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2025.09.30

Cross-Border Royalty Payments

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1. Introduction
As international transactions increase, payments for the use of intellectual property—commonly referred to as “royalties”—have become a key issue in global business. When Japanese companies use patents, trademarks, or copyrighted works owned by overseas entities, royalty payments are required.
This article explains the basic tax concepts and practical considerations related to cross-border royalty payments, based on guidance from the National Tax Agency (NTA) of Japan and other official sources, in a way that is easy to understand for those without a tax background.

2. What Are Royalties?
Royalties are payments made as compensation for the right to use intellectual property owned by another party. For example, if a Japanese company uses technology or a brand owned by a foreign company, it must pay a royalty.
From a tax perspective, royalties are considered taxable income for the recipient. The method of taxation may vary depending on the country of the recipient and the terms of the contract.

3. Withholding Tax in Japan
Under Japanese domestic law, royalty payments to non-residents are generally subject to withholding tax at a rate of 20.42% (including the Special Reconstruction Income Tax). The payer is responsible for withholding this amount and remitting it to the Japanese tax authority.
However, if there is a tax treaty between Japan and the recipient’s country, the withholding tax may be reduced or even exempt. For example, under the Japan–U.S. tax treaty, royalty payments may be subject to reduced treaty rates if certain conditions are met. To apply such treaty benefits, specific forms must be submitted to the Japanese tax office in advance.

4. Practical Considerations
 Treaty Application Requires Advance Filing
 To benefit from reduced withholding under a tax treaty, companies must file the prescribed notification
forms with the Japanese tax office. Without this, the domestic rate of 20.42% will be applied.
 Clear Contract Terms
 Contracts should clearly define the scope, amount, and payment terms of royalties to avoid disputes
during tax audits.
 Avoiding Double Taxation
 If the recipient’s country also imposes tax, Japan allows for a “foreign tax credit” to reduce the risk of
double taxation, provided certain filing requirements are met.
 Consumption Tax (VAT) Issues
 If royalties are considered a “service” provided by a foreign entity, they may fall under Japanese
Consumption Tax rules. In such cases, the reverse charge mechanism requires the Japanese payer
to self-assess and pay the tax. The scope of services and applicable rules are updated periodically,
so it is important to confirm the latest guidance from the NTA.
 Foreign Currency Conversion
 When payments are made in foreign currency, the withholding tax must be calculated by converting
the payment into Japanese yen, typically using the telegraphic transfer buying rate (TTB) at the time
of payment.

5. Conclusion
This explanation has been prepared for the purpose of providing general strategic information and does not constitute professional advice. Please do not make decisions or take actions based solely on this information without consulting a qualified professional.

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