Photo/Illutration High-rise apartments in Tokyo’s Chuo Ward on April 17 (Hiroshi Nakano)

A man who formerly rented an apartment in Tokyo was recently blindsided by a tax inspector who bore the bad news that he owed a hefty sum to the government.

“Due to a withholding failure, you did not pay the taxes you owed,” he was told, and ordered to pay approximately 800,000 yen ($5,170) in back taxes.

The apartment’s owner turned out to be a foreign national who did not have a legal domicile in Japan.

With an increasing number of foreigners buying Japanese real estate due to the weak yen, national tax authorities are investigating such tax omission cases with great interest.

Subsequently, many renters are being placed in a similar predicament as the unfortunate former tenant.

Interviews with people involved in the man’s case revealed the following.

The man established a corporation headed by himself. He lived in the apartment for about a year from 2021 to 2022.

During the time, he deemed his home “company housing” and expensed a portion of the rent as a deduction, which was approximately 300,000 yen per month, on his tax return.

The rent was automatically withdrawn from his bank account every month by the management company of the apartment.

But earlier this year, a tax inspector came to see the man, who now lives elsewhere.

RENTERS’ OBLIGATION TO WITHHOLD TAX

The apartment owner was a foreign national of Asian descent. 

Under the Income Tax Law, when renting real estate in Japan from a nonresident and paying rent, it is the renter’s obligation to withhold 20.42 percent of the amount of rent as the nonresident’s portion of income tax and pay the tax.

This system aims to prevent “missing” landlord cases and the failure to collect income taxes and other taxes from people abroad.

The owner’s proceeds are reduced by the amount of taxes withheld. But, in many cases, the owners can receive refunds if they file tax returns, although the refund may be only partial.

In the man’s case, he was obligated to pay approximately 60,000 yen of the 300,000-yen rent to the tax office every month and the remaining 240,000 yen to the management company.

The man was unaware and failed to pay the tax for about a year, resulting in a tax liability of about 800,000 yen, including delinquent taxes and additional taxes for nonpayment. 

The management company, to which the rent was transferred to, was also apparently unaware of the tax structure.

The man plans to request reimbursement from the management company, saying that he paid more rent than necessary.

‘CHECK THE OWNER’S ADDRESS’ 

Shinya Yamada, a certified public accountant with an office in Tokyo’s Shibuya Ward, said he has recently received many consultations similar to the man’s case.

He said that properties in the capital’s Minato Ward and other so-called “bay areas” tend to be the “stage” for similar troubles to occur.

Yamada, who has a popular YouTube channel, said, “The depreciation of the yen has led to an increase in the number of properties owned by foreign nationals, and tax audits themselves are easier to conduct because there are fewer points of contention, such as whether or not withholding taxes have been collected.”

“It is possible that the national tax authorities are increasingly paying attention (to such cases),” he said, calling for caution.

According to Yamada, even when the owner is a nonresident, if the renter is an “individual” and the purpose of the rental is solely for “residential purposes,” then the obligation to withhold taxes for the renter does not arise.

He said, “This exception only applies to ‘individuals.’ So it does not apply to corporate contracts.”

For example, a spouse starts a business from home and treats the workspace in the residence as an “office” and records a portion of the rent for the home as a business expense, the obligation to withhold taxes may arise, he said.

Yamada said, “Whether the owner is foreign or Japanese, it is advisable to check the contract to see if the address is overseas.”

He added, “The real estate industry should also be proactive in alerting renters.”

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