What Happens to Your Japanese Taxes After Living in Japan for 5 Years? A Guide for Americans

Hello, my name is Taisei Koshida, a certified public accountant and tax accountant in Japan.

I often receive questions from American clients who are approaching five years of living in Japan.

For example:

• What changes after I have lived in Japan for five years?
• Will Japan start taxing all of my U.S. income?
• Does remittance-based taxation still apply?
• What happens if I pass the five-year point in the middle of the year?
• When is a distribution from my U.S. LLC recognized as income?
• Should I sell my U.S. investments before reaching five years?

The basic rule itself is not very difficult.

However, once U.S. LLCs, securities, IRAs, overseas property and other foreign assets are involved, the actual tax calculation can become complicated.

One particularly important point is that your Japanese tax treatment can change in the middle of a calendar year.

In this article, I explain Japan’s five-year rule and some of the practical points I usually discuss with my American clients before they reach that point.

1. What Is Japan’s 5-Year Tax Rule?

If you are a Japanese tax resident without Japanese nationality and have had a domicile or residence in Japan for an aggregate period of five years or less during the preceding ten years, you are classified as a non-permanent resident for Japanese income tax purposes.

Once your aggregate period in Japan exceeds five years during the preceding ten years, you cease to be a non-permanent resident.

One important point is that the rule is not simply based on five years from your most recent arrival in Japan.

If you lived in Japan before, your previous period of residence can also count.

Also, the change does not wait until January 1 of the following year.

You cease to be a non-permanent resident from the day after you exceed the five-year threshold.

Therefore, your Japanese tax status can change in the middle of the year.

2. A Temporary Trip Outside Japan Does Not Stop the 5-Year Clock

I am sometimes asked whether returning temporarily to the United States stops the five-year count.

If Japan remains the base of your life and you leave Japan only temporarily with the intention of returning, the period generally continues to count as part of your Japanese residence.

For example:

• a temporary trip back to the United States;
• an overseas vacation;
• a business trip; or
• a short or temporary stay outside Japan.

Simply leaving Japan does not automatically stop or reset the five-year period.

The important question is whether you continue to have your domicile or residence in Japan.

3. How Does Remittance-Based Taxation Work?

A non-permanent resident is still a Japanese tax resident, but special rules apply to certain foreign-source income.

Foreign-source income paid outside Japan can become taxable in Japan based on the amount remitted to Japan.

There is one point that is often misunderstood.

The source of the particular money you remit does not determine whether the remittance is counted.

Suppose you have USD 100,000 of relevant foreign-source income during the year and remit USD 30,000 to Japan.

You cannot simply say:

“The USD 30,000 came from savings I had before moving to Japan, so it has nothing to do with this year’s income.”

That is not how the remittance rule works.

The calculation is made on a calendar-year basis by comparing the relevant foreign-source income and remittances, together with the rules applicable to other income paid outside Japan.

In a simple case, if you have USD 100,000 of relevant foreign-source income and remit USD 30,000 to Japan, up to USD 30,000 can be included in the Japanese tax calculation under the remittance rules.

The fact that the actual USD 30,000 came from old savings does not by itself change the result.

The money does not have a label saying “old savings” or “this year’s dividend.”

For this reason, the amount you remit to Japan can be very important while you remain a non-permanent resident.

If you want to see how these rules work when preparing an actual Japanese return, see How to Prepare a Japanese Tax Return for U.S. Non-Permanent Residents.

4. What Happens in the Year You Pass the 5-Year Point?

Suppose you cease to be a non-permanent resident in October 2026.

Your entire 2026 income does not automatically become subject to worldwide taxation from January 1.

During the period in which you are still a non-permanent resident, the non-permanent-resident rules apply.

In broad terms, that means Japanese-taxable income plus foreign-source income brought into the Japanese tax calculation under the remittance rules.

After you cease to be a non-permanent resident, you become subject to Japanese income tax on your worldwide income.

Therefore, in the year your status changes, you need to identify separately:

• income recognized while you were still a non-permanent resident;
• income recognized after you ceased to be a non-permanent resident; and
• remittances made during the relevant non-permanent-resident period.

This is why the transition year requires more careful calculation than an ordinary year.

5. Income Is Not Always Recognized When Cash Reaches Your Bank Account

This is another important point.

For Japanese tax purposes, the timing of income is not always determined by the date cash reaches your bank account.

The relevant timing depends on the type of income.

For example, suppose a U.S. LLC is treated as a foreign corporation for Japanese tax purposes and a distribution from the LLC is treated as dividend income.

The important question is when your right to receive the dividend became fixed.

Depending on the LLC’s governing law and documents, relevant dates can include:

• the date of a members’ meeting;
• the date the distribution is resolved; or
• the date the distribution is formally approved.

Therefore, if a distribution is formally resolved before you cease to be a non-permanent resident but the cash is transferred later, the date on which your right to receive the dividend became fixed is important.

Minutes, resolutions, operating agreements and other supporting documents should be kept.

Of course, this does not mean that you can simply choose any convenient date for tax purposes.

The date must be consistent with the applicable law, the LLC’s documents and what actually happened.

For more information about the Japanese treatment of U.S. LLCs, see U.S. LLC Taxation in Japan: PE Risk, Foreign Tax Credits, and Remittance Rules.

6. After the 5-Year Point, Remittance No Longer Controls the Taxation of Foreign-Source Income

Once you cease to be a non-permanent resident, the remittance-based taxation rule no longer limits the taxation of your foreign-source income.

You become subject to Japanese income tax on your worldwide income.

For example, if you receive U.S.-source dividend income after that point, it is taxable in Japan even if:

• you leave the money in a U.S. bank account;
• you leave it in a U.S. brokerage account;
• you do not remit it to Japan; or
• you do not use it for living expenses in Japan.

The basic difference is simple.

Before the five-year point, remittances can matter.

After the five-year point, whether you remit the money does not determine whether foreign-source income is taxable in Japan.

7. Capital Gains on U.S. Securities Are Generally Taxable in Japan

This area is often misunderstood.

The fact that you trade through a U.S. brokerage account does not mean that all capital gains are foreign-source income for Japanese tax purposes.

As a general rule, capital gains from securities are taxable in Japan even while you are a non-permanent resident.

Therefore, the following idea is generally wrong:

“The shares are held in a U.S. brokerage account, so Japan does not tax the gain unless I remit the money.”

However, there is an important exception.

Certain securities are treated as foreign-source income for purposes of the non-permanent-resident rules.

This can include certain securities:

• acquired before you became a Japanese tax resident; or
• acquired on or before March 31, 2017.

If the securities qualify for this treatment, the capital gain can fall within the remittance-based taxation rules while you remain a non-permanent resident.

This is why the acquisition date of your investments is extremely important.

For securities, when you acquired them can be more important than where the brokerage account is located.

8. Selling and Repurchasing Investments Before the 5-Year Point

This can be an important tax-planning opportunity.

Suppose you purchased U.S. shares before becoming a Japanese resident and the shares now have a substantial unrealized gain.

If those shares qualify for remittance-based taxation, one option is to sell them while you are still a non-permanent resident and then repurchase them.

For example, suppose you purchased shares for USD 100 and they are now worth USD 300.

If you simply hold them until after you cease to be a non-permanent resident and later sell them for USD 400, a substantial capital gain will be subject to Japanese taxation at that time.

Instead, you may sell the shares at around USD 300 while you are still a non-permanent resident and then repurchase them.

The first sale realizes the existing gain.

If the gain qualifies as foreign-source income under the special securities rules and you keep your remittances to Japan low during the same calendar year, you can reduce the amount of that gain subject to Japanese tax.

When you repurchase the shares, you establish a new acquisition cost.

As a result, if you later sell the shares after becoming subject to worldwide taxation, the capital gain arising after the repurchase is smaller.

If the conditions are right, selling and repurchasing before the five-year point can be an effective tax-planning method.

However, you should check the numbers before doing it.

In particular, you need to confirm:

• when the securities were acquired;
• whether they qualify for remittance-based taxation;
• the Japanese acquisition cost;
• U.S. tax consequences;
• transaction costs; and
• the amount you expect to remit to Japan during the year.

9. Plan Your Remittances Over Several Years

While you are a non-permanent resident, the amount you remit to Japan can have a significant effect on your Japanese tax.

Suppose you realize a large foreign capital gain that qualifies for remittance-based taxation.

If you remit a large amount of money to Japan in the same calendar year, a larger amount of that foreign-source income can become taxable in Japan.

If you do not need that much money in Japan during the year, keeping the remittance lower can reduce the amount subject to Japanese tax.

For someone approaching the five-year point, I think it is useful to look at household cash needs over several years.

For example:

• How much money do you need in Japan this year?
• How much will you need next year?
• How much will you need after you become subject to worldwide taxation?

Planning remittances over several calendar years can make a significant difference.

Again, the source of the particular money transferred does not decide the result.

Even a transfer from old savings can count as a remittance.

The important comparison is between the relevant foreign-source income and remittances during the calendar year.

10. U.S. LLC Owners Need to Be Particularly Careful

The Japanese tax treatment of a U.S. LLC does not necessarily follow its U.S. federal tax treatment.

For example, a single-member LLC can be treated as a disregarded entity for U.S. federal income tax purposes.

Japan can nevertheless treat the LLC as a separate foreign corporation depending on its legal characteristics.

If that happens, you need to reconsider the Japanese tax treatment of:

• compensation paid by the LLC;
• distributions from the LLC;
• the timing of dividend income;
• foreign tax credits; and
• permanent establishment risk.

If you live in Japan and personally operate your U.S. LLC from Japan, these issues become particularly important.

11. IRA, Roth IRA and 401(k) Accounts Also Need Separate Japanese Tax Analysis

The Japanese tax treatment of an IRA, Roth IRA or 401(k) does not automatically follow the U.S. tax treatment.

Something that is tax-free or tax-favored in the United States is not automatically tax-free in Japan.

If you are considering a large withdrawal, Roth conversion or other transaction around the five-year point, check the Japanese tax consequences before you carry it out.

For a large transaction, it is much easier to plan before the transaction than to deal with the tax result afterwards.

These issues are also discussed in my broader guide, Moving to Japan? How Your U.S. Income Is Taxed in Japan.

12. Foreign Tax Credits Can Reduce Double Taxation

The same income can sometimes be taxed in both Japan and the United States.

In that case, Japan’s foreign tax credit can reduce double taxation.

However, it is not as simple as:

“I paid USD 10,000 of U.S. tax, so my Japanese tax is automatically reduced by USD 10,000.”

The foreign tax credit has limitations.

You also need to identify which foreign tax relates to which income.

For this reason, I normally review the U.S. tax return and supporting documents when calculating a Japanese foreign tax credit.

13. “Non-Permanent Resident” Has Nothing to Do With Japanese Immigration Permanent Residence

This is another common source of confusion.

The term “non-permanent resident” in this article is a Japanese income tax classification.

It has nothing to do with Permanent Resident status under Japanese immigration law.

You can cease to be a non-permanent resident for tax purposes even if you do not have Japanese Permanent Residence.

The five-year rule discussed in this article is a tax rule, not an immigration rule.

14. Previous Periods of Living in Japan Also Count

The five-year test looks at your aggregate period of domicile or residence in Japan during the preceding ten years.

For example:

Three years in Japan
↓
Several years living overseas
↓
Return to Japan

You do not necessarily restart from zero when you return.

If the previous three years still fall within the preceding ten-year period, they count.

Also, as explained above, a temporary absence from Japan does not automatically interrupt your Japanese residence if Japan remains the base of your life.

15. What Should You Check Before Reaching the 5-Year Point?

If you have substantial income or assets in the United States, I recommend reviewing your situation before you reach the five-year point.

I would normally check at least the following:

• your exact period of residence in Japan during the preceding ten years;
• the exact date on which you cease to be a non-permanent resident;
• U.S. bank accounts;
• U.S. brokerage accounts;
• the acquisition dates of securities;
• the acquisition costs of securities;
• unrealized capital gains;
• U.S. dividends and interest;
• IRA accounts;
• Roth IRA accounts;
• 401(k) accounts;
• ownership of a U.S. LLC;
• LLC distributions;
• the dates on which distributions are resolved;
• overseas rental property;
• expected foreign-source income;
• planned remittances to Japan; and
• foreign taxes already paid.

The most important questions are often:

What income do you have?
When is the income recognized?
When did you acquire the asset?
How much will you remit to Japan during the year?

The period just before the five-year point can be an important time for tax planning.

If you are preparing your Japanese return yourself, you may also find Japanese Tax Return Guide for Foreign Sole Proprietors and Self-Employed Individuals useful.

FAQ

Are all capital gains in my U.S. brokerage account subject to remittance-based taxation while I am a non-permanent resident?

No.

This is often misunderstood.

Capital gains on securities are generally taxable in Japan.

The fact that you use a U.S. brokerage account does not mean that Japan taxes the gain only if you remit the proceeds.

However, there is an exception.

Certain securities acquired before you became a Japanese tax resident, or acquired on or before March 31, 2017, can be treated as foreign-source income for purposes of the non-permanent-resident rules.

Capital gains from qualifying securities can therefore fall within remittance-based taxation.

This is why checking the acquisition date is very important.

If I remit savings that I accumulated before moving to Japan, is the remittance excluded?

No.

The source of the particular money you remit does not determine whether it is counted.

If you have relevant foreign-source income during the same calendar year, a transfer from old savings can still affect the amount taxable in Japan under the remittance rules.

The basic calculation compares the relevant foreign-source income and remittances during the calendar year.

Does a temporary trip back to the United States stop the five-year clock?

Normally, no, if Japan remains the base of your life and your absence is only temporary.

Simply leaving Japan does not automatically interrupt your Japanese tax residence.

I reach the five-year point in October. Does worldwide taxation begin the following January?

No.

Your tax status changes during the year.

The non-permanent-resident rules apply to the relevant period before the change, and worldwide taxation applies after you cease to be a non-permanent resident.

This is why the income and remittances for each period need to be identified separately.

Should I sell my U.S. investments before reaching five years?

Not always.

However, if you have substantial unrealized gains on securities that qualify for remittance-based taxation, selling the investments while you are still a non-permanent resident and then repurchasing them can be worth considering.

This can allow you to realize the existing gain while the remittance rules still apply and establish a higher acquisition cost for future Japanese capital-gain calculations.

You should first check the acquisition dates, Japanese tax basis, remittance amount and U.S. tax consequences.

Will I be taxed twice by Japan and the United States after the five-year point?

The same income can be taxed in both countries.

Foreign tax credits and applicable treaty rules can reduce double taxation.

However, U.S. tax paid is not automatically credited in full against Japanese tax.

Japanese Tax Support for Americans Living in Japan

Koshida Accounting and Tax Office provides Japanese tax and accounting services in English for foreign individuals and business owners.

I increasingly assist American clients with issues involving:

• U.S. income;
• U.S. LLCs;
• remittance-based taxation;
• U.S. securities;
• foreign tax credits; and
• Japanese tax returns.

If you are approaching five years of living in Japan and have substantial income or assets in the United States, I recommend reviewing your position before you cross the five-year point.

There are some things you can consider before the five-year point that you cannot do afterwards.

I focus on the Japanese side of your tax situation and can coordinate with your U.S. CPA or tax preparer when necessary.

Please feel free to contact me through the inquiry form.