RetireJapan

Hi all,
I invest mainly in Listed Investment Companies (LIC's) I do this as in Australia dividends are paid to me fully franked (and they are exempt from being on my tax return.) I am such a novice when it comes to tax. Would such dividends be taxed if I was living in Japan?
Regards,
Thurston

This depends on your tax residence status.

If you're a non-permanent tax resident of Japan (e.g. have been in Japan for less than 5 years), then as a general rule your Australian dividends won't be taxed in Japan (regardless of whether or not they're fully franked). This assumes you don't remit money to Japan from overseas—if you do, the dividends and other overseas income might become taxable in Japan.

If you're a permanent tax resident of Japan (e.g. been in Japan for more than 5 years), then the dividends will be taxable in Japan. Permanent tax residents are taxed on their worldwide income.

The question really is whether you can claim a tax credit in Japan for the franking credits attached to Australian dividends. I think the short answer is probably 'no'. Japan does has a system of foreign tax credits (外国税額控除) but it only applies to tax you have actually paid overseas. A franking credit is not tax that you have paid (or that has been withheld), but instead is a credit for tax paid by the company at a corporate level (i.e. you get a credit because the company has already paid tax on its profits). Japan doesn't have a system of franking credits. It taxes corporate income twice—it taxes both the company on it profits and the shareholder on the dividends. So I don't think Japan will give you a tax credit just because a credit is sometimes available under Australian tax law.

This is just my opinion. I've never seen anything written about this before, so I might be wrong. I sold my Australian shares before I became a permanent tax resident to avoid these (and other) headaches.

Thanks for your reply.

It is a big issue for me moving forward.

Such dividends are not even required to be submitted to the ATO ion a tax return n Australia (as they are already taxed.) if they are taxed and these are my income stream when I retire I would like to know how much the Japanese government will slug me. Hopefully I can find an accountant oneway who could help me answer such a question!

Japanese income tax is progressive and based on your total income: dividends, employment income, rental income etc. You can easily find out how much tax you’d pay by checking the income tax bands.

Japanese income tax is progressive and based on your total income: dividends, employment income, rental income etc. You can easily find out how much tax you’d pay by checking the income tax bands.

It's a little more complicated than this when they tax dividends you have received from a foreign company for which you have also already paid foreign taxes and it is based on the tax treaty Japan has with that country. For my US dividends I have to pay 23.8% tax to the US Internal Revenue Service and then an additional 10% tax to Japan (but not 20.315% as I would pay for dividends from a Japanese company). That 10% comes from the US-Japan tax treaty.

Yeah, but the OP is referring to Australian dividends...

Yes and I don’t know what the exact situation will be, but it is not just how Japanese dividends are handled because of tax treaties.

For my US dividends I have to pay 23.8% tax to the US Internal Revenue Service and then an additional 10% tax to Japan

Hey TokyoWart, where does the 23.8% come from? The US-Japan tax treaty (article 10) says the US can only impose tax of no more than 10% when a US company pays a dividend to a resident of Japan. I must be missing something.

Unfortunately neither the IRS nor the Japanese tax officials read the treaty the way I would. US federal taxes on dividends fall into three brackets (0/15/20) based on income and then allow you to claim a tax credit for foreign taxes paid (that 10% to Japan) but the credit is limited by a “stacking rule” for how your dividends added to your post-FEIE income and then are limited by the AMT. After all that an additional income based 3.8% tax is applied to fund the Obama health insurance legislation. At no point are those taxes limited to 10% and referencing the tax treaty makes no difference to the IRS. As you can see this is a sore point for me (is the word “triggering”?).

OK, I see how it works now. Article 4 of the US-Japan tax treaty preserves the right for the US to tax (or, perhaps more accurately, screw) its citizens even if they live outside the US. Australian tax laws and the Australia-Japan tax treaty are different from those of the US. They still screw us, of course, but they do it differently.