Japan Tax Tips: Reduce Your Tax Using Your Rent
Japan is famously one of the higher tax jurisdictions in the world. It should come as no surprise that spending time, and even money, to reduce your annual taxes is not an exercise reserved for the ultra-wealthy. An average income earning person or family can easily stand to save a considerable amount off their tax bill each year, provided they do their homework and plan ahead.
We have already spoken at length about the various methods of reducing your tax bill in Japan, outlining the main types of annual deductions or tax rebates available to the average wage earner and their family depending on what type of activities they engage in and how they spend their annual earnings. For instance, the Japanese tax authorities are very lenient towards those who can document regular financial assistance to dependents, especially if that person is an elder. Another sizable deduction comes from documenting the depreciation of any Japanese real estate you may own.
There is another potentially major tax break which involves real estate that often goes unnoticed or unpursued due to the taxpayer often incorrectly assuming they are unable to take advantage of this tax benefit. Another one of the reasons this “cash is left on the table” is because this tax benefit is rather unique to Japan, with most other countries not having a similar system in place. Accordingly, some foreigners after having moved to Japan can go years without even realizing its existence. This particular tax benefit is, of course, the company dormitory deduction.
This tax deduction focuses on the large segments of the population who are not yet home owners. If you own your home, then chances are you are already making use of deducting the 1% per annum for the first 10 years of your outstanding mortgage balance (as of 2014 applicable only to the first 40 Million JPY of your mortgage), as well as any fixed asset depreciation each year. If you are not a home owner, you may feel left out in the cold while unable to make use of these tax breaks. To add insult to injury, paying rent each year feels like money out the window, while all the homeowners are building a small amount of equity each year through their mortgage payments. However, take heart, as one of the largest possible annual tax breaks is reserved for the renters of the world; whether you plan to rent and periodically move for most of your life, or simply do not yet have any plans to buy a home in Japan.
Many of Japan’s larger companies, for a multitude of reasons both financial and corporate-HR focused, maintain company dormitories to house their staff. Due to the nature of these living arrangements, the companies are able to make the legal case that the monthly rent is in fact a company expense, and not simply a personal cost born by the employee. The good news is: even if you are not working for a large traditional Japanese company and living in an apartment block along with 100 of your coworkers, you may still be able to take advantage of this tax break system (or your company may already be making use of this tax break without your noticing it).
So what exactly does it mean to be able to deduct rent from your taxes? Take a look at an example of an average person living in Tokyo, and earning 6,000,000 JPY each year. Assuming this is after taking into account any other potential tax deductions, and we are only looking at federal income tax and Tokyo resident’s tax, this person should be expecting to pay approximately 1,372,500 JPY in taxes each year. Let’s see how much that can be reduced by expensing the rent. Assuming he is living in an apartment that costs 150,000 JPY each month, that would make his annual rent 1,800,000 JPY. However, this is where it starts to get a little tricky. Unless you are on a short-term expat package, and your company can make a strong legal case to the tax office for example why you must have a specific type of apartment and that you are in the country strictly on a short-term work assignment, it is unlikely you will be able to deduct the entirety of your apartment rent from your taxes. A good rule of thumb is that in most cases you should be able to deduct at least half of the rent as a company dormitory expense. This still allows in our example for a 900,000 JPY deduction (1,800,000 JPY divided by 2). However, this does not mean you get to reduce your tax bill by 900,000 JPY. From here, you simply reduce your taxable income by the 900,000 (bringing it down from 6 Million to 5.1 Million). In this case, it would reduce your annual tax bill from 1,372,500 to 1,012,500; which comes out to 270,000 JPY worth of tax savings each year. Your savings could be even more depending on which of the social insurance programs you are currently enrolled in, such as health, pension, and unemployment insurance, which could be reduced in line with reducing your taxable income. If you happened to live at that apartment for just four years, your total tax savings would be over 1 Million JPY.
Take a look at a similar example, but this time assume you are in a higher income tax bracket and have an apartment with a higher level of rent. If you happen to be earning 12 Million JPY each year, and your apartment rental cost is 300,000 JPY each month, your annual tax savings would jump to 720,000 JPY, or almost 3 Million JPY over four years.
Given that most foreigners living in Japan are not home owners, it would seem to be a mystery as to why everyone is not taking advantage of this significant annual tax break that adds up to hundreds of thousands of yen each year. The difficulty comes in the preparation and necessary actions to take that ensure you can get the tax break. For you to make use of this, you are likely first going to have to speak with your boss or HR manager. This is going to involve spending some political capital or even just outright asking for a favor. To get the tax break, you will need to have your current apartment rental agreement be not a personal contract (kojin keiyaku), but instead be a company contract (hojin keiyaku). This is why the tax break is best sought out when you happen to be planning to move to a new apartment. This way, when you apply for your next apartment, you can set it up as a company contract right from the start. This is where it can become a bit complicated and require a little more work than usual, as the company contract application could require not only the usual documentation for yourself, but also extensive documentation for the company as well, such as the company registry (tokibo tohon) company seal certificate (inkan shoumeisho) and the company’s summary financial statements (kessan sho). Depending on how strict the owner, management company, or guarantor company may be, they may require further due diligence on the company. After getting the application approved and the contract sealed, the complexity does not stop there. As it is a company contract, they are the ones that will have to make the monthly payments, not you. Your employer’s accountant or HR will also then have to do the tax calculation to determine how much of the monthly rent is deductible as an expense, and then reduce your monthly salary accordingly (unless you somehow managed to convince them to pay your rent at no cost to you…)
If there are any barriers to entry for this tax benefit, the likely culprits are the various ways it could get clogged up in company bureaucracy. Running around government offices to acquire the company’s documents, meeting with the management company to seal contracts on your company’s behalf, and updating payroll calculations to account for your new arrangement all amount to extra work for one or more of your colleagues with no immediate benefit to them. It is also possible that, in order to avoid having to engage in this extra administrative work, and to reduce the company’s liability (as they are responsible for the rental contract, and as such are liable for damages to the apartment or having to continue paying rent even if you leave the company), it may be company policy to not engage in company rental contracts. However, it is certainly not without merit to at least inquire with HR or your manager as to the possibility of such an arrangement. If you must spend some political capital, or even your own money treating some of your colleagues to for example dinner or drinks to repay their kindness in doing all this extra work for you, it can easily end up being worth everyone’s while.
[ Sources ]
– The Choice of Accounting Policy In Japan – Tatsuo Inoue, Journal of International Financial Management and Accounting, Volume 7, Issue 1
– Effects of government policies on residential mobility in Japan: Income tax deduction system and the Rental Act – Miki Seko, Journal of Housing Economics, Volume 16, Issue 2
– Taxation in Japan 2014 – KPMG