2024~ Foreign Tax Deduction for Dividends: Residence tax

[adamu]

For US stocks held in a Japanese broker by non-US citizens, until this year it has been possible to claim a deduction on the double-taxed dividend.

In a tax-collecting tokutei kouza, what usually happens is this:

1) US takes their tax from the dividend
2) Japan takes their tax from what's left

If you do a tax return, you can:

1) Declare the total dividends you received.
2) Also declare the amount of tax that was already withheld by the tokutei kouza.
2) The Japanese tax is recalculated on the full amount.
3) Claim the foreign tax deduction to cover the US withheld tax, and avoid the double taxation.
This effectively results in a refund of the US part, with a small increase in the Japanese part.

This is handled for national income tax. But there is still residence tax to worry about. Until this year, we could check "don't need to declare this for residence tax, it was handled by the tokutei kouza" (申告不要). This was fine, as we already got the full deduction applied to national income tax.

However, from this year, it is no longer possible to skip the residence tax declaration. The dividend we declare on the tax return will also be declared for residence tax, but without a way to enter the withheld residence tax amount, even though the tax was already witheld by the tokutei kouza. This will result in the residence tax being more than twice the original amount, as far as I can see.

Does anybody know a solution for this? The only things I can think of are:
1) Do a Residence Tax return as well, to submit the withheld tax amount.
2) Don't use a tax-collecting account, to avoid the problem.

[Tkydon]

However, from this year, it is no longer possible to skip the residence tax declaration. The dividend we declare on the tax return will also be declared for residence tax, but without a way to enter the withheld residence tax amount, even though the tax was already witheld by the tokutei kouza. This will result in the residence tax being more than twice the original amount, as far as I can see.

Does anybody know a solution for this? The only things I can think of are:
1) Do a Residence Tax return as well, to submit the withheld tax amount.
2) Don't use a tax-collecting account, to avoid the problem.

This is tricky word-smithing... I hope you get what I mean...

The Tokutei Kouza withholds the National and Reconstruction Taxes of 15.32% PLUS The Residents' Taxes of 5%, and sends them to their respective destinations, so you ave been taxed correctly.

When you do your Kakutei Shinkoku, you declare the Dividends, and you are given credit for the National and Reconstruction Taxes already withheld, as shown on the Gensen Choshu Hyo.

You then have the choice of selecting either the Separate Method Taxation to be taxed at 15.315% National and Reconstruction Taxes and 5% Residents' Taxes, OR to revert to the Aggregate Taxation Method to be taxed at your Marginal Aggregate Tax Rate, in which case your Dividend income becomes indistinguishable from all other Aggregate Taxation Method Income that would be taxed at the Residents' Tax Rate of 10%. The Option to remove the Dividend Income from the Passed Though Aggregate Income Information was to avoid this problem, as the Residents' Taxes have already been correctly withheld at 5%. (See Remember: below).

You then claim the Foreign Tax Credit for the 5% tax withheld in the US.

You use the special Tax Credit Calculator that calculates the amount that your Aggregate Taxable Income at your Marginal Rate of Income Tax plus Residents' Tax Rate of 10% should be reduced by to produce the exact same amount of reduction in Total Income Tax Payable equal to the tax withheld overseas; in the case of the US, 5%.
If the overseas withheld tax is more than the total National Aggregate Income Tax Payable, then any surplus can be applied to further reduce the actual Residents' Taxes as well (but it probably will not be...).

Applying this deduction has the effect of reducing your other Aggregate Taxable Income (not the Separate Method Dividend Income), which then results in less Aggregate National Income Tax to pay at your Marginal Income Tax Rate, and also less Residents' Taxes to pay on the Reduced Taxable Income at 10%, totaling the 5% tax paid overseas.

The Residents' Taxes on the Dividend Income have still already been withheld by the Tax Agent and paid to the Prefecture and City at the Residents' Tax Rates totaling 5%, so you are square.

In previous years, if you selected the Aggregate Taxation Method for Dividend Income (probably not for Foreign Dividends - see Remember: below), the system would levy the Residents' Tax Rate of 10% on the dividend income as well, as it would be indistinguishable from all other aggregate income, and so it was necessary to select the option to not include the Dividend Income information as part of the Aggregate Taxable Income information, as the Prefecture and Municipality have already received their 5%, but if included, the Residents' Tax Offices would end up charging the Aggregate Tax Rates totaling 10%, with a credit for the 5% withholding tax already paid (through the Gensen Choshu Hyo), meaning an excess 5% residents' taxes being levied, but you only have to pay 5%...
(See Remember: below).

In previous years this was a BUG in the system that required the filer to select this option to not pass the information on dividend income to the Residents' Tax Offices as part of the Aggregate Taxable Income, in order to avoid being taxed at 10% on the Aggregate Income and incurring the additional 5% charge, instead of the 5% already withheld by the Tax Agent (the Broker).

If the Separate Taxation Method is selected, it makes no difference as the Residents' Taxes are 5% and the Gensen Choshu was also 5%, so the credit for the Gensen Choshu woud also be 5%.

And this year, my "GUESS" is that this BUG has been fixed, and the information will be correctly handled on the back-end at the Residents' Tax Offices (Prefectural and Municipal) to take into account that the Aggregate Taxation Method has been selected at the National Level, but that at the Local Level, the tax has already been withheld at the correct 5% (as the Gensen Choshu Hyo) by the Tax Agent, and they will not charge a further 5% on your dividend income, thereby removing the need for the field and the option to select to withhold that dividend income information out of the information passed to the Residents' Tax Offices... (You were still paying the correct 5% Tax through withholding.)
This will only apply to low income filers, or filers who don't know about the Separate Taxation Method for Dividends, who elect the Aggregate Taxation Method for their Dividend Income. (See Remember: below).

My "GUESS" is that this BUG has been rectified for Dividends reported under the Aggregate Taxation Method.

This does not apply for the Separate Taxation Method, where the Residents' Tax Offices already know that the Income is Separate Taxation Method Dividend Income to be taxed at 5%....

Would need to confirm when the information and guides become available.

Remember:

For Foreign Dividends, if your Total Taxable Income including the Dividends is less than about Y3.3M, it would be more beneficial (lower tax) to have your foreign dividends taxed as Aggregate Income at your Marginal Tax Rate at the National Level, Plus in previous years select the option to not pass the Dividend Income Information so that the Residents' Tax Rate of 5% withheld - Gensen Chosu - remains, than at the Separate Method Dividend Tax Rates of National and Reconstruction 15.315% Plus Residents' Tax Rate of 5%.

The Foreign Tax Credit will still be calculated correctly against Aggregate Income to reduce your total tax bill by the actual amount of tax paid overseas.

For Japanese Dividends, if your Total Taxable Income is less than about Y6M, it would be more beneficial (lower tax) to have your Japanese dividends taxed as Aggregate Income at your Marginal Tax Rate after claiming the Domestic Dividend Credit on those Japanese Dividends, Plus in previous years select the option to not pass the Dividend Income Information so that the Residents' Tax Rate of 5% withheld - Gensen Choshu - remains, than at the Dividend Tax Rate of 15.315% Plus Residents' Tax Rate of 5%.

If you are in the ballpark of the Total Income figures quoted above; Y3.3M or Y6M, you should confirm these actual thresholds in your case, for your actual situation; amounts of Aggregate Taxable Income, Dividend Income and Total Taxable Income, to determine which Taxation Method; Separate or Aggregate would yield a lower amount of tax to be paid, probably with the help of a professional.
If you are clearly over these amounts, then you should definitely select the Separate Taxation Method for the more beneficial (lower tax) treatment.

Once you have made the choice on the Kakutei Shinkoku, you cannot go back and change that choice at a later date, so you should get it right first time.

[adamu]

If the Separate Taxation Method is selected, it makes no difference as the Residents' Taxes are 5% and the Gensen Choshu was also 5%, so the credit for the Gensen Choshu woud also be 5%.

This is my main concern. Putting aside aggregate taxation and only considering separate taxation, normally there would be no change to putting it on the tax return (except for maybe increasing the total income figure, which could affect insurance etc.).

Because we are claiming the foreign dividend deduction, we re-declare the full dividend on the tax return, to be subject to Japanese income tax. But we *also* declare the income tax already witheld by the tokutei kouza, which is then deducted from the final amount due.

For residence tax, by selecting 申告不要, we don't re-declare anything and just leave it as already handled by the tokutei kouza (this is a tax benefit, because the residence tax was calculated on the amount after deducting the foreign tax, even though we likely get the foreign tax back due to claiming the foreign tax deduction).

However, from 2023年分 it is not possible to choose 申告不要 for residence tax when submitting a tax return, so by redeclaring the full dividend for national income tax, we also automatically re-declare it for residence tax. But unlike national income tax, there is no way on the tax return to declare the residence tax already witheld in the tokutei kouza. I'm worried it's going to be charged as residence tax without accounting for the tax already witheld in the tokutei kouza.

And this year, my "GUESS" is that this BUG has been fixed, and the information will be correctly handled on the back-end at the Residents' Tax Offices (Prefectural and Municipal) to take into account that the Aggregate Taxation Method has been selected at the National Level, but that at the Local Level, the tax has already been withheld at the correct 5% (as the Gensen Choshu Hyo) by the Tax Agent, and they will not charge a further 5% on your dividend income, thereby removing the need for the field and the option to select to withhold that dividend income information out of the information passed to the Residents' Tax Offices... (You were still paying the correct 5% Tax through withholding.)

I hope this is the case, but since the withheld amount is manually entered for national income tax, I doubt it's likely to be automatic for residence tax.

[adamu]

unlike national income tax, there is no way on the tax return to declare the residence tax already witheld in the tokutei kouza

It appears this goes into the 配当割額控除 field of the 住民税に関する事項 section of 第二表. At least using the kaikei7.com that correctly deducts the already paid withholding tax from residence tax.

It also correlates with on Page 54 of the 2023 guide (heavily edited by me):

Deduction of allocated dividend amount[配当割額控除額]

② in the event that this amount was reported as income tax etc. and a deduction or refund of the amount withheld at source of income tax etc. is received, a deduction or refund for the amount specially withheld for inhabitants tax will also be receivable.

...if you reported this amount as income tax..., please write the amount of the dividend rate... in the... column of "deduction of allocated dividend amount [配当割額控除額]" ... on the Page 2.

Please note that if you omit the writing, you are not eligible to this deduction.

So if you 1) declared the dividend it on the tax return and 2) already paid withholding tax in the tokutei kouza then you can 3) write the amount withheld in 配当割額控除額 section of the residence tax part to ensure it will be accounted for when your residence tax is calculated (it says "amount of the dividend rate" but the form has a 円 sign so I guess it's the amount withheld).

This is a slightly worse situation than before with 申告不要 where you got a tiny tax break on residence tax, but it means you will be able to claim the foreign dividend deduction, and then the income and residence tax will be correctly calculated based on the full dividend. You just have to not forget the quoted step otherwise you'll pay more than double residence tax on the dividend

edit: found the original:

配当割額控除額・株式等譲渡所得割額控除額

令和5年中に道府県民税配当割額（5%の税率）が特別徴収されたいわゆる特定配当等の額及び道府県民税株式等譲渡所得割額（5%の税率）が特別徴収されたいわゆる特定株式等譲渡所得金額について、①所得税等の確定申告をしないで源泉徴収で済ませた場合には、住民税についても特別徴収で済ませることとなり、②所得税等の確定申告をして所得税等の源泉徴収税額の控除や還付を受ける場合には、住民税についても特別徴収税額の控除や還付を受けることとなります。
 所得税等の確定申告をした場合は、配当割額及び株式等譲渡所得割額を記入します（記入がない場合、この控除を受けることができない場合がありますのでご注意ください。）。

※ ①の場合、配偶者控除、扶養控除などの判定上の合計所得金額には、特定配当等の額及び特定株式等譲渡所得金額は含めません。
※ ②の場合、市区町村が税額を計算した結果、特別徴収税額の還付を受ける場合は、その旨と還付を受けるための手続を市区町村が納税者に通知することになっています。