We are Murata Sogo Tax & Accounting Office, specializing in inheritance and international taxation, with an office in Miyakojima-ku, Osaka.
In this issue, we will explain the tax treatment of a person who received a U.S. pension while residing in Japan.

We are often asked for advice on receiving pension benefits from the U.S. for people who were born in Japan but moved to the U.S. when they were young and lived in the U.S. for many years, but returned to Japan because they wanted to live in Japan after retirement.

1. Taxpayer Classification

Since many of our clients are returning to Japan permanently, many of them are considered to be classified as “residents” under the Japanese Income Tax Law.
A resident is an individual who has an address in Japan or has been continuously present in Japan for at least one year.
Residents are divided into “residents other than non-permanent residents” and “non-permanent residents.

(1) Residents other than Non-permanent Residents

Residents other than non-permanent residents are subject to tax on all income regardless of whether the income is earned in or outside of Japan. Generally speaking, most of them fall under this category.

(2) Non-permanent residents

A non-permanent resident is an individual who does not have Japanese nationality and has 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.

2. Whether Domestic Source Income or Not

(1) Japanese Income Tax Law

Residents other than non-permanent residents are taxed on their worldwide income.
However, for non-permanent residents, “income other than income generated outside Japan (foreign source income) and foreign source income paid or remitted in Japan are subject to tax”.

In this regard, under the Income Tax Law, “public pensions, retirement allowances, etc., which are based on service during the period of residence” are considered to be domestic source income. However, if there are other provisions in tax treaties, the provisions of the tax treaties are to be followed.

(2) Treatment under the Tax Treaties

The treatment under the Japan-U.S. Tax Treaty will vary depending on the type of annuity.

For example, if you receive a U.S. public pension, IRA (Individual Retirement Account), 401k, or other private pension while living in Japan, it will be treated as domestic source income because it is taxable in Japan, your country of residence, in accordance with Article 17 (1) of the Japan-U.S. Tax Treaty.

Article 17 of the Japan-U.S. Tax Convention
Except where the provisions of Article 17(2) below are applied, retirement pensions and other similar remuneration (including benefits under social security systems) in respect of which a resident of one Contracting State is the beneficiary shall be taxed as domestic source income in Japan, in accordance with Article 17(1) of the Japan-US Tax Convention. Taxes may be imposed only in one Contracting State on retirement pensions and other similar remuneration (including benefits under social security schemes) in which a resident of that State is the beneficiary, except in cases where the provisions of Article 2 of the following Article 7 apply.

Therefore, regardless of whether the taxpayer is classified as a non-permanent resident or a non-permanent resident, the taxpayer is required to report the income as miscellaneous income (public pension, etc.) on his/her tax return.

On the other hand, there are cases where a former member of the U.S. Armed Forces may receive a pension as a military pensioner, or a former employee of a city hall may receive a pension from the city.

In such a case, the tax will be imposed in the U.S. in accordance with Article 18(2)(a) of the U.S.-Japan Tax Treaty. Since tax is imposed “only” in the U.S., no tax is imposed in Japan, regardless of whether the taxpayer is classified as a non-permanent resident or a resident other than a non-permanent resident. Therefore, it is not necessary to file a tax return in Japan.
Please note that the tax treatment is different from the case (1) above.

U.S.-Japan Tax Treaty Article 18
2
(a) One Contracting Party shall not pay to an individual a retirement pension or other similar remuneration for public services rendered to the other Contracting Party or to a local public entity of the other Contracting Party, by or from the other Contracting Party or a local public entity of the other Contracting Party. (excluding benefits paid pursuant to an agreement under a law relating to social security) (2) Taxes may be imposed only in one Contracting State on retirement pensions and other similar remuneration (other than benefits paid under an agreement under a law relating to social security) paid by a Contracting State or by a local public entity of that State or by a local public entity of that State.

The taxation of pensions and similar income between Japan and the U.S. can be complex, and the tax treatment will vary depending on individual circumstances.
The above discussion focuses mainly on the treatment in Japan, but it is necessary to consider the treatment in the U.S. as well, and it is necessary to take measures across borders.

Murata Sogo Tax & Accounting Office is happy to provide consultation on international tax issues such as these.