News Details


Withholding Tax on Real Estate Purchase from Non-Residents

List of news

1. Introduction
Since the treatments of withholding tax in most international transactions are complicated, the deep understanding of tax treaties and foreign regulations is strongly required. In this News, we will mention the treatment of withholding tax when purchasing domestic real estate from non-residents and introduce a dispute about a purchaser’s (an obligated withholding tax payer) duty of care in respect of a seller’s non-residential status.

2. Treatment of withholding tax
A non-resident is subject to income tax only on domestic source income in Japan. In cases where a non-resident transfers domestic lands and other related assets in Japan, a purchaser (an individual or a company) has to deduct 10.21% of withholding tax from the transfer value. (Individual Income Tax Law 161 Article 1-5, 212 Article 1)
However, withholding tax is not required on the condition that an individual purchases lands and other related assets for residence of oneself or the relatives, and that the transfer value is 100 million yen or less. 

3. Summary of a case
The plaintiff X Kabushiki-Kaisha operating constructing business purchased the real estate from a seller A and paid the full amount of the transfer value without deducting withholding tax at the time of payment. Later, it was found out on a tax audit that the seller A was a non-resident and that the plaintiff X was obligated to withholding tax on the transaction under Individual Income Tax Law 212 Article 1 and 213 Article 1-2. As a result, the tax authority gave a notice of tax due and made an assessment and determination of an additional tax on non-payment to the plaintiff X. The plaintiff X was dissatisfied with the disposition and demanded revocation.

4. The point at issue (Tokyo District Court Judgement dated March 4, 2011)
The point at issue is whether or not the withholding tax system in which a purchaser of domestic real estate from a non-resident is obligated to withholding tax is against the Constitution Article 29-1, 3 and Article 13. (The constitutionality of the withholding tax system)

5. Judgement
The Tokyo District Court stipulated that the purchaser’s obligation of withholding tax on the transfer of domestic real estate by non-residents does not violate the Constitution and ruled the following matters against the plaintiff’s assertion.
・The purchaser’s burden of judging the seller’s non-residential status is far from the violation of the Constitution.
・The limited interpretation about the withholding tax system in consideration for the difficulty of judging non-residential status is not required.
・There is no valid reason for not imposing additional tax on non-payment.

6. Conclusion
In actual business activities, there are many cases where it is difficult to investigate and confirm a seller’s non-residential status. However, even in such difficult situations, please note that a purchaser may be obligated to withholding tax on transactions due to negligence of a duty of care.

References (Japanese)
Sozei-Hanrei-Hyakusen(6th Edition)Special Edition Jurist “Significance of Withholding Tax under International Taxation” 
National Tax Agency Tax Answer No.2879 When purchasing lands, etc. from non-residents(Accessed on July 27, 2020)