Question:

our company is a Japanese corporation with an overseas parent company and is supposed to accept foreign directors from the parent company for about 1 year. All executive compensation will be transferred from the parent company to the principal’s overseas account. As long as I don’t send my salary to Japan, it won’t be regarded as domestic source income, so is there no need for taxation?

Answer:

When paying salary, etc to a foreign person, it’s important to consider their resident status under Japanese tax law.

If a person intends to live in Japan for more than a year, then they are considered a resident. There are two different types of resident – non-permanent and permanent resident. Non-permanent resident is defined by Japanese tax law as anyone who has lived in Japan for less than 5 years. Permanent resident is defined as anyone who has lived in Japan for more than 5 years.
Per Japanese tax law, non-permanent residents are taxed on their domestic income earned in Japan and income earned abroad that is remitted to Japan. Permanent residents are taxed on their worldwide income.
In the case of this question, the “place of services provided” is Japan and therefore even if the salary is paid overseas and deposited in an overseas bank account, it is considered domestic source income.
This means that the director’s salary should be taxed. Normally tax would be withheld from the salary at the time of payment, but since it is being paid overseas and therefore the Japanese entity cannot withhold taxes, the director will have to file an individual tax return in Japan, where they must report their income and pay any applicable tax.