Hello, this is NS from Sayu Certified Public Accountants Office.
Many people who earn income from overseas—such as salary income from overseas work, dividends from foreign stocks or investment trusts, or foreign real estate income—may have wondered or felt anxious, “I paid tax overseas, will I be taxed in Japan too?”.
Under Japanese tax law, if you are determined to be a “Resident” of Japan, you are taxed in Japan on your worldwide income, including income earned overseas. For this reason, there are cases where double taxation occurs, in which the same income is taxed in both the overseas country and Japan.
The system designed to mitigate such a burden is the Foreign Tax Credit (Gaikoku Zeigaku Kōjo). By utilizing it properly, a part or all of the tax burden in the foreign country can be deducted from Japanese income tax, making it possible to reduce the tax burden.
This article clearly explains the important points, from the outline of the Foreign Tax Credit system to its calculation method and precautions for the final tax return.

1. What is the Foreign Tax Credit?

When a “Resident” under Japanese tax law earns income overseas, that income may be taxed in both of the following:
• The local country (a country other than Japan)
• Japan (worldwide income taxation)

The Foreign Tax Credit was established to adjust for this double taxation. The credit covers income tax paid overseas on foreign source income, such as salary, interest, dividends, and real estate income.
• The Foreign Tax Credit is not applicable to a “Non-Resident” (since the income is not taxed in Japan in the first place)
• A similar Foreign Tax Credit also exists for “Local Inhabitants Tax” (Jūminzei)

2. Calculation Method for the Credit Limit

The Foreign Tax Credit does not guarantee that the “full amount” of taxes paid overseas will always be credited.
The maximum creditable amount is determined by the following formula:
Credit Limit = Japanese Income Tax Amount x (Foreign Income / Worldwide Income)
For example, if the annual Japan domestic income is 45 million yen, the foreign income is 5 million yen, and the Japanese income tax amount is 15 million yen, the upper limit for the foreign tax credit is:
15 million yen x (5 million yen / 50 million yen) = 1.5 million yen
$\rightarrow$ No matter how much tax was paid overseas, the maximum amount that can be credited in Japan is 1.5 million yen.

• “Worldwide Income” and “Foreign Income” are based on adjusted taxable income
• Note that if the “No Tax Return Required System” (Shinkoku Fuyō Seido) is selected for listed stock dividends, etc., that income should not be included in foreign income

3. Procedures during Final Tax Return Filing

〇 Preparation of Necessary Documents
Documents that “prove that income tax was borne overseas” are required, such as:
• Overseas withholding tax slip
• Tax payment certificate
• Securities company’s annual transaction report (for dividends, interest, etc.)
• Tax payment certificate for real estate income, etc.

〇 Entry on the Final Tax Return Form
• Attach the “Statement on Foreign Tax Credit” (Gaikoku Zeigaku Kōjo ni Kansuru Meisaisho) (stating the type of income, country name, tax amount paid overseas, presence of carry-over deduction, etc.)

4. Carry-over of Excess Credit and Credit Remaining Amounts

■ Carry-over of Excess Credit Amount (When the overseas tax amount exceeds the credit limit)
When:
Overseas tax paid > Credit Limit
The excess portion (excess credit amount) can be carried over for the next 3 years and later.
To apply this, a declaration of “Carry-over Credit Application” (Kurikoshi Kōjo Tekiyō) must be filed in the final tax return for the year the excess credit occurred, and continuous final tax filing is required for the subsequent years.
■ Carry-over of Credit Remaining Amount (When the overseas tax amount is less than the credit limit)
When:
Credit Limit > Overseas tax paid
The difference (credit remaining amount) can be added to the foreign income amount for the next 3 years and later.

5. Points to Note When Using the Foreign Tax Credit

• Since the calculation is based on the Japanese income tax amount, which has an upper limit, it does not necessarily mean that the full amount of tax paid overseas can be credited.
• Calculation is required by country and by income category
o The income tax Foreign Tax Credit adopts the basket method (basket hōshiki), requiring calculation by country and by income category (salary, dividends, real estate, ordinary income, etc.)
• Document preparation is required
o Documents such as withholding tax slips, annual transaction reports, and tax payment certificates must be prepared, and the “Statement on Foreign Tax Credit” must be attached to the final tax return form.

6. Main Patterns Where the Foreign Tax Credit Can Be Used

You may consider whether the Foreign Tax Credit can be applied if you have income such as the following:
• When you have salary income from working overseas
• When you have received dividends from foreign stocks or investment trusts
• When you have rental income from foreign real estate
• When you have received interest from foreign deposits or bonds, etc.

7. Summary

By utilizing the Foreign Tax Credit, a part or all of the tax paid overseas can be deducted from Japanese income tax, thereby reducing the burden of double taxation. It is especially worthwhile to check if the credit applies when you have salary from overseas work, dividends, interest from overseas investments, or real estate income.
Our office also supports the tax affairs of employees of foreign-affiliated companies and those who own overseas assets. If you have any questions regarding the applicability or calculation method of the Foreign Tax Credit, or procedures such as final tax returns, please consult us