When Three Countries Seem to Tax You at Once: Reading the Structure

"Japan, my home country, and the United States. It feels like all three are taking a cut at the same time." We hear this regularly from people who run a company in Japan, hold rental property back home, and still have an investment account in the US.

The feeling is, in large part, accurate: the same income genuinely can fall within the taxing scope of more than one country. Article 7(1)(i) of the Income Tax Act defines the scope of taxable income for residents other than non-permanent residents as all income — rent from property in your home country included, as a rule. That same property's host country may tax it as income sourced within its own borders. The overlap is not a defect in the system but its premise; the foreign tax credit and tax treaties exist precisely to reconcile it.

What is rarely the main driver of the burden, however, is the rates themselves. Far more often, no one has established which income sits in which category in which country — and so the reconciling mechanisms are never used to their full extent.

The Premise: Account Data Moves, but the Route Differs by Country Pair

The starting point has to be stated first. As a matter of Japanese domestic law, Article 10-6 of the Act on Special Provisions of the Income Tax Act, the Corporation Tax Act and the Local Tax Act Incidental to the Enforcement of Tax Treaties requires reporting financial institutions to provide the competent tax office, by 30 April of the following year, with the name, address and reportable residence jurisdiction of each person holding a reportable contract as of 31 December, together with the value of the assets under that contract and the income arising from their management, holding or transfer. The machinery by which account information reaches the authorities independently of your own filing is already operating in statute.

What happens beyond that point — which country receives the information, how much of it, and whether automatically — differs by country pair. Automatic exchange under the Common Reporting Standard operates between participating jurisdictions; where a country does not participate, a separate arrangement governs instead. You therefore cannot build a structure on the premise that nothing is visible anywhere, nor generalise that every country sees the same thing. The practical starting point is to confirm, for the specific combination of countries where your assets sit, which framework is actually in operation.

Either way, what is on the table is always "how to arrange the structure on top of correct filings."

The Japan Side: Received Personally, or Through a Company

For business income arising in Japan, Article 27 of the Income Tax Act defines business income as income arising from a business, computed as gross revenue less necessary expenses. The rate structure that applies when an individual receives it directly and the structure that applies when it passes through a company sit on entirely different provisions.

Under the rate table in Article 89 of the Income Tax Act, the top rate is 45% on amounts exceeding ¥40 million. Inhabitant tax is layered on top: Article 35 of the Local Tax Act sets the prefectural standard rate at 4% (2% for those domiciled in a designated city) and Article 314-3 sets the municipal rate at 6% (correspondingly 8%) — 10% in aggregate either way. The familiar figure of roughly 55% comes from the combination of those two provisions.

The corporate side is built differently. Article 66(1) of the Corporation Tax Act sets the general rate at 23.2%, and Article 66(2) applies 19% to the first ¥8 million of income for ordinary corporations whose stated capital at fiscal year end is ¥100 million or less. Article 42-3-2 of the Act on Special Measures Concerning Taxation then reads that 19% down to 15% — except that fiscal years with income exceeding ¥1 billion take 17%.

This reduction does not reach everyone. Article 66(5) of the Corporation Tax Act provides, as to the corporations it lists, that "paragraph (2) shall not apply." The 19% line in the table above therefore does not follow from the capital figure alone; it presupposes that the corporation falls outside that paragraph. What Article 66(5) lists includes mutual companies, ordinary corporations wholly controlled by a large corporation with stated capital of ¥500 million or more, trust corporations, investment corporations, and special purpose companies. On top of that, the opening text of Article 42-3-2 excludes from the 15% rate the corporations listed in Article 66(5) together with "excluded businesses" and consolidated-group corporations. An "excluded business," per the definition in Article 42-4 of the Special Measures Act, is a corporation whose annualised average income across the fiscal years ending in the three years before the start of the current year exceeds ¥1.5 billion. The special measure also carries a statutory expiry date.

"Incorporate and the rate drops," in other words, comes with preconditions: stated capital, ownership relationships, and the income level of the past three years are all items to confirm at the design stage, not after.

There is one more. Director's remuneration paid from the company to yourself does not automatically become deductible. The Corporation Tax Act excludes from deductible expenses amounts of director's remuneration that do not fall within certain defined types, with how the timing and amount are fixed forming the conditions. A design built on the individual-versus-corporate rate gap alone tends to fail at exactly this point.

The Home Country and the US: Different Category, Different Treatment

Where rental property sits in your home country, the starting question is which income category the rent falls into under that country's income tax law. Under China's individual income tax law, income from the lease of property sits apart from comprehensive income, in a category taxed at a flat 20%. Whether it is received personally or through a company changes the range of deductible costs — structurally the same question as on the Japan side.

Whether an investment account left in the US raises the passive foreign investment company (PFIC) rules does not turn on the account being in the US. The rules operate where the holder is treated as a US person for US tax purposes and what is held constitutes shares in a foreign corporation meeting the PFIC conditions. The order of enquiry is therefore the holder's US tax status first and the account's contents second; the account's location settles nothing. Where they do apply, certain distributions and disposition gains on PFIC stock fall under a method of computation separate from ordinary capital gains treatment, and the regime also leaves room for the holder's own elections to change how the shares are treated. Which method applies, and how much any election actually changes, turns in part on when the holding began and what has happened since. That is a question of US tax law, outside the range on which we express a conclusion, and requires confirmation by a US-licensed professional.

In each case, what we do is map the structure on the Japan side; filings and tax computations in each jurisdiction are handled by licensed professionals there.

The Order of Diagnosis

There is a sequence to untangling a three-country position.

• Which income falls into which category, in which country — rate comparisons come after this, not before.
• Received personally or through a company — on the Japan side this changes which rate table applies at all.
• Are the preconditions for the reduced rate met — stated capital, ownership relationships, income over the past three years.
• Have you identified the foreign income tax you will be liable to pay? The foreign tax credit under Article 95(1) of the Income Tax Act is available where foreign income tax becomes payable, subject to a creditable limit, and claiming it requires the prescribed entries and supporting documents on the Japanese return. Whether the other country requires a return of its own or is settled by withholding depends on that country's system.

The sense of being taxed by three countries at once usually comes from these four never having been drawn on a single page. Drawing them is the work that precedes any design.

This article provides general information on tax systems and does not constitute individual tax consultation. Specific filings and tax computations are handled by licensed partner tax accountants whom we introduce.