JAPAN Law and Practice Contributed by: Yutaka Shimoo, Anderson Mōri & Tomotsune
2.5 Tax Residence of Legal Entities Domestic corporation means a corporation that has its head office or principal office in Japan. The location of a head office or principal office is determined not by the place of management and control, but by corporate registration. Accordingly, in substance, residence is determined by the governing laws of incorporation. 2.6 Definition of Permanent Establishment Japanese tax law provides the following three types of PEs that are consistent with the OECD Model Tax Convention. A service-type PE is not included in the definition of a PE. Types of Permanent Establishment Branch type A branch, factory, or any other fixed place located in Japan is deemed to be a PE, provided, however, that a “representative office” is not considered to be a PE because it conducts only secondary operations, such as information gathering or market research. Construction-work type A place in Japan in which a foreign corporation carries out any construction work or supervises a construc - tion work effort for more than one year is deemed to be a PE. Agent type An agent of a foreign corporation in Japan who is habitually authorised to execute an agreement, or to conduct significant aspects of contract negotia - tions, is deemed to be a PE unless the agent is an “independent agent”. An independent agent is one that provides, as part of its ordinary business, certain services to foreign companies. Exclusions and Priority Any type of business base mentioned above which has a preparatory or auxiliary nature is excluded from being a PE. In addition, tax treaties generally override provisions in domestic tax laws that may be contrary to the trea - ties, so the specific concept of a PE contained in a tax treaty will apply with priority. However, the basic
residents), the taxable income is limited to (i) income other than foreign-sourced income; and (ii) foreign- sourced income that is paid in Japan or transmitted from abroad. 2.4 Taxation of Non-Resident Individuals Non-residents are subject to income tax only on domestic-sourced income. Under the domestic tax law, domestic-sourced income includes the following types of income: • business income derived from a permanent estab - lishment (PE) in Japan; • income from the utilisation or holding of assets located in Japan (excluding as stated below); • income from the transfer of certain types of assets located in Japan (including shares of Japanese corporations in certain situations but excluding income from the transfer of real estate (including leasehold of land) in Japan); • distribution of profit from a partnership which has a PE in Japan; • income from the transfer of real estate (including leasehold of land) in Japan; • consideration for the provision of personal services carried out in Japan; • rentals from real property, ships and aeroplanes located/registered in Japan; • interest on bonds or debentures; • dividends paid by Japanese corporations or invest - ment trusts in Japan; • interest on loans paid by business operators engaging in Japan; • royalties from intellectual property in Japan/rentals from movables in Japan; • wages or compensation in consideration of ser - vices carried out in Japan; • awards received from sales promotional activities; • annuities from life insurance policies; and • distribution of profits from a silent partnership ( tokumei kumiai ). Domestic source rules may be overridden by applica - ble tax treaties.
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