Japan Tax Bulletin
Tax treatment of real estate owned by a foreign corporation andleased in Japan
December 2021
1.

Overview

Due to the prolonged Covid-19 pandemic, more and more
Japanese companies are selling off their headquarter buildings andother real estate holdings in order to secure cash reserves anddrastically downsize their office space. Among the buyers are foreign
funds, foreign corporations, and wealthy foreign individuals. In thisbulleting, we will review the tax treatment of a foreign corporation
and a non-resident individual that leases office space in Japan to aJapanese company or a Japanese resident.
2.

Obligation of the lessee (Japanese corporation) to withhold tax

Office rentals fall under the category of "consideration for therental of real estate located in Japan" within Japanese domestic
source income, and Japanese companies paying such rent are
obliged to withhold tax at 20.42%.
In general, tax treaties grant taxation rights for real estate rental
income to the country where the real estate is located (e.g., JapanU.S. tax treaty, Article 6), so the treatment under the Japaneseincome tax law is applied as it is.
The withholding obligation of the lessee may be waived if theforeign corporation has a permanent establishment in Japan for thepart of the rental income attributable to that permanentestablishment.
3.

Obligation of the lessor (foreign corporation) to file a tax return

The lessor is subject to income tax withholding from the rental
income at a rate of 20.42% and also has the obligation to file acorporate tax return in Japan. If the lessor is a foreign corporation,
the income tax withheld on the rental income is deducted from theamount of corporate tax. The corporate tax imposed on foreign
corporations is levied at a rate of 23.2%, based on taxable domestic
source income after deducting appropriate expenses. Therefore, if
a foreign corporation files a corporate tax return, the amount ofwithholding income tax at 20.42% is generally larger than thecalculated corporate tax liability, and the corporation is entitled to arefund of the withholding tax in excess over the income taxliability.
A foreign corporation that earns domestic rental real estate income
without establishing permanent in Japan is not subject to businesstax and inhabitant tax as long as the foreign corporation does nothave a permanent establishment in Japan, but is subject to local
corporate tax. The local corporate tax is a surcharge to the national

corporate tax collected with it and the revenues are delivered to
local governments entirely. The local corporate tax rate has been
increased from 4.4% to 10.3% for taxable years beginning on orafter October 1, 2019. For Japanese corporations, the local
corporate tax rate was raised instead of the inhabitant tax rate
being lowered, so there was no change in the total tax burden.
However, for foreign corporations that are only required to file
corporate tax and local corporate tax returns, the increase in thelocal corporate tax rate has an impact on their tax payments.
If a foreign corporation has a permanent establishment in Japan,
it is obliged to file business tax and inhabitant tax returns inaddition to the corporation tax and local corporate tax.
4.

Obligation of the lessor (not-resident individual) to file tax return

For non-residents, the lessee is required to withhold income tax at
the rate of 20.42% from the rental fee and the lessor is also
required to file an individual income tax return in Japan.
In the case of non-residents, the amount of real estate income is tobe reported and taxed with other categories of income at
progressive tax rates. The method of calculating the amount of realestate income for non-residents is the same as that for residents, as
the regulations on calculating taxable income for residents areapplied to non-residents as well.
5.

Consumption Tax Return Obligation

Office rentals are “taxable transactions" under the consumption
tax law because the location of the office is in Japan. If thetransaction falls under the category of rental of residentialaccommodation, it is a "non-taxable transaction*1.
In principle, the consumption tax liability is the same regardless of
the lessor's place of residence or corporate status. A foreign
corporation that does not have a permanent establishment in Japan
may still be a consumption taxable enterprise if its taxable sales
exceed the threshold. An enterprise is exempt from filing a
consumption tax return and making consumption tax payments if
its taxable sales in the base period do not exceed JPY10 million as ageneral rule (there are other requirements). The base period
generally means the fiscal year 2 years prior to the current fiscalyear.

*1 non-taxable transaction
Transfers of certain designated types of assets and services are
non-taxable either because the asset is not of the typecontemplated for Consumption Tax or for reasons based on social
policy concerns.
–Sales and leases of land and rights to land
–Transfers of securities–Financial transactions–Sales of postage stamps and document stamps–Merchandise and service cards–Government fees
–International money orders and foreign exchange–Medical services–Nursing care services–Social welfare services–Rental fee for lease of residential accommodation© 2021 Grant Thornton Taiyo Tax Corporation. All rights reserved.
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