Life Insurance Premiums

If you pay life insurance or private pension premiums to a Japanese agency in local currency, you are eligible for deductions based on national income. The maximum deductible amount is ¥40,000 and ¥28,000 for the national tax and the local inhabitant tax, respectively.

An additional ¥40,000 for the national tax and ¥28,000 for the local inhabitant tax deductions are included if the premiums are paid under an individual pension plan or nursing insurance. If you have a foreign, non- Japanese policy, these deductions are not applicable.

In addition, earthquake insurance is also deducted for up to ¥50,000 annually.

Real Estate Investments

Investment real estate in Japan can be a good way to generate income in a tax efficient way.

If you hold property investments in Japan, you can deduct some tax from your total taxable income. Since real estate assets depreciate, you can deduct depreciation costs. In addition, you can deduct management and maintenance expenses, insurances, and interest payments on a loan.

Entertainment Expenses

Companies in Japan can deduct entertainment expenses for eating and drinking as long as this expense does not exceed ¥5,000 per outing. This deduction comes in handy if the company entertains a lot of clients. According to the Tax Reform Act 2020, corporations can deduct 50% of the entertainment expenses for food and drinks if the capital amount is more than ¥10B.

Capital Losses

From 1st January 2016, capital losses from the sale of publicly traded shares and some bonds via a Japanese broker can be offset against dividends. Based on the current tax laws in Japan, these capital losses can be carried over for three years.

Bereavement and Disasters

Condolence payments, funeral contributions, and disaster compensation will not be taxable. Although this varies depending on the tax office, these contributions are eligible for tax deductions in Japan.

Start-up Expenses

If you establish a business in Japan, you can reduce your tax bill on the opening costs used to establish the business and organization costs. This is possible because these expenses are treated as deferred assets: therefore, they can be amortized.

Net Operating Losses

A tax loss can be carried forward to offset your future company income. According to the 2016 Tax Reform Act, the net operating loss deduction will be implemented over three years. After this period, the limitation will be reduced to 50%. SMEs are not subject to this loss deduction limitation.

Payment To Foreign Affiliates

To get this deduction for expenses incurred by a foreign affiliate and charged to a Japanese corporation, you need to demonstrate that the service agreement between the two entities meets the criteria of Japan’s transfer pricing regulations. These tax deductions are allowed if the following conditions are met.

• You have a written service agreement.
• A Japanese corporation requested these services.
• There’s documented evidence, such as regular invoices from the foreign affiliate.
• The service charges are reasonable.

Dependents

If you support anyone financially, you are eligible for a tax deduction. For instance, general dependents have a tax deduction of ¥380,000. However, this amount may vary. Therefore, you should confirm with your local tax office to get the actual figure.

A dependent is a relative or spouse who depends on the taxpayer. You don’t have to live in the same house. If your dependent is a person with special disabilities or is under the age of 23, the deduction applies as long as their annual income does not exceed ¥480,000.

Honorable Mention:  Furusato Nozei

While not exactly a tax deduction, Furusato Nozei (or hometown tax) is a program created by the Japanese government to encourage taxpayers to prepay their annual income and residential taxes to municipalities, rather than to where they live.

The program was created to shift much-needed funds from wealthy cities like Tokyo and Osaka, to cash-strapped regions. To encourage people to send the money their way, these local regions offer a “gift” in return, which may have a monetary value of up to 30% of the amount of tax paid.  Basically, you pre-pay your taxes and receive gifts in return.

To learn more about Furusato Nozei, please read our article on the topic here.

Summary

Japan has several tax deductions that allow you to save money on taxes. However, keep in mind that most tax deductions are reviewed frequently and may change over time. You can always check with your local tax office or visit the National Tax Agency website for up-to-date information.

Once you receive your tax refunds, the next step is to put your money to work! Feel free to contact us at Argentum Wealth for a free consultation on investment strategies for expats in Japan.