depreciation into Japanese yen correctly
• Differences between foreign and Japanese depreciation records
• Failure to track restricted losses for the eventual sale calculation
• Incorrect foreign tax credit treatment
• Failure to report overseas bank accounts or foreign assets separately

A property may be profitable under US, UK, Australian, or European tax rules while producing a completely different result under Japanese tax law.

Foreign tax returns should therefore not be copied directly into a Japanese return.

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3. A Director Living Overseas May Still Be Taxed in Japan

For an ordinary employee, the basic rule is relatively straightforward.

When an employee of a Japanese company relocates overseas, becomes a Japanese non-resident, and performs all employment duties outside Japan, the salary for those overseas services is generally not treated as Japanese-source employment income.

The treatment can be very different for a director of a Japanese corporation.

Under Japanese domestic tax law, remuneration received by a non-resident in their capacity as a director of a Japanese company is generally treated as Japanese-source income—even when the director lives and works entirely outside Japan.

The Japanese company may therefore be required to withhold tax at 20.42%.

The job title can change the tax result

Consider two individuals performing similar work from Singapore:

Person A: Overseas employee
Person A resigned from the Japanese board and became an employee responsible for Asian operations.

Their salary for duties performed entirely outside Japan may generally fall outside Japanese taxation.

Person B: Japanese company director
Person B retained a seat on the board of the Japanese company.

Even though Person B performs all duties from Singapore, the director remuneration may remain subject to Japanese withholding tax.

The commercial difference between the two arrangements may appear small. The Japanese tax difference can be significant.

Important exceptions and treaty issues

The analysis does not end with the individual’s title.

For example, an individual who is formally a director but works continuously overseas in a genuine employee capacity—such as the manager of an overseas branch—may fall within a specific domestic-law exception.

The applicable tax treaty must also be reviewed. Many treaties contain a separate article for directors’ fees, and the result may differ from the ordinary employment-income provisions.

Where treaty relief is available, the necessary treaty forms and supporting documentation may need to be submitted before payment. Relief should not be assumed merely because the recipient is tax-resident in another country.

Questions to resolve before the move

Before relocating a Japanese company owner or director overseas, confirm:

• Whether the individual will remain a statutory director
• Whether the payment is salary, director remuneration, a bonus, or a consulting fee
• Where the duties will physically be performed
• Whether any duties will continue to be performed in Japan
• Which company will bear the compensation cost
• Whether a tax treaty changes the domestic-law treatment
• Whether treaty notification forms must be filed
• Whether the arrangement creates corporate tax or permanent establishment risks overseas

A poorly planned board structure can create Japanese withholding tax, foreign tax, double-taxation exposure, and corporate compliance problems at the same time.

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The Common Pattern: Small Legal Details Create Large Tax Costs

These three rules have one thing in common:

The tax result depends not only on where you live or where the money is paid, but also on when the payment is made, how the income is classified, and what legal position you retain.

By the time the payment has been made, the property has been sold, or the executive has relocated, some planning opportunities may already have disappeared.

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Consider a Japanese Tax Review Before Taking Action

A focused cross-border tax review can be valuable before:

• Leaving Japan
• Receiving a severance or retirement payment
• Purchasing or selling overseas real estate
• Changing an executive’s employment or board status
• Restructuring compensation between Japanese and foreign companies
• Applying a tax treaty to payments made by a Japanese company

Our office advises foreign executives, international investors, and overseas business owners on Japanese income tax, non-resident taxation, overseas assets, director compensation, tax treaties, and departure planning.

Depending on the complexity of the matter, the review can be provided through:

• A confidential online consultation
• A written Japanese tax risk assessment
• A detailed cross-border tax memorandum
• An annual Japanese tax review for internationally mobile individuals

Before finalizing your departure date, compensation arrangement, or overseas property sale, request a confidential Japanese tax review.

The cost of reviewing the structure in advance is often significantly lower than correcting withholding tax, denied deductions, or double taxation after the transaction has occurred.

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This article provides general information only. Japanese tax treatment depends on individual facts, tax residence, payment terms, employment and director status, applicable tax treaties, and the relevant filing procedures. Professional advice should be obtained before implementing any transaction or relocation plan.

Request a Japan Tax Review or schedule a confidential consultation with our international tax team.