Tax residence and fiscal domicilei Corporate residence
An entity becomes a Japanese tax resident (that is, it is deemed a domestic corporation for Japanese tax purposes) if its head office or principal office is located in Japan. The place where management and control are exercised is irrelevant for the purposes of determining tax residency in Japan. Accordingly, a foreign-incorporated entity cannot be a Japanese tax resident, even though it exercises its management and control functions in Japan.ii Permanent establishment
A foreign company will be considered to have a fiscal presence for purposes of Japanese tax if it has a PE in Japan, such as a fixed place of business (branch PE), building or site (building PE), or a person who is predominantly based in Japan to act on the corporation's behalf (agent PE). Several factors are relevant in determining whether a PE exists. For example, in determining whether a foreign company has a PE in Japan, relevant factors include, inter alia, whether the corporation's business is conducted at such a fixed place. Several steps can be taken to avoid being deemed to have a PE in Japan, including using the fixed place only for the purchase or storing of goods, or for performing supporting functions such as advertising, information collection or dispensation, and conducting of market research and feasibility studies.
The definition of PE will be amended from the financial years beginning on or after 1 January 2019 to align it with the OECD Model Tax Convention on Income and on Capital (OECD Model Convention) 2017. In addition, the most notable new rule is that the definition of PE under domestic tax law will be overwritten by the definition of PE under a relevant tax treaty applicable to a foreign company if the definition under the relevant treaty is different from that of domestic tax law. The other major amendments to domestic tax law include the following:
- After the amendments to the definition of agent PE, agent PE will include not only a person who has an authority to conclude a contract in Japan on behalf of the foreign company but also a person who has a principal role in concluding a contract in Japan on its behalf. However, an agent of a foreign company will not be considered as PE if the agent is 'independent' from the foreign company and acts in the ordinary course of its business unless the agent acts only on behalf of one or more related parties.
- After the amendments to the exception of definition of PE, even places that are used only for certain purposes, such as storing, exhibiting or delivering goods, etc., would not be excluded from PE unless the activity is purely preparatory or auxiliary in nature.
Japanese tax law adopts the attributable income principle, under which only the income attributable to the PE in light of the Authorised OECD Approach is taxable. Thus profits calculated by deeming that the PE was a distinct and separate entity from the corporation, was engaged in the same or similar activities under the same or similar conditions with the corporation, and was dealing wholly independently from the enterprise, are attributable to the PE.
Treaty tiebreakers, such as Article 4, Paragraph 3 of the US–Japan tax treaty (or the US–Japan double tax treaties (DTAs)), prescribe the method by which to determine the tax residence of a person who falls within the definition of tax resident in both the US and Japan. There is no concept of branch profit tax in Japan.