- September 28, 2023
- Posted by: Aki Kojima
- Category: Individual & Self-Employed
Hello. In this blog, I would like to delve into the topic, “Is withholding tax(Gensen Choushu Zei[源泉徴収税]) required for translation fees paid by a corporation located in Japan to a non-resident?” I want to delve into the subject of “Is withholding tax required for translation fees paid by a corporation located in Japan to a non-resident? Translation services are one of the indispensable fields in today’s globalized society, and the works covered by such services are diverse. However, when both the payer and receiver have different nationalities and residences, issues related to tax procedures may arise. In this article, we will explain the responsibilities and points to note for corporations that provide translation services in Japan and the necessity and method of withholding tax concerning translation fees.
- 1 Necessity of income tax withholding on amounts paid
- 2 What is a derivative work in translation?
- 3 Necessity of withholding tax
- 4 Central tax rates are required for withholding tax for non-residents and foreign corporations.
- 5 Differences in treatment according to tax treaties with various countries
Necessity of income tax withholding on amounts paid
Sometimes, a Japanese corporation must withhold income tax from remuneration, such as translation fees, to a non-resident. This withholding is a method of producing the payment in advance income tax.
The amount is determined as a fixed percentage of the revenue. Since translations are considered derivative works, they are also subject to withholding tax. When a translation is commissioned to a non-resident, domestic source income is determined based on the location where the work is used. Withholding tax is required because the payment is made from Japan to a non-resident. Therefore, the same applies to payments to foreign corporations and non-residents.
The treatment differs depending on how tax treaties with various countries are stipulated. Please be sure to understand the principle standards for tax purposes accurately and remember to withhold tax when necessary.
What is a derivative work in translation?
The content of a translated article or other work is based on the original work. Therefore, the translated text is considered a derivative work. According to Japanese copyright law, you must obtain permission to use a derivative work from the rights holder of the original work. Failure to obtain permission constitutes copyright infringement.
The name “derivative work” is ostentatious and may be difficult to understand. It is essential to understand that translation will likely constitute a derivative work.
Necessity of withholding tax
When a company in Japan requests a non-resident to translate a document, income tax withholding is required for the compensation. Since the translated text is treated as a derivative work, withholding tax is always imposed on the translation fee paid to the non-resident. Although the treatment differs depending on the tax treaty provisions of each country, it is essential to understand the principle first.
When a company in Japan requests a translation service from a non-resident who resides overseas, the remuneration is subject to “domestic source income. In this case, the company is required to withhold taxes at a rate of 20.42%. The withheld tax must be paid to the tax office by the 10th of the month following the payment. If a company fails to fulfill its withholding obligation, it must pay the tax later. In such cases, a delinquent tax will be charged. This is a real penalty.
Another problem is that withholding means you have to make deductions when paying foreign companies. Later, getting the money back from the foreign company is a genuine hurdle. There are also remittance fees. If you cry yourself to sleep, the payer may have to pay all of them. Be careful.
Central tax rates are required for withholding tax for non-residents and foreign corporations.
Japanese income taxation on non-residents and foreign corporations is based on domestic source income. Therefore, withholding tax is required in Japan. The withholding tax rates for non-residents and foreign corporations are summarized in Chart 12.3.
Domestic source income is subject to withholding tax, and the tax rates are as follows.
- Profit derived from business conducted through a permanent establishment based on a partnership contract, etc., as defined in the Civil Code and allocated based on such contract: 20.42%.
- Consideration for the transfer of land, etc.: 10.21% (However, withholding tax is not required for consideration for the transfer of land, etc. of 100 million yen or less, which is paid by an individual who receives the ground, etc., for their use or that of a relative).
- Consideration for the business of providing personal services: 20.42%.
- Rent of real estate, etc.: 20.42% (However, withholding is not required for rent of real estate, etc., paid by an individual who rents the property to use it for their residence or that of their relatives.)
- Interest, etc.: 15.315%.
- Dividends, etc.
- (a) Dividends of listed stocks, etc.: 15.315%.
- (Note 1) Dividends of listed shares, etc., paid by a non-resident who owns shares or capital contributions in a number or amount equivalent to 3% or more of the total number or total amount of issued shares or capital contributions are excluded.
- (Note 2) “Listed shares, etc.” includes beneficial interests in publicly offered securities investment trusts (excluding bond and specified stock investment trusts) and established investment corporations.
- (b) Distribution of income from privately placed publicly offered bond investment trusts, etc.: 15.315%.
- (c) Dividends other than (a) and (b): 20.42%.
- (a) Dividends of listed stocks, etc.: 15.315%.
- Interest on loans: 20.42%.
- Royalties from industrial property rights, copyrights, etc.: 20.42%.
- Salaries, remuneration for rendering other services, retirement allowances, etc.: 20.42%.
- Public pensions, etc.: 20.42% (the tax rate is calculated by deducting from the amount of assistance paid the amount of 50,000 yen (95,000 yen for those aged 65 or over) multiplied by the number of months about the pension amount).
- The monetary award for advertising and promotion of business: 20.42% (the amount paid minus ¥500,000 is multiplied by the tax rate)
- Annuities, etc., under life insurance contracts: 20.42% (the tax rate is multiplied by the amount of premiums or premiums paid, less the amount of the portion corresponding to the amount of annuity to be paid)
- Compensation for benefits of term deposits, etc.: 15.315%.
- Distribution of profits under silent partnership agreements, etc.: 20.42%.
Differences in treatment according to tax treaties with various countries
When making payments to non-residents, etc., if a tax treaty has been concluded between the country of residence and Japan, withholding tax can be reduced based on the tax rate (maximum tax rate) stipulated in the tax treaty. It is necessary to check each one by one. Let’s look at an example.
For example, let us assume that the payee is a resident of the United Kingdom. In this case, it is possible to exempt the payment from tax under the provisions of the tax treaty, treating it in the same way as other movable property. However, please note that a prescribed procedure is required.
Next, as with copyright royalties, taxation is based on the debtor’s principle in the case of a Korean resident. In this case, the debtor is considered the Japanese party who made the request, and a 20.42% withholding tax is required at the time of payment.
As you can see, even if the transactions are the same, the treatment may differ.
Please get in touch with me if you have inquiries about withholding tax against translation fees.