When a Japanese company makes payments to overseas non-residents or foreign corporations (hereinafter referred to as non-resident), one crucial aspect to consider is the “withholding tax.” This tax is a mechanism where the Japanese company deducts a portion of the payment and remits it to the tax authorities on behalf of the non-resident. This article will explain the basic mechanism of withholding tax, the types of income subject to it, tax rates, and the impact of international tax treaties.

Basic Mechanism of Withholding Tax

Withholding tax is a system where the payer of the income withholds a portion of the payment and directly remits it to the tax authorities. Normally, this applies to residents. But it also applies to income earned by non-residents within Japan. The purpose is to ensure that non-residents who earn income in Japan pay their fair share of taxes.

Types of Income Subject to Withholding Tax

The main types of income paid to non-residents that are subject to withholding tax include:

  1. Salary Income: Compensation for work performed within Japan.
  2. Interest Income: Interest on loans to businesses operating in Japan.
  3. Dividend Income: Dividends from Japanese companies.
  4. Royalties: Payments for the use of copyrights, patents, etc.
  5. Real Estate Income: Rental income from properties located in Japan.

These incomes are considered domestic source income and are therefore subject to withholding tax.

Tax Rates

In many cases, the tax rate for withholding tax is 20.42% (20% income tax plus 0.42% special reconstruction income tax). However, specific tax rates may vary depending on international tax treaties.

Impact of Tax Treaties

Japan has signed tax treaties (tax conventions) with many countries, which may reduce or exempt the withholding tax rates. For instance, under the Japan-United States tax treaty, the withholding tax rates on certain dividends and interest can be exempted (or reduced) under certain conditions.

To apply a tax treaty, non-residents must submit a “Application Form For Income Tax Convention” to the Japanese tax authorities before they receive payments. Then the applicable reduced rates or exemptions can be applied.

Procedures and Obligations

When a Japanese company makes payments to non-residents, it first needs to confirm whether the payment is subject to withholding tax. If it is, the company must withhold the appropriate amount of tax and promptly remit it to the tax authorities. The payment deadline is the 10th of the month following the payment month.


When Japanese companies make payments to non-residents, withholding tax is an unavoidable consideration. Depending on the type and amount of income and the presence of a tax treaty with the non-resident’s country, applicable tax rates and procedures will vary. By following accurate procedures, companies can ensure tax compliance for non-residents while achieving a fair tax burden. It is crucial to consult with tax professionals and stay updated on the latest tax law changes.