We are Murata Sogo Tax Accounting Office, specializing in inheritance and international taxation, with an office in Miyakojima-ku, Osaka City.
In this issue, we would like to summarize the Japanese tax filing requirements regarding interest on overseas deposits, which we are often consulted by our clients who have overseas deposit accounts.
In particular, unlike in Japan, interest rates in certain countries, such as Australia, are often high, and the amount of income may be large.

First, let's look at who is liable for income tax.

(1) Persons liable for income tax and scope of taxable income

Persons liable for income tax are classified into the following three categories

Residents (permanent residents): Persons who have a domicile or residence in Japan for at least one year, other than non-permanent residents.

Resident (non-permanent resident): A person who does not have Japanese nationality and has had a domicile or residence in Japan for less than 5 years in the past 10 years.

Non-residents: Individuals other than residents.

The scope of taxable income is as follows according to each taxpayer.

Residents (permanent residents): All income generated in Japan and abroad.

Residents (non-permanent residents): Income other than foreign source income and foreign source income paid in Japan or remitted from abroad.

Non-residents: Domestic source income

 

(2) Interest on foreign deposits

(1) Treatment under the Income Tax Law

Under the Japanese Income Tax Law, interest on deposits deposited with a business office, office, or other equivalent located outside of Japan is considered foreign source income (Article 95④(6)(b) of the Income Tax Law).

 

(2) Treatment of tax treaties (e.g., Japan-Australia tax treaty)

Article 11(2) of the Tax Convention provides that “Tax may be imposed on interest in one Contracting State (e.g., Australia) in respect of which the interest accrues. The amount of such tax shall not exceed 10% of the amount of such interest. This allows Australia the right to levy a certain amount of tax. In this case, if withholding income tax is levied in Australia, it is considered as foreign source income (Law No. 95-46, Order No. 225-13).

In other words, interest is treated as foreign source income under both the Income Tax Act and tax treaties.

 

(3) Declaration of interest on foreign deposits for each taxpayer

（The following is the procedure for reporting interest on foreign deposits for each of the taxpayers listed in (1) above.

Resident (Permanent Resident): Because of worldwide income taxation, the interest is included in taxable income and must be declared.

Residents (non-permanent residents): To the extent that remittance is made to Japan, it should be included in taxable income and declared.

Non-residents: Interest on foreign deposits need not be declared.

In addition, if included in taxable income, as described in (2) above, interest on foreign deposits is considered foreign source income, and is therefore eligible for a foreign tax credit in Japan if taxed in the country where the deposit is located.

In this issue, we have written about the treatment of interest on foreign deposits, which is frequently asked about.
The treatment may differ depending on the country, such as income tax, tax treaties, etc. If you have any specific questions, please contact us using the Inquiry Form.