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 player, 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

1. International Investment Agreements
2. Double Taxation Agreements

Convention on the Prevention of Double Taxation between Israel – Japan

The agreement between the Governments of Israel and South Korea regarding the avoidance of double taxation was signed in 1993 and entered into force in 1994.

To read the agreement in English, click here.

Reciprocal Promotion and Protection of Investments

In 2017, a bilateral agreement between Israel and Japan entered into force, aiming to provide legal protection for investors and investments from non-commercial risks. The agreement also seeks to foster mutual investments between Israelis and Japanese by establishing a comfortable and secure investment environment. Its purpose is to encourage and facilitate investment activities while promoting a favorable investment climate for both countries.

To read the agreement in English, click here.

Applicability of the MLI

Japan and Israel have signed the MLI, which means that there is an automatic exchange of information between the two countries. Japan and Israel signed the MLI in 2017. Israel ratified it in 2018, and Japan in 2018. This means that the treaty between Israel and Japan changed automatically according to the content of the MLI treaty, subject to the reservations set by both countries.

Residency for tax purposes in Japan

Residence of an individual

A resident taxpayer in Japan refers to an individual taxpayer who meets either of the following criteria:

1. Possesses a ‘jusho’ (residence) in Japan.
2. Has maintained a ‘kyosho’ (temporary place of abode) in Japan for a duration of at least one year.

A resident taxpayer who is not a Japanese national and has spent five years or less in Japan within the preceding ten years (equivalent to 60 months within the preceding 120 months) is classified as a non-permanent resident taxpayer. On the other hand, if a resident taxpayer is a Japanese national or a foreign national who has resided in Japan for more than five years within the preceding ten years, they are considered a permanent resident taxpayer.

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

Residency of a company

A company establishing its principal office in Japan is recognized as a domestic corporation. The nationality of its shareholders or the location of its central management holds no relevance in this determination.

However, any corporation that does not fall under the category of a domestic corporation is considered a foreign corporation.

In accordance with tax law, the determination of Japan-source income subject to taxation for a foreign corporation relies on the specific type of taxable presence it maintains within Japan.

It is important to note that the determination of residency for tax purposes involves considering various factors, such as the individual’s intentions, family ties, social and economic ties, and other relevant circumstances. Additionally, Japan has tax treaties with several countries that may impact an individual’s tax residency status based on specific treaty provisions.

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

The tax system in Japan

The Japan Tax Authority is called the National Tax Agency

Income taxation:5% – 45% plus 2.1% surtax

Taxation of companies and branches 23.2%

VAT: 10%

Capital gains tax: 20.315% (stock), 39.63% (real estate), 23.2% (corporate)

Withholding Tax

Inheritance tax and estate tax in Japan

In Japan, there is a basic exemption for inheritance and estate tax of ¥30,000,000 and an additional ¥6,000,000 for each statutory heir.

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%

Over ¥600,000,000 = 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 United 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.

Real estate taxation in Japan

If you own property in Japan, it’s important to be aware of the annual real estate tax that you will be required to pay. This tax is calculated based on the appraised value of your property as of January 1st of each year. The tax rate can vary depending on the location of your property:

1. City Planning Tax: This tax is imposed to cover the cost of urban development projects and public facilities. The tax rate for city planning tax can range from 0.3% to 1.0% of the assessed value of the land and buildings.
2. Property Tax: Property tax is levied to fund local government operations and services. The tax rate for property tax can range from 0.4% to 1.4% of the assessed value of the land and buildings.

To determine the appraised value, licensed appraisers evaluate various factors, including the property’s location, size, condition, and current trends in the real estate market. This appraised value serves as the basis for calculating the real estate tax.

For more information on real estate rental taxation abroad, click here.

Transfer of funds from Israel to Japan

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to 25% of withholding tax. The tax authority can allow, under certain circumstances, to reduces or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – 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:

1. 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.
2. 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.
3. 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.
4. Nihon Gaisha (NG) – NGs, or general partnerships, involve shared responsibilities and liabilities among partners.
5. Yūgen Gaisha (YG) – Specialized form of a corporation for social welfare and nonprofit organizations.
6. Gōmei Kaisha (GM) – GMs are general partnerships that provide a flexible structure for businesses with partners willing to accept unlimited personal liability.
7. Shadan Hōjin (SH) – SHs are nonprofit corporations that operate for the benefit of society, often involved in charitable, cultural, or educational activities.
8. Gōdō Shadan Hōjin (GSH) – GSHs are mutual benefit corporations formed to serve their members’ specific needs and interests, fostering collaboration and shared benefits.
9. Shōshi Kaisha (SK) – SKs, or SME corporations, cater to the needs of small and medium-sized businesses, offering simplified governance and administrative procedures.
10. 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 subject to corporate income taxes on their global income. To prevent the double taxation of foreign income, Japanese corporations can claim a tax credit against both corporation and inhabitant’s taxes for foreign income taxes paid directly.

However, there are specific criteria that foreign taxes must meet to be eligible for the credit, including their similarity to Japanese income tax and corporation tax. It’s important to note that there are limitations on the amount of foreign taxes that can be credited, currently set at a maximum of 35% of the foreign taxes paid. Any excess amount can be carried forward for a period of three years. While the foreign tax credit system does not apply to enterprise tax, it’s worth mentioning that foreign branch income arising from business activities conducted outside Japan is exempt from such taxation.

For foreign corporations with a permanent establishment in Japan, the potential for double taxation exists, and they can benefit from a similar foreign tax credit regime. Recent tax reform acts have introduced changes to the foreign tax credit system, including adjustments for tax consolidation and pass-through provisions. Additionally, certain types of foreign taxes are no longer eligible for credit as of April 2021.