In recent years, there has been an increase in cases where non-residents and foreign corporations purchase real estate in Japan.
When such a situation arises, we are often asked questions like, “Is it better to buy as an individual or as a corporation?” When considering ways to buy, the following patterns are often seen:
① “A non-resident purchases as an individual.”
② “A non-resident establishes a Japanese corporation and purchases through that corporation.”
③ “A foreign corporation purchases directly.”
④ “A foreign corporation establishes a Japanese subsidiary which then makes the purchase.”
We will now examine the characteristics of each method from a tax perspective.
1. When an Individual Purchases Real Estate in Japan
When a non-resident purchases and leases out real estate in Japan as an individual, they are required to file a tax return in Japan. Moreover, when rent is paid, a withholding tax of 20.42% must be withheld and paid by the tenant or payer.
However, if the non-resident provides the property to a relative living in Japan rent-free or at a low rent, there is no need for the payer to withhold tax.
Also, if the non-resident sells real estate located in Japan, the capital gain is taxable in Japan. If the buyer is a resident of Japan, the buyer must withhold 10.21% of the purchase price and pay it as withholding tax. However, if the seller is a non-resident but the property is not subject to taxation (e.g., no capital gain), tax may not be owed. Still, the withholding tax must be paid regardless.
However, if the transfer price of the real estate is 100 million yen or less, and the purchaser is an individual who is buying it for their own residence or that of a relative, there is no need to withhold tax.
2. When a Corporation Established in Japan Purchases Real Estate
When a non-resident establishes a corporation in Japan to purchase real estate, the taxation follows the general rules for domestic corporations. The corporation, not the shareholder, is subject to taxation on profits, including rental income and capital gains.
If the corporation sells its shares, and the shares correspond to “real estate holding corporations” (※1), capital gains taxes may apply, and the non-resident shareholder may be subject to reporting obligations in Japan if they have a permanent establishment.
However, in general, there is no obligation to withhold taxes on income earned by such corporations.
(※1) Shares of a Real Estate Holding Company
Shares of a company that issues such shares and that company owns, directly or indirectly, real estate whose value comprises more than 50% of its total assets, and:
If the shares were issued within the last 365 days, and
If the seller (and related parties) held at least 25% of the shares at any time during that period,
Then the shares are considered “real estate holding company shares,” and special rules apply for capital gains taxation and withholding tax obligations.
3. When a Foreign Corporation Purchases Real Estate Directly
Next, when a foreign corporation directly purchases real estate in Japan, corporate tax is imposed on any profits generated from rental income or the sale of the property. However, local taxes that are generally levied on corporate profits (excluding the national local corporate tax) are not applicable.
As for consumption tax in this case, it depends on factors such as the foreign corporation’s capital amount, business year, whether a base period exists, and if so, the amount of taxable sales during that period — so caution is necessary.
4. When a Subsidiary Established by a Foreign Corporation Purchases Real Estate
If a foreign corporation establishes a subsidiary in Japan and that subsidiary purchases real estate, the taxation will be based on the domestic corporate tax rules, as the property is held by a Japanese corporation.
If the foreign corporation sells its shares in the Japanese subsidiary and those shares are considered “real estate holding company shares” (※1), then a withholding tax may apply on the capital gains. In such cases, the foreign corporation must file a tax return in Japan, and the purchaser may be obligated to withhold tax. If the shares do not meet the definition of “real estate holding company shares,” no withholding tax is required.
5. Attention Required When Gifting Real Estate or Shares
Special attention is needed when:
A foreign corporation owning real estate in Japan gifts its shares, or
A foreign person gifts shares of a Japanese corporation owning real estate in Japan.
For example, when “an individual who has neither a domestic address nor Japanese nationality” gives assets as a gift to “another individual who also has neither a domestic address nor Japanese nationality”, the recipient is classified as a ‘non-resident limited taxpayer.’ Therefore, if the gifted asset is shares and the issuing company’s head office is located outside Japan, the shares are considered foreign assets and are not subject to Japanese taxation.
If you are interested in the tax system related to real estate held by non-residents or foreign corporations, please contact BPS International Tax Corporation.
