Moving to Japan Self Employed.

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monocle
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Joined: Fri Jul 20, 2012 1:06 pm

Moving to Japan Self Employed.

Post by monocle »

I'm a software developer that gets paid in US funds to a US account. I work from home and can work from any location in the world. I run our business currently with an LLC and use a SEP-IRA to defer taxes.
We are planning to move to Japan in 3 years and most likely settle there for retirement.
The business is bringing in 200K+ per year.

I've been trying to figure out a way to reduce our taxes once in Japan. Does anyone have any familiarity with this type of situation?

Options I'm thinking currently.

1. Keep it how it is.
-All pass through income with Foreign Earned Income Exclusion
-But… the self employment taxes don't get any deductions and my individual tax bracket in Japan will be 40%(ughh)

2. Switch to a C-Corp
-Pay myself and my Japanese spouse around 90K each… under the FEIE and dividends for the extra with capital gains tax.
-Our individual Japan tax brackets will be 23% with 15% capital gains on the extra
-Would I have to file US income taxes for my spouse? She's a non US citizen… currently a resident alien in the US. Once we move to Japan she will be just a regular Japanese citizen with no ties to the US except me.

3. Move the company offshore. (not the illegal way)
-Pay myself and my spouse as in option 2, but then leave the extra profits in the company to grow tax deferred.

Does anybody know a tax accounting firm that is good at handling these types of situations?

Also looking to build a new house with cash once we get there (around 300k). Are there any US deductions I can take for that? Any advice on transferring large sums like that?

When living as an expat getting paid in US currency and spending in another currency, are there any hard,fast rules for mitigating exchange rate differences?

Really just looking for anyone's thoughts on any of this or any advice anyone with experience has.

Thanks.
bpp
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Location: Japan

Re: Moving to Japan Self Employed.

Post by bpp »

Not being self-employed myself, my uneducated guess would be that option 2 looks best.
Option 3 will probably trip all sorts of double-secret nasty provisions in the tax code, at a guess.
Hopefully, others will weigh in.

As for your wife, I would have her do the paperwork to sever all legal/financial connection to the US, and do NOT file jointly. Then she won't have to file. No point in her paying US taxes, or more significantly, being liable for insanely complicated paperwork burdens with huge, arbitrary fines assessed for minor mistakes even if she does not owe US taxes.

No US tax deductions for building a house in Japan that I am aware of. (At least not with cash -- I think the mortgage interest deduction may still be available, though interest rates in Japan are so low that you may not be able to use that anyway.) (Japan has some pretty nice tax credits for taking out a mortgage, but of course if you have the cash, you won't need that.)

As for exchange rate differences, not much you can do other than gradually build up some yen-denominated savings from your dollar-denominated earnings over time.

Anyway, those are my immediate, off-the-cuff thoughts.
SeattleCPA
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Re: Moving to Japan Self Employed.

Post by SeattleCPA »

You mght find this blog post of mine interesting:

http://evergreensmallbusiness.com/s-cor ... employees/

Also, if you haven't done so already, you probably want to pore over the relevant IRS publication here:

http://www.irs.gov/publications/p54/index.html

BTW, I think my favorite tax return is all the world is Japans... It's a postcard! :o
bpp
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Location: Japan

Re: Moving to Japan Self Employed.

Post by bpp »

SeattleCPA wrote:BTW, I think my favorite tax return is all the world is Japans... It's a postcard! :o
I wouldn't go quite that far. :D
It can actually get pretty complicated if you have investments, deductions, credits, etc.

But I do agree that it is easier to understand than IRS tax forms -- even though the instructions are written in Japanese (which is not my first language).
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LadyGeek
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Re: Moving to Japan Self Employed.

Post by LadyGeek »

While you're researching, don't forget to take a look at the wiki: Investing in Japan
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
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Watty
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Re: Moving to Japan Self Employed.

Post by Watty »

I don't have any answers but a few more questions.

Don't forget about your state income taxes since they may want to still tax you or your company. Some people go as far as moving to a state with favorable tax laws and living there just long enough to get through the legal hoops before permanently moving overseas.

Be sure to look into your estate planning since the estate taxes for non-residents with assets in the US is done with different rules and can be out outrageously high. Retirement accounts can be complicated like if you wife inherits your IRA. Get started on this early since something could happen to one of you soon after relocating.

A will done in one country may not be accepted by the other so you need to look at both countries and some countries have very different inheritance laws especially if you have kids.

Look in what it takes to qualify for Medicare (about ten years work?) since it is not automatic and if your plans change one day then you might want to return to the US when you are retired that would be hard to do without Medicare. If you are close to qualifying then it might make sense to work in the US just long enough to qualify for it.
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in_reality
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Re: Moving to Japan Self Employed.

Post by in_reality »

monocle wrote: Does anybody know a tax accounting firm that is good at handling these types of situations?
http://www.greenbacktaxservices.com/

That is just a reference. No personal experience with them.
monocle wrote: Also looking to build a new house with cash once we get there (around 300k). Are there any US deductions I can take for that?
see the Foreign Housing Exclusion. If you don't have self-employment income you can't claim a deduction but you can take an exclusion for housing expenses paid out of your employer-provided earnings. This is not particular to a new house though...
http://www.irs.gov/publications/p54/ch0 ... k100047529

Keep in mind there is a housing limit that depends on location within Japan.
monocle wrote: When living as an expat getting paid in US currency and spending in another currency, are there any hard,fast rules for mitigating exchange rate differences?
One thing I noticed in reading the greenbacktaxservices info was that you can use an exhange rate that is an average (for the year for example) or for a particular date. In other words, if your company pays you when the rate is favorable (ie dollar is low), you can keep track of that and use that rate for that payment. Again, I have no experience doing this and just mentioned it as something you could look into.

ahh nevermind. You'd be getting pain in dollars right? That's only relevant for yen income you are reporting to the US.
Last edited by in_reality on Fri Sep 06, 2013 10:47 pm, edited 1 time in total.
cbeck
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Re: Moving to Japan Self Employed.

Post by cbeck »

You will face a large and continuing currency risk. If your assets are in US brokerages the best you can do is invest in foreign stock ETFs, and unhedged bond funds to diversify your USD exposure.
bpp
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Re: Moving to Japan Self Employed.

Post by bpp »

cbeck wrote:You will face a large and continuing currency risk. If your assets are in US brokerages the best you can do is invest in foreign stock ETFs, and unhedged bond funds to diversify your USD exposure.
Good point about the OP's current portfolio. He could start investing it now with a bias towards yen-denominated assets.

In the US, Japanese stocks should be easy to get, though the expense ratios seem to run around 0.5% or higher.
In a pinch, the Vanguard Pacific index fund is about 56% Japan, with an ER of 0.12%.

Bonds would be harder.

Is it possible to open an account in Japan now? (Probably not, if not yet a resident.)
Topic Author
monocle
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Re: Moving to Japan Self Employed.

Post by monocle »

I was searching around for that GIF of the smiley shooting himself but couldn't find it. :confused

Thanks for all your replies and tips. I'll have to keep researching. Looking like it won't be as bad as I initially feared. Just need to structure everything right before the move.
Found a Tokyo based accounting firm that files both Japanese and US taxes. Hopefully they can provide some good advice.

I can open a Japanese brokerage account under my wife's name now if necessary for the currency hedge. Guess I'll hop on the TOPIX index.

I was thinking about asset allocation where I would keep my US Brokerage accounts and Japanese brokerage accounts about 50/50, with an annual rebalancing via new purchases... buying the weaker market. Would that make any sense?

Luckily no state taxes for now.

Currently past the Medicare requirement so that is fine (probably won't need it, but good to know just in case).

So... plan is looking like setting up as an S-Corp with my wife and I as two employees drawing under the FEIE (0 US taxes, 23% marginal in Japan), and dividends for the rest (20% to Japan). Foreign housing deduction for utilities.
plats
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Re: Moving to Japan Self Employed.

Post by plats »

Good idea using a professional accounting firm in this case. Don't forget those dividends will be taxable in the USA as well as Japan, and the foreign tax credit may help alleviate the pain.
bpp
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Location: Japan

Re: Moving to Japan Self Employed.

Post by bpp »

monocle wrote: I can open a Japanese brokerage account under my wife's name now if necessary for the currency hedge. Guess I'll hop on the TOPIX index.
You might want to hold off on your wife using any Japan-based mutual funds or ETFs until she is no longer a US taxpayer, to avoid having to deal with the PFIC rules. Individual stocks and bonds should be ok. I wouldn't recommend bothering with individual stocks if she will be escaping the IRS's jurisdiction in three years, but she could start accumulating Japanese savings bonds (個人向け国債), for example.
I was thinking about asset allocation where I would keep my US Brokerage accounts and Japanese brokerage accounts about 50/50, with an annual rebalancing via new purchases... buying the weaker market. Would that make any sense?
Sounds reasonable to me. I keep my portfolio at 50/50 Japan/elsewhere, for both my stocks and bonds, for what that is worth.
Others may have quite different opinions, though.
So... plan is looking like setting up as an S-Corp with my wife and I as two employees drawing under the FEIE (0 US taxes, 23% marginal in Japan), and dividends for the rest (20% to Japan). Foreign housing deduction for utilities.
The foreign housing deduction can only be used if total housing expenses exceed $15,600 (for 2012). I'd guess your utilities are unlikely to be anywhere near that much.
expat
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Re: Moving to Japan Self Employed.

Post by expat »

Does Japan even need to know about your income? I don't think I would declare it unless I had a good reason to do so.
bpp
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Re: Moving to Japan Self Employed.

Post by bpp »

expat wrote:Does Japan even need to know about your income? I don't think I would declare it unless I had a good reason to do so.
He will have to pay Japanese tax on his worldwide income once he becomes a permanent resident of Japan, or has lived here for 5 years. The Japanese tax agency is reported to be cracking down on undeclared foreign income lately.

There is a thread here on filing Japanese taxes that may be of interest:
http://www.bogleheads.org/forum/viewtop ... 2&t=111555
plats
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Re: Moving to Japan Self Employed.

Post by plats »

expat wrote:Does Japan even need to know about your income? I don't think I would declare it unless I had a good reason to do so.
It's an interesting point, but the question "Are you required to pay income tax to the country where you claim bona fide residence?" on Form 2555 might trip you up.
bpp
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Location: Japan

Re: Moving to Japan Self Employed.

Post by bpp »

plats wrote:
expat wrote:Does Japan even need to know about your income? I don't think I would declare it unless I had a good reason to do so.
It's an interesting point, but the question "Are you required to pay income tax to the country where you claim bona fide residence?" on Form 2555 might trip you up.
The G20 agreeement to start sharing tax information between countries by 2015 may also do so.
Topic Author
monocle
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Re: Moving to Japan Self Employed.

Post by monocle »

bpp wrote: You might want to hold off on your wife using any Japan-based mutual funds or ETFs until she is no longer a US taxpayer, to avoid having to deal with the PFIC rules. Individual stocks and bonds should be ok. I wouldn't recommend bothering with individual stocks if she will be escaping the IRS's jurisdiction in three years, but she could start accumulating Japanese savings bonds (個人向け国債), for example.


Thanks for the tip.
plats wrote:Good idea using a professional accounting firm in this case. Don't forget those dividends will be taxable in the USA as well as Japan, and the foreign tax credit may help alleviate the pain.


I had thought the dividend tax would be taken by the country with the higher dividend tax and then deducted from the country with the lower. Thought the purpose of the tax treaty was to prevent double taxation. Does it not apply to capital gains?
bpp wrote:The foreign housing deduction can only be used if total housing expenses exceed $15,600 (for 2012). I'd guess your utilities are unlikely to be anywhere near that much.


Good to know. Doubt they will be that high as well.

One thing I'm getting conflicting information about... permanent resident vs non-permanent resident status. I've seen some say it is dissociated from intent and actual immigration status.
Some say the 5 out of 10 years rule is all that matters for permanent vs non-permanent status. Do you know if this is true? I would like it to be. But it is sounding too good to be true.

Under the 5/10 rule, it is sounding like my first 5 years I would only have to pay Japanese income tax on earnings remitted to Japan, while at the same time getting the foreign earned income exclusion for US taxes. (100,000x2 for me and the wife). In that case I could set it up so that only I get paid for the first 5 years, only taxed in the US on income above 200K, and have almost zero tax liability in Japan (except the first year when we remit a lot to buy the house.) But it sounds like I could even avoid that, if I transfer the savings for the house a year prior to moving to Japan.
expat wrote:Does Japan even need to know about your income? I don't think I would declare it unless I had a good reason to do so.
Not looking to break any laws. Tax avoidance vs tax evasion. Typically like to keep things on the up and up unless it is commonly accepted practice to do otherwise (e.g. driving a couple of ticks over the speed limit). Got no problem being creative with the company structure to avoid as much as possible. That has more to do with ambiguity in the laws rather than hiding income. I mean, who in the IRS or NTA has the right to tell me how much pay vs dividends my wife or I receive. The rule is "reasonable compensation" I mean... I think Apple paid Steve Jobs 1 dollar one year. Hardly reasonable.
bpp
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Re: Moving to Japan Self Employed.

Post by bpp »

monocle wrote: I had thought the dividend tax would be taken by the country with the higher dividend tax and then deducted from the country with the lower. Thought the purpose of the tax treaty was to prevent double taxation. Does it not apply to capital gains?
The US-Japan tax treaty assigns the first 10% in dividends tax to the source country (where the dividends came from), and anything above that to the country of residence (where you live).

Capital gains taxes are all assigned to the country you are living in, except for real estate.
One thing I'm getting conflicting information about... permanent resident vs non-permanent resident status. I've seen some say it is dissociated from intent and actual immigration status.
Some say the 5 out of 10 years rule is all that matters for permanent vs non-permanent status. Do you know if this is true? I would like it to be. But it is sounding too good to be true.
If you do not have a Permanent Residency Permit (Japanese Green Card, 永住権), then the 5-year rule applies.
It used to be that one couldn't get Permanent Residency before 5 years anyway, but I think it is possible in 3 now if you are married to a Japanese citizen. Still, there is nothing forcing you to apply for it before the 5-year mark if you don't want to.
Under the 5/10 rule, it is sounding like my first 5 years I would only have to pay Japanese income tax on earnings remitted to Japan, while at the same time getting the foreign earned income exclusion for US taxes. (100,000x2 for me and the wife). In that case I could set it up so that only I get paid for the first 5 years, only taxed in the US on income above 200K, and have almost zero tax liability in Japan (except the first year when we remit a lot to buy the house.) But it sounds like I could even avoid that, if I transfer the savings for the house a year prior to moving to Japan.
Your FEIE allowance and your wife's FEIE allowance are separate, and cannot be combined. If you are the only one getting paid, you will only be able to claim the exclusion up to your personal FEIE allowance.

As for transferring money tax-free before you move here... hmm, never heard of anybody doing that before.
You might want to call up the NTA to make sure there is no problem with that idea ahead of time. (Better than finding out afterwards!)

Standard caveat: all the above are the ramblings of a random stranger on the internet of unknown reliability, etc. etc.

PS -- if you end up moving large amounts of money around between your wife and yourself after you move to Japan, beware of Japanese gift taxes, which kick in at 1,100,000 yen. For example, if you buy a jointly-owned house with money that had all been transferred into your wife's account, you will want to document somehow that half of that money actually came from each of you (if that is true). Otherwise, your half of the house would be deemed a gift from your wife.
Topic Author
monocle
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Re: Moving to Japan Self Employed.

Post by monocle »

bpp, thanks for your responses.

This source country/vs residence country stuff for taxes really starts getting confusing.

Do you know anything about the sale of real estate (capital gains)? We have three properties we are planning to sell before moving but wonder what would happen if we sold after we move.

My wife will be taking a bigger role in the company when we move and will most likely take half the pay so she can get the FEIE as well.

Going to have to find out more about the pre move transfers. Would love to be pretty much tax free for a few years. I've got a couple of requests for consults out with some Japan/US accountants. No replies yet. I'll update when I find out anything concrete.
bpp
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Re: Moving to Japan Self Employed.

Post by bpp »

monocle wrote:Do you know anything about the sale of real estate (capital gains)? We have three properties we are planning to sell before moving but wonder what would happen if we sold after we move.
From the US-Japan tax treaty:
ARTICLE 13
1. Gains derived by a resident of a Contracting State from the alienation of real property situated in the other Contracting State may be taxed in that other Contracting State.
I read this as meaning the US gets first dibs on capital gains taxes from the sale of real estate located in the US. Japan can also tax it, but you should be able to take a foreign tax credit against your Japanese taxes for capital gains taxes paid to the US.

For details see here:
http://www.irs.gov/Businesses/Internati ... -Documents

and also various amendments here:
http://www.treasury.gov/resource-center ... 4f360101f2

(Would be nice if they created an updated summary document with all amendments applied...)
Topic Author
monocle
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Re: Moving to Japan Self Employed.

Post by monocle »

bpp wrote:
monocle wrote:Do you know anything about the sale of real estate (capital gains)? We have three properties we are planning to sell before moving but wonder what would happen if we sold after we move.
From the US-Japan tax treaty:
ARTICLE 13
1. Gains derived by a resident of a Contracting State from the alienation of real property situated in the other Contracting State may be taxed in that other Contracting State.
I read this as meaning the US gets first dibs on capital gains taxes from the sale of real estate located in the US. Japan can also tax it, but you should be able to take a foreign tax credit against your Japanese taxes for capital gains taxes paid to the US.

For details see here:
http://www.irs.gov/Businesses/Internati ... -Documents

and also various amendments here:
http://www.treasury.gov/resource-center ... 4f360101f2

(Would be nice if they created an updated summary document with all amendments applied...)
Would be awesome if they used the words Japan and US instead of "contracting state" it gets really confusing.
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