We are Murata Sogo Tax ＆Accounting Office in Miyakojima-ward, Osaka.

We often receive inquiries from persons who are residents of Japan for tax purposes and have U.S. permanent resident status (green card) or citizenship in the United States. In this issue, we would like to explain how tax treatment in Japan and the U.S. will be handled in such cases.

1. Tax Treatment in Japan

(1) Criteria for Determination of Resident/Nonresident Status

Under the Japanese Income Tax Law, a “resident” is defined as an individual who has a “domicile” in Japan or has had a “residence” in Japan for at least one year, and an individual other than a “resident” is defined as a “non-resident.

(2) Definition and Taxation of Non-Permanent Residents and Permanent Residents

Residents are further classified into non-permanent residents and permanent residents.
Non-permanent residents are individuals who do not have Japanese nationality and have had a domicile or residence in Japan for less than 5 years within the past 10 years. Non-permanent residents are subject to tax on income other than income generated outside Japan (foreign source income) as defined in the Income Tax Law, as well as foreign source income paid or remitted in Japan.
Permanent residents are taxed on all income regardless of whether the income arose in or outside Japan.

(3) Taxation on Nonresidents

Nonresidents are taxed only on income generated in Japan (domestic source income).

2. Tax Treatment in the U.S.

If you are a U.S. permanent resident (green card) or U.S. citizen, you are subject to U.S. income tax regardless of where you live in the world, and you are required to file a U.S. income tax return.
In this case, if you are taxed in Japan in the first case, you will be subject to double taxation in both countries. In order to avoid double taxation, it is essential to check the Japan-U.S. Tax Treaty as described below. 3.

3.　Treatment under the Japan-U.S. Tax Treaty

The treaty provides that “the amount of foreign income tax to be taken into account in applying the Japanese foreign tax credit to a Japanese resident who is a citizen of the United States shall be limited to the amount of income tax that the United States could impose on the Japanese resident under the treaty if the resident were not a citizen, not the amount of income tax due under the citizenship taxation of the resident” (Japan-U.S. Tax Treaty). (Article 23(3)(a) of the U.S.-Japan Tax Treaty).

Under domestic law, “the amount of foreign income tax imposed on a resident's income that is not taken into account in calculating the foreign tax credit under the provisions of a tax treaty shall not be included in the foreign income tax credit” (Article 222-2(4) of the Income Tax Enforcement Ordinance). 

Furthermore, “the application of the foreign tax credit in the United States shall permit the United States to deduct from U.S. income tax the amount of Japanese income tax after the deduction provided for in paragraph (a). The credit so allowed shall not reduce the amount of U.S. income tax deducted in Japan pursuant to subsection (a)” (Article 23(3)(b) of the U.S.-Japan Tax Convention). 

The treaty also provides that “with respect to U.S. source income on which income tax is imposed in Japan by a U.S. citizen, if a foreign tax credit is allowed in the United States pursuant to paragraph (b), the income described in paragraph (a) shall be deemed to be income outside the United States” (Article 23(3)(c) of the Japan-U.S. Tax Treaty).

 Based on the above, income tax due to citizenship taxation in the U.S. is not an income tax that the U.S. can levy on a Japanese resident under this treaty if the resident is not a citizen of the U.S. Therefore, the resident will receive a foreign tax credit in the U.S., thus eliminating double taxation in both countries. This will eliminate double taxation in both countries.

For those who have U.S. permanent residence (green card) or citizenship in the U.S. and reside in Japan, the taxation relationship can be very complicated because it is necessary to take into account the taxation system in the U.S. as well as in Japan.
Murata Sogo Tax & Accounting Office can assist you in such cases. If you have any questions or concerns, please feel free to contact us using the inquiry form.