Israel – Japan Tax Treaty

Business Activity in Japan

Japan’s business activity thrives as the world’s third-largest economy, known for its technological innovation and manufacturing prowess in industries like electronics, automobiles, and machinery. The service industry has experienced remarkable growth, contributing approximately 75% of Japan’s GDP. The Tokyo Stock Exchange showcases the nation’s financial prominence, attracting domestic and international investors.

Small and medium-sized enterprises (SMEs) are pivotal in employment generation and innovation, representing 99% of all businesses in Japan. Despite exports, particularly electronics, and automobiles, contributing around 16% of the country’s GDP, intensifying global competition poses challenges. Addressing the concern of an aging population, the government focuses on initiatives to promote workforce productivity, technological advancements, and healthcare innovations, ensuring sustained economic growth on the global stage. Japan remains a formidable stakeholder, shaping various industries and setting trends worldwide. The country’s adaptability, economic vitality, and commitment to addressing challenges continue to drive its success in the global business landscape.

Bilateral Agreements Between Japan and Israel

Several agreements were signed between Israel and Japan:

• Investment Encouragement and Protection Agreement
• Double Taxation Convention

Reciprocal Promotion and Protection of Investments

The Reciprocal Promotion and Protection of Investments (RPPI) was signed on 31 January 2017 and went into effect on 04 October 2017. The RPPI is an agreement between Israel and Japan that is designed to encourage and safeguard investments made by individuals and companies from each country in the territory of the other. These agreements typically include provisions related to non-discrimination, compensation for expropriation, dispute resolution, and the transfer of funds.

To read the agreement in English click here.

Convention on the Prevention of Double Taxation

The original agreement between the Governments of Israel and Japan regarding the avoidance of double taxation was signed on 7 March 1993 and entered into force on 31 December 1993.

To read the agreement in English, click here.

Applicability of the MLI

Both Japan and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework. Both Israel and Japan signed the MLI on the 7th of June 2017, with its provisions entering into force on the 1st of January 2019.

Residency for Tax Purposes in Japan

Residence of an Individual

As per the Japanese law, a resident taxpayer is an individual taxpayer who:

• Who has a ‘jusho’ (i.e. a residence) in Japan; or
• Has maintained a ‘Kyosho’ (i.e. a temporary place of abode) in Japan for a period of one year or more.

In addition, a foreign national resident in Japan for a total of five years or less within the past ten years is classified as a non-permanent resident taxpayer. However, a Japanese national or a foreign national who has resided in Japan for over five years within the last ten years is classified as a permanent resident taxpayer.

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

Pursuant to the Japanese Corporation Tax Law, a resident corporation is a corporation whose head office or main office is located in Japan. The effective place of management is irrelevant.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Japan

The German Tax Authority is called the National Tax Agency.

Income Taxation: 5% – 45% plus a 2.1% surtax

Taxation of Companies and Branches:23.2% (National Corporate Tax) and 10.3% (National Local Corporate Tax)

VAT: 10%

Capital Gains Tax: 20.315% (Stock), 39.63% (Real Estate), 23.2% (Corporate)

Withholding Tax

Inheritance Tax and Estate Tax in Japan

Pursuant to Japanese law, there is a basic exemption for inheritance and estate tax of JPY 30 million, plus an additional JPY 6 million for each legal heir.

Otherwise, the standard inheritance tax is levied as per the following badges (in JPY):

0          10,000,000 10%

10,000,000        30,000,000 15%

30,000,000        50,000,000 20%

50,000,000        100,000,000 30%

100,000,000      200,000,000 40%

200,000,000      300,000,000 45%

300,000,000      600,000,000 50%

600,000,000      And above 55%

Relocation

According to the Immigration Services Agency of Japan, the number of foreign residents in the country at the end of 2022 rose 11.4% from the year before to hit a record high of 3,075,213. Although there are many factors that play into relocation, one of the most important factors as to why so many people choose to move to Japan is the job market.

The country has always had a very low unemployment rate which has dropped to 2.8%. In comparison, Israel’s unemployment rate is 5.05%, and the USA’s unemployment rate is 3.9% (2021). In addition, Japan is renowned for its exceptional higher education system, and it boasts several top universities that consistently rank among the best in the world, such as the University of Tokyo, Kyoto University, Osaka University, etc. This attracts young talent to their country and improves their economy with a large population of students studying abroad.

Japan has a Jewish community of around 1,000 people, made up mostly of foreign-born Jews and expatriates. Despite its small size, the community is well-organized and active.

Real Estate Taxation in Japan

Japanese law provisions two layers of taxation on fixed assets, composed of:

Property Tax: Property tax is levied to fund local government operations and services. The tax is levied at 1.4%. Assets subject to the fixed assets tax include land, buildings, and depreciable assets.

City Planning Tax: This tax is imposed to cover the cost of urban development projects and public facilities. The tax is imposed at a rate of 0.3%.

In addition, Japan imposes a real estate acquisition tax.

The acquisition of real property is subject to a local tax on the value of the property as assessed by the local government. The standard rate is 4%.

For land and residential buildings acquired no later than March 31, 2027, a reduced rate of 3% applies. Real property acquired on the merger or as part of a corporate division is exempt from real property acquisition tax, subject to conditions.

Transfer of Funds from Israel to Japan

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met. Our firm handles withholding tax matters with the Israeli Tax Authority.

As mentioned above, the countries have signed a tax treaty, that allows taxpayers to submit a 2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax, to potentially transfer the payments without paying the withholding tax.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more.

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in Japan

Business activity in Japan can be carried out within the framework of different types of business entities, the most prominent of which in Japan are:

Kabushiki Kaisha (KK) – Joint-stock company or corporation. KKs are widely preferred for their flexibility and robustness, making them popular for businesses of all sizes and types.

Gōdō Kaisha (GK) – Limited liability company (LLC). GKs offer a streamlined business structure with reduced administrative requirements, making them an attractive option for small and medium-sized enterprises (SMEs) and startups.

Gōshi Kaisha (GK) – Partnership for professional services. GKs enable professionals in fields such as law, accounting, and consulting to collaborate and share both profits and liabilities, fostering a cooperative business environment.

Nihon Gaisha (NG) – NGs, or general partnerships, involve shared responsibilities and liabilities among partners.

Yūgen Gaisha (YG) – Specialized form of a corporation for social welfare and nonprofit organizations.

Gōmei Kaisha (GM) – GMs are general partnerships that provide a flexible structure for businesses with partners willing to accept unlimited personal liability.

Shadan Hōjin (SH) – SHs are nonprofit corporations that operate for the benefit of society, often involved in charitable, cultural, or educational activities.

Gōdō Shadan Hōjin (GSH) – GSHs are mutual benefit corporations formed to serve their members’ specific needs and interests, fostering collaboration and shared benefits.

Shōshi Kaisha (SK) – SKs, or SME corporations, cater to the needs of small and medium-sized businesses, offering simplified governance and administrative procedures.

Jimusho – A Jimusho refers to a sole proprietorship or individual business, allowing individuals to conduct business under their own name and assume personal liability.

Incentive Laws in Japan

Japanese corporations are taxed on their global income, but to prevent double taxation on foreign-source income, they can claim tax credits for foreign taxes paid. These credits apply to taxes that are directly paid by the corporation, imposed by foreign governments on corporate income, and similar in nature to Japanese income taxes. However, taxes eligible for optional refunds or where payment timing is controlled by the taxpayer don’t qualify.

Credits for foreign taxes have a cap set at 35% of the foreign taxes paid, calculated as corporate tax liabilities × (foreign source income ÷ worldwide taxable income in Japan). Any amount exceeding this limit can be carried forward for three years.

This foreign tax credit doesn’t apply to Japan’s enterprise tax, nor does it cover dividend income eligible for a dividend exemption. For foreign corporations with a permanent establishment (PE) in Japan, a similar credit regime helps avoid double taxation. However, taxes paid in the corporation’s country of residence are generally not creditable.