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I'm an American that's been living in Japan for the past 2 1/2 years, and I work for an American company (small startup). I receive my income via a US bank account, after paying income tax.

However, I've had "Tax For Expats" handle my U.S. tax returns, so in the end, all my federal / state income tax comes back. Pretty sure they're using the "Foreign Earned Income Exclusion" when submitting my tax returns.

I assumed that I would have to pay Japanese taxes, especially since all my US taxes are returned to me. However, I've asked the local tax office multiple times, describing exactly what I've stated here... and each time they've told me that if I'm working for an American company, and my salary is paid to an American bank, and I pay American taxes (even if they are later returned to me... yes, they explicitly included this), then I am not required to pay taxes in Japan.

I even went as far as to ask if this would be the case even if I continued to live in Japan for many years, to which they answered that I still would not be required to pay Japanese taxes.

Reading online, it seems that as long as I'm not considered a "permeant resident", I'm not required to pay taxes on foreign income until I've lived in Japan for 5 years. So I suppose for now I'm fairly certain I'm not required to pay taxes. But, according to my local tax office in Japan, they told me that I would not be required to pay taxes even after that.

Is what they're saying true? Is anyone else in the same boat as me? Am I really not required to pay Japanese taxes?

Is it because of a tax treaty between Japan and the US? But it seems strange that that would work if I'm taking the "Foreign Earned Income Exclusion".

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First, I am not a tax expert or legal professional. I am an individual American citizen living in Japan.

It seems like the situation may be as the tax office describes it, but you would be expected to pay Japanese taxes after five years.

From the IRS's perspective, if you are doing work abroad, your salary is Foreign Earned Income and eligible for the exclusion, even if you lived in a country with no taxes. This is regardless of the source. From IRS docs

For example, income you receive for work done in France is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is in New York City.

From the Japanese tax office's perspective, if you have been in Japan less than five years, and the money is from a foreign source to a foreign bank account, it's none of Japan's business. See this form.

Note that the Japanese tax office's definition of "permanent resident" has nothing to do with the visa status of "permanent resident". The tax definition is someone who has had a residence in Japan five of the last ten years. At that point you owe taxes on worldwide income.

One thing you might want to ask a professional about is about how the money is "remitted" - how do you get money to live on in Japan? If you have a Japanese bank account you transfer wages into it that may make a difference.

This is a surprising situation, but it may be that very few people can be in a situation like this, so the tax office doesn't consider it much. For most visas you would be unable to live in Japan without Japanese-source income if you've been in the country less than five years.

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There is a tax treaty between the United States and Japan. However the whole point of the Foreign Earned Income Exclusion tax is to avoid double taxation for US expats. So I'm assuming you are referring to income over that limit.

From the Technical Explanation of the tax treaty, Article 4:

A resident of one State may be taxed by the other State only on income from sources within that other State (including industrial or commercial profits attributable to a permanent establishment located in that other State), subject to the limitations set forth in the Convention.

I would normally only attribute that to such things as income off of investments and interest, but that distinction doesn't seem to be made here. So even for general employment income over the FEIE limit, the Japanese may be applying this rule as worded.

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  • I'm referring to the income under the limit. For U.S. taxes, I make under 100k, so the foreign earned income exclusion means that I get all my federal & state income taxes back. But then the local tax office in Japan says I don't owe taxes in Japan, even though I'm getting the foreign earned income exclusion. Is that how it's supposed to work? – American in Japan Jan 6 at 4:39
  • @AmericaninJapan, "...so the foreign earned income exclusion means that I get all my federal & state income taxes back." I find this an odd statement. Is your company actually witholding state/federal income tax from your pay? Or are you actually paying that yourself to later get it refunded? Because the general idea is that you don't have to pay it in the first place on the presumption that you are already paying those equivalent taxes to local government where you are residing. Thus avoiding double taxation. – ouflak Jan 6 at 7:56
  • I work for a small American startup, they don't have the resources for overseas payroll, so my address for work is in the States. Apparently, this is fine; I report my American address, but then include that I've been living at my foreign address all year, and that qualifies me for the "foreign earned income exclusion", apparently. So yes, U.S. income taxes are being withheld by the company, and are returned to me each year (minus medicare and social security unfortunately). But, even after I've explained this to the Japanese tax office, they told me I don't owe Japanese taxes. – American in Japan Jan 7 at 8:19
  • I just hope my local tax office knows what they're talking about, and I'm not later charged for many years of unpaid taxes or something. Which is why I was asking if this is really how it works. – American in Japan Jan 7 at 8:21

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