Income Tax Act

If a Nonresident with a permanent establishment has to pay foreign income taxes (meaning foreign income taxes as prescribed in Article 95, paragraph (1) (Foreign Tax Credit); hereinafter the same applies in this paragraph and paragraph (6)) in any year, the amount of those foreign income taxes (limited to the amount of foreign income taxes imposed on domestic source income set forth in Article 161, paragraph (1), item (i) (Domestic Source Income), and excluding the amount of any foreign income taxes imposed on income arising from a transaction prescribed by Cabinet Order as one that cannot be regarded as an ordinary transaction undertaken by a Nonresident and the amount of any other foreign income taxes prescribed by Cabinet Order; hereinafter referred to as the "amount of credit-eligible foreign income tax" in this Article) is credited against the income tax for that year, up to the amount calculated pursuant to Cabinet Order as corresponding to the amount of foreign income arising in that year (meaning the amount prescribed by Cabinet Order as the part of the income related to income attributable to a permanent establishment which relates to foreign source income), out of the income tax for that year calculated pursuant to the provisions of Article 89 through Article 92 (Tax Rates and Dividend Tax Credits), as applied in accordance with Article 165, paragraph (1) (Calculation of the Tax Base and Amount of Income Taxes Imposed on Aggregate Income) to the income related to income attributable to a permanent establishment, and the provisions of the preceding Article (hereinafter referred to as the "maximum credit" in this Article).

If the amount of credit-eligible foreign income tax which a Nonresident with a permanent establishment has to pay in any year exceeds the sum total of the maximum credit for the year and the amount specified by Cabinet Order as the maximum credit for local taxes, and part of the maximum credit in any of the three years prior to the relevant year (referred to as "any of the last three years" in the following paragraph) is an amount prescribed by Cabinet Order as being carried over to the relevant year (hereinafter referred to as the "maximum carry-over credit" in this paragraph), the amount by which the former exceeds the latter is credited against the income tax for the year pursuant to Cabinet Order, up to the maximum carry-over credit.

If the amount of credit-eligible foreign income tax which a Nonresident with a permanent establishment has to pay in any year is less than the maximum credit for the year, and part of the amount of credit-eligible foreign income tax that the Nonresident has had to pay in any of the last three years constitutes an amount prescribed by Cabinet Order as being carried over to the relevant year (hereinafter referred to as "carry-over, credit-eligible foreign income taxes" in this paragraph), the carry-over, credit-eligible foreign income taxes are credited against the income tax for the year pursuant to Cabinet Order, up to the amount remaining when the amount of credit-eligible foreign income tax that the Nonresident has to pay in that year is deducted from the maximum credit.

The term "foreign source income" as prescribed in paragraph (1) means income set forth in Article 161, paragraph (1), item (i) which falls under any of the following:

income arising from investing or holding assets located outside Japan;

income prescribed by Cabinet Order as arising from the transfer of assets located outside Japan;

compensation that a person conducting business prescribed by Cabinet Order whose main content is providing personal services outside Japan receives for providing those personal services;

consideration for renting out real property located outside Japan, a right on real property located outside Japan, or a right of quarrying outside Japan (this includes the establishment of a superficies right or a right of quarrying or doing anything else that gives another person the use of real property, a right on real property, or a right of quarrying), for establishing a mining lease outside Japan, or for renting out a vessel or aircraft to a Nonresident or Foreign Corporation;

interest and similar income as prescribed in Article 23, paragraph (1) (Interest Income) and anything equivalent thereto, which are as follows:

interest on government bonds or municipal bonds of a foreign state, or on bonds issued by a Foreign Corporation;

interest on deposits or savings (including anything equivalent to what is prescribed by Cabinet Order as prescribed in Article 2, paragraph (1), item (x) (Definitions)) deposited with a business office located outside Japan;

a distribution of proceeds from a Jointly Managed Trust or a trust equivalent thereto, a Bond Investment Trust, or a Bond-Based Investment Trust Under Public Offering or a trust equivalent thereto, which has been established as a trust at a business office located outside Japan.

dividends and similar income as prescribed in Article 24, paragraph (1) (Dividend Income) and anything equivalent thereto, which are as follows:

anything received from a Foreign Corporation that is equivalent to dividends of surplus, dividends of profits, or distributions of surplus prescribed in Article 24, paragraph (1), or to distributions of monies or interest on funds prescribed in that paragraph;

a distribution of proceeds from an Investment Trust (other than a Bond Investment Trust, and a Bond-Based Investment Trust Under Public Offering or a trust equivalent thereto) or a Specified Trust That Issues Beneficiary Certificates or a trust equivalent thereto, which has been established as a trust at a business office located outside Japan.

interest from a loan provided to a person doing business outside Japan (including monies equivalent to such a loan) in connection with that business (this includes any amount prescribed by Cabinet Order as margin arising from purchase and sale transactions involving bonds with buyback or resale agreements which are prescribed by Cabinet Order);

any of the following royalties or consideration that the earner receives from a person doing business outside Japan in connection with that business:

royalties for an industrial property right or any other right to the use of technology, a production method based on special technology, or any equivalent right or method; or consideration for the transfer thereof;

royalties for a copyright (including print rights, neighboring rights, and any equivalent rights), or consideration for the transfer thereof;

royalties for machinery, equipment, or any other tool prescribed by Cabinet Order.

income prescribed by Cabinet Order as a monetary award for doing advertising for business conducted outside Japan;

a pension that the earner is paid based on an insurance policy concluded by a foreign insurer as prescribed in Article 2, paragraph (6) (Definitions) of the Insurance Business Act or on any other contract for a pension prescribed by Cabinet Order, concluded through a business office located outside Japan or through a person acting as an agent for the conclusion of such contracts outside Japan (including a surplus distributed or a rebate refunded based on such a contract for a pension on or after the start date for the payment of the pension, and a lump-sum payment made in lieu of paying a pension based on such a contract);

compensation for periodic deposits, finance charges, profits, or margin profits as follows:

compensation for periodic deposits as set forth in Article 174, item (iii) (Tax Base for a Domestic Corporation's Income Taxes), linked to installment savings accepted by a business office located outside Japan;

anything equivalent to compensation for periodic deposits set forth in Article 174, item (iv), linked to anything equivalent to installment deposits as prescribed in that item which are accepted by a business office located outside Japan;

anything equivalent to finance charges set forth in Article 174, item (v) linked to anything equivalent to a contract as prescribed in that item which is concluded through a business office located outside Japan;

profits set forth in Article 174, item (vi) linked to a contract as prescribed in that item which is concluded through a business office located outside Japan;

margin profits set forth in Article 174, item (vii) linked to deposits or savings that are accepted by a business office located outside Japan;

anything equivalent to margin profits set forth in Article 174, item (viii) linked to anything equivalent to a contract as prescribed in that item which is concluded through a business office located outside Japan or through a person acting as an agent for the conclusion of contracts outside Japan.

a distribution of profits based on a silent partnership agreement (this includes anything prescribed by Cabinet Order as an agreement equivalent thereto) for capital contributions made to a person doing business outside Japan;

beyond what is set forth in the preceding items, income prescribed by Cabinet Order as arising from sources outside Japan.

Notwithstanding the provisions of the preceding paragraph, if a tax treaty (meaning a treaty as prescribed in the proviso to Article 2, paragraph (1), item (viii)-4; hereinafter the same applies in this paragraph) contains provisions on foreign source income (meaning foreign source income as prescribed in paragraph (1); hereinafter the same applies in this paragraph) which differ from the provisions of the preceding paragraph, the foreign source income of a Nonresident subject to that tax treaty is governed by that tax treaty, to the extent of the differing provisions.

If the foreign income taxes that a Nonresident has had to pay are reduced in any of the seven years beginning in the year after one in which the Nonresident is subject to the provisions of paragraphs (1) through (3) with regard to those foreign income taxes, Cabinet Order provides for the application of those provisions to foreign income taxes for the year in which the day that the amount is reduced falls.

The provisions of Article 95, paragraphs (10) and (11) apply mutatis mutandis where a credit is made under paragraphs (1) through (3) with regard to the amount of credit-eligible foreign income tax that a Nonresident has to pay. In such a case, in paragraph (10) of that Article, the phrase "the provisions of paragraph (1)" is deemed to be replaced with "the provisions of Article 165-6, paragraph (1) (Foreign Tax Credit for Nonresidents)", the phrase "a credit under paragraph (1)" is deemed to be replaced with "a credit under paragraph (1) of that Article", the phrase "the amount of credit-eligible foreign income tax" is deemed to be replaced with "the amount of credit-eligible foreign income tax prescribed in that paragraph (hereinafter referred to as the "amount of credit-eligible foreign income tax" in this paragraph and the following paragraph)", and the phrase "the amount to be credited under paragraph (1)" is deemed to be replaced with "the amount to be credited under paragraph (1) of that Article"; and in paragraph (11) of that Article, the phrase "paragraphs (2) and (3)" is deemed to be replaced with "Article 165-6, paragraphs (2) and (3)", the phrase "the maximum carry-over credit or carry-over, credit-eligible foreign income taxes" is deemed to be replaced with "the maximum carry-over credit prescribed in paragraph (2) of that Article (hereinafter referred to as the "maximum carry-over credit" in this paragraph) or carry-over, credit-eligible foreign income taxes prescribed in paragraph (3) of that Article (hereinafter referred to as "carry-over, credit-eligible foreign income taxes" in this paragraph)", and the phrase "the maximum credit for each of those years in the returns, etc." is deemed to be replaced with "the maximum credit for each of those years (meaning the maximum credit prescribed in paragraph (1) of that Article; hereinafter the same applies in this paragraph) in the returns, etc.".

The amount to be credited under paragraphs (1) through (3) is credited against the income tax on taxable total income, the income tax on taxable timber income, and the income tax on taxable retirement income calculated in accordance with Article 165, paragraph (1), in that order.

Beyond what is prescribed in the preceding three paragraphs, Cabinet Order provides for the necessary particulars concerning the application of the provisions of paragraphs (1) through (5).