We are Murata Sogo Tax & Accounting Office, specializing in inheritance and international taxation, with an office in Miyakojima-ku, Osaka City.
Some Japanese residents with foreign citizenship may have served in the U.S. military in the past and received a veteran's pension after leaving the military. We would like to explain the taxation in this case.

1. Treatment for Japanese tax purposes

(1) Pensions paid under “insurance or mutual aid schemes based on foreign laws and regulations” are considered “foreign source income” (Article 95(iv)(10) of the Income Tax Act).

(ii) If the recipient of the retirement pension is a Japanese resident (permanent resident), all income, including foreign source income, is subject to taxation in Japan.
If the recipient falls under the category of Japanese resident (non-permanent resident), all income including foreign-source income is subject to taxation in Japan.

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

Article 18(2)(a) of the U.S.-Japan Tax Treaty provides that “[a]ll retirement pensions and other similar remuneration (other than benefits paid by the United States under social security or similar laws and regulations) payable in respect of services rendered to a Contracting State or to a local government or local public entity of a Contracting State shall be subject to tax. ) The tax may be levied only in one of the Contracting States.

In other words, pensions paid to former U.S. military personnel who have retired from the U.S. military are taxable only in the U.S. and not in Japan.

In the tax treatment, tax treaties take precedence over domestic laws, so in this case, based on the tax treaties, the pension will not be taxed in Japan, but only in the U.S.

3. What happens if the Japanese wife receives a retirement pension instead?

There are cases where the husband who served in the U.S. Armed Forces dies and his Japanese wife (residing in Japan) receives the pension instead.
Article 18(2)(b) of the U.S.-Japan Tax Convention states that “In the case of a resident of the other Contracting State and a citizen of the other Contracting State, tax shall be imposed only in that other Contracting State on such retirement pension and other similar remuneration,” so in this case the tax is imposed in Japan.

In this article, we summarize the treatment of pensions related to the U.S. Armed Forces, which we often receive inquiries about.
Since it is complicated, including the treatment under domestic laws and tax treaties, if you have any questions, please contact us using the Inquiry Form.