{"id":972,"date":"2026-10-28T11:33:17","date_gmt":"2026-10-28T02:33:17","guid":{"rendered":"https:\/\/japantaxsupport.com\/?post_type=topics&#038;p=972"},"modified":"2026-10-28T11:37:32","modified_gmt":"2026-10-28T02:37:32","slug":"us-llc-s-corp-living-in-japan","status":"publish","type":"topics","link":"https:\/\/japantaxsupport.com\/en\/topics\/us-llc-s-corp-living-in-japan\/","title":{"rendered":"Living in Japan with a US Single-Member LLC (S-Corp): What Changes and What to Do"},"content":{"rendered":"\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"649\" src=\"https:\/\/japantaxsupport.com\/wp\/wp-content\/uploads\/2026\/10\/118486110-1024x649.jpg\" alt=\"Business owner working on a laptop from home in Japan\" class=\"wp-image-973\" srcset=\"https:\/\/japantaxsupport.com\/wp\/wp-content\/uploads\/2026\/10\/118486110-1024x649.jpg 1024w, https:\/\/japantaxsupport.com\/wp\/wp-content\/uploads\/2026\/10\/118486110-300x190.jpg 300w, https:\/\/japantaxsupport.com\/wp\/wp-content\/uploads\/2026\/10\/118486110-768x487.jpg 768w, https:\/\/japantaxsupport.com\/wp\/wp-content\/uploads\/2026\/10\/118486110.jpg 1200w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Who this article is for<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">This article is for US citizens who own a single-member LLC taxed as an S-Corporation and who have moved to Japan, or are planning to move, while continuing to work for US clients from Japan.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We receive a lot of questions about this exact situation. Many people arrive in Japan with the S-Corp structure their US accountant set up for them, continue filing Form 1120-S and W-2 as before, and assume Japan will simply follow the US treatment. It does not. We have also supported clients through Japanese tax audits involving this structure, and the questions the tax office asks are predictable once you understand how Japan views a US LLC.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Our goal here is simple: to explain how Japan actually taxes this structure, so that you can file in a way that is defensible and avoid being put in an unfavorable position later. Please take this as general reference information, not as advice on your own case.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In short: once you are a tax resident of Japan, the structure that saved tax in the United States as a rule stops working. Salary from the LLC for work performed in Japan is taxable in Japan whether or not it is remitted, and the LLC&#8217;s profit has to be examined separately under PE taxation and the CFC rules. Keeping the LLC adds filing work and tax risk on both sides, so in most cases the better choice is to move the business into a Japanese entity. The sections below explain why.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Summary of this article<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Salary from the LLC for work performed in Japan is taxable in Japan whether or not the money is sent to Japan. This is true even if you are a US citizen and even if you qualify as a &#8220;non-permanent resident&#8221; under Japanese tax law. The LLC&#8217;s profit, separately from the salary, has to be examined under both PE taxation and the CFC rules.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">From there, the right structure depends on one question: will your clients agree to switch the contracting party from your US LLC to a Japanese entity? This is the first thing to settle.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">If your clients agree to the switch<\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>If your annual profit is around JPY 15 million or less, work as a sole proprietor in Japan and contract with your clients directly (business income, filed under the blue return system).<\/li>\n\n\n\n<li>Once your annual profit goes beyond JPY 15 million, consider setting up a Japanese godo kaisha (GK) to contract with your clients, with a disregarded entity (DE) election for it on the US side on Form 8832 (decide on the basis of a projection).<\/li>\n\n\n\n<li>In either case, dissolve the US LLC. If you keep it after moving the business to a Japanese entity, the issues in Reasons 1 to 3 stay with you.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">If your clients will not agree to the switch<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">You keep the US LLC and must examine both of the legal routes (PE taxation and the CFC rules), and file in Japan on the basis of the correct attribution and category of income. In practice, some owners report the profit as their own business income instead, but that approach has a weak legal basis and is not a substitute for the statutory filing obligations (explained later in this article).<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A disregarded entity (DE) is an entity that US tax law treats as one with its owner rather than as a separate taxpayer. When a GK is a DE, its profit and loss are reported on the US return as the owner&#8217;s own business income. On the Japanese side the GK remains a corporation, and the election does not change how Japan taxes it.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Reason 1: Japan treats your LLC as a foreign corporation<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">This is the starting point for everything else. In the view of Japan&#8217;s National Tax Agency, a US LLC is in principle a foreign corporation. The S-Corp election is only a choice about how the entity is taxed inside the United States. Japan does not take it into account.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">As a result, Japan does not treat the income on Form 1120-S or Schedule K-1 as your own business income. The basic rule is to tax each payment from the LLC to you, such as salary or distributions, according to its nature. On top of that, as explained in Reasons 2 and 3, the LLC&#8217;s own profit is also likely to be taxed in Japan, either through the permanent establishment (PE) rules or through the controlled foreign company (CFC) rules.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The table below shows these two layers as they result from applying Japanese tax law as written. How PE taxation and the CFC rules are coordinated is touched on in Reason 3.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><thead><tr><th>Layer<\/th><th>Item<\/th><th>Classification in Japan<\/th><th>Tax treatment<\/th><\/tr><\/thead><tbody><tr><td>Payments to you (basic rule)<\/td><td>Salary (W-2)<\/td><td>Employment income<\/td><td>Japan-source income, taxed in full<\/td><\/tr><tr><td>Payments to you (basic rule)<\/td><td>Distribution<\/td><td>Dividend income from a foreign corporation<\/td><td>Foreign-source income; for a non-permanent resident, taxed in full if paid in Japan, and to the extent remitted to Japan if paid abroad<\/td><\/tr><tr><td>The LLC&#8217;s own profit (in addition)<\/td><td>Profit after salary<\/td><td>PE: corporate tax on the LLC for the profit attributable to the PE. The CFC rules are examined separately (the specific treatment of the relationship between the two has to be confirmed case by case)<\/td><td>Taxed whether or not it is distributed. See Reasons 2 and 3<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">In other words, Japan does not accept the S-Corp as a pass-through entity. In law, the LLC&#8217;s profit is taxed either to the LLC itself (the PE route) or to you through the CFC rules (the CFC route); it is not treated as your own business income. A different approach seen in practice, and its problems, are discussed later in this article.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Reason 2: Permanent establishment risk<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">When you, the owner, perform the LLC&#8217;s services from your home in Japan, your home is likely to be treated as a permanent establishment (PE) of the LLC in Japan.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If a PE exists, the LLC itself must file Japanese corporate tax and local tax returns on the income attributable to that PE. This is a separate filing from your personal income tax return. Consumption tax is a separate question: whether it is payable does not depend on the existence of a PE alone, but on whether the transactions are domestic transactions and on the small-business exemption and its special rules. For a one-person company, maintaining a corporate tax filing in Japan in addition to a personal filing is a heavy burden.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In an audit, this is one of the first things the tax office looks at: where was the work physically done, and who did it?<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Reason 3: Controlled Foreign Company (anti-tax-haven) rules<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Japan&#8217;s CFC rules work in two steps. First, at the company level, a foreign corporation is a &#8220;foreign related company&#8221; if Japanese residents and Japanese corporations together hold more than 50% of it, or effectively control it. Second, residents who hold 10% or more of such a company are the ones subject to inclusion. A single-member LLC owned 100% by you meets both the company-level and the shareholder-level requirements.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The rules then look at the effective tax rate of the foreign related company. An S-Corp as a rule pays no entity-level tax in the United States, so looking only at the US tax burden, the rate is close to 0%. The effective tax rate, however, is computed under a prescribed formula, and how Japanese corporate tax is treated in that formula is among the points to confirm for each case. If the rate is below the trigger of 20% (or 27% for a so-called &#8220;paper company&#8221; and similar categories), the analysis moves on to inclusion.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A one-person consulting company with no employees and no office, managed from a home in Japan, is unlikely to meet the substance test or the management-and-control test. In that case the company&#8217;s profit is attributed to you and taxed as miscellaneous income in Japan, whether or not it is paid out.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">On the relationship between PE taxation and the CFC rules: excluding income, crediting tax, and reflecting tax in the effective rate are separate mechanisms, and the specific treatment under the provisions that apply to individual shareholders has to be confirmed against the applicable provisions and calculations. This article does not claim that the two are automatically coordinated. The point here is that if you keep the LLC, its profit has to be examined under both PE taxation and the CFC rules, in addition to the tax on the salary you receive.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Reason 4: Your service income is Japan-source income<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Many people expect that &#8220;non-permanent resident&#8221; status will limit Japanese tax to money sent to Japan. This is only partly true, and it is the single most common misunderstanding we see.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Under Japanese tax law, compensation for personal services is sourced where the work is performed. If you work in Japan, the income is Japan-source income even when the payer is a US corporation. Japan-source income is taxed in full, with or without remittance.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The scope of taxation for a non-permanent resident is not a matter of main business versus side income. All Japan-source income is taxable. Foreign-source income is taxable in full if it is paid in Japan, and, if it is paid abroad, to the extent it is remitted to Japan, with the remitted amount computed under a statutory method. The remittance rule matters for foreign-source income paid abroad, such as interest on US bank accounts or dividends from US stocks. For the LLC&#8217;s profit, as explained in Reasons 1 to 3, PE taxation and the CFC rules each have to be examined, independently of whether anything is remitted.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Reason 5: Social insurance and double filing<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The US-Japan Social Security Agreement has an exception that lets employees sent temporarily from the US to Japan, and self-employed people who temporarily move their business activity to Japan, stay in the US system, in principle for up to five years. Whether you are treated as an employee or as self-employed, and whether the conditions are met (the employment relationship before the transfer, the expected length of stay, the substance of the business transfer, and so on), is decided case by case, and a certificate of coverage is required. Whether sending yourself to Japan through your own company fits this exception has to be confirmed individually.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If you work in Japan, you will normally join the National Pension and National Health Insurance (or Employees&#8217; Pension and health insurance if you set up a Japanese company). If your US W-2 salary continues to have FICA withheld at the same time, you pay into both systems.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The filing burden is also doubled. The LLC&#8217;s salary has no Japanese withholding, so you must file a Japanese tax return every year. On the US side, Form 1120-S, Schedule K-1, W-2, and FICA processing continue as before.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Why we recommend a Japanese entity<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The original benefit of the S-Corp structure, saving self-employment tax, is as a rule not available to a resident of Japan. What remains is the complexity of being taxed in two countries and the administrative burden that comes with it.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">How much tax you pay after switching to a Japanese sole proprietorship or godo kaisha depends on your income level, how the director&#8217;s salary is set, and other factors, so no general statement is possible. What certainly changes is complexity. Once the business is held in a Japanese entity, Reasons 1 to 3 disappear entirely, and your filing follows the normal Japanese route: business income under the blue return, or corporate tax plus director&#8217;s salary for a godo kaisha.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">When keeping the LLC can still make sense<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">There are two situations in which keeping the US LLC is reasonable:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Your clients can only contract with a US entity. Some clients have vendor rules that do not allow a foreign contractor, or they do not want to change an existing contract.<\/li>\n\n\n\n<li>Your stay in Japan is expected to be shorter than five years. Switching to a Japanese entity and later switching back means setting up and closing companies twice, re-signing client contracts twice, and losing the LLC&#8217;s US bank account, credit history, and vendor registrations. For a short stay, the cost of this round trip can be higher than the cost of a few years of more complex filing.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">In the second case, the Japanese tax risks described above do not go away. The decision is about transaction cost and business continuity, not about tax.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So the two key questions are: will your clients accept changing the contracting party from the US to Japan, and how long do you expect to stay in Japan?<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Switching to a Japanese entity: sole proprietor or godo kaisha?<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">If your clients agree to contract with a Japanese entity, the next decision is between a sole proprietorship and a godo kaisha (GK). The size of your profit is the guide. &#8220;Profit&#8221; here means pre-tax profit before any director&#8217;s salary or owner&#8217;s draw, and the figure of JPY 15 million below is not a statutory threshold but the level at which our office starts to review the question. Looking at both the Japanese and the US side, a sole proprietorship is usually enough when annual profit is around JPY 15 million or less, and once profit goes beyond roughly JPY 15 million it is worth starting to consider a GK combined with a US disregarded entity (DE) election on Form 8832. The answer depends on the level of director&#8217;s salary, the policy on retained earnings, family circumstances, social insurance premiums, the running costs of a company, and the US tax position, so an actual projection is needed.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">We do not recommend leaving the GK as a corporation for US purposes unless there is a specific reason. There are two main problems with that. First, the Japanese corporate tax paid by the GK is the GK&#8217;s own tax and cannot be claimed directly on your personal Form 1116 (an indirect credit may be available through a \u00a7962 election, but that is a complex procedure; under DE treatment the tax is treated as paid by you and is credited directly). Second, the GK becomes a controlled foreign corporation (CFC) under US law, which brings an annual Form 5471 and, if you want GILTI income kept out of your return, an annual high-tax exception election; a missed Form 5471 carries a penalty starting at USD 10,000 and keeps the statute of limitations open. Under DE treatment none of the CFC filings apply, and the information reporting is limited to Form 8858 (with its schedules).<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><thead><tr><th>Item<\/th><th>Sole proprietorship (blue return)<\/th><th>GK + DE election<\/th><\/tr><\/thead><tbody><tr><td>Japanese tax rate<\/td><td>Progressive (up to 55% including local tax); blue return deduction of JPY 650,000<\/td><td>Split between corporate tax and director&#8217;s salary (with the employment income deduction); as a rule of thumb, tends to become favorable above JPY 15 million of profit (projection needed)<\/td><\/tr><tr><td>Japanese social insurance<\/td><td>National Pension + National Health Insurance (NHI premiums rise with income; the annual cap varies by fiscal year, age and municipality, and is in the JPY 1.1 million range for FY2026 including the long-term care portion)<\/td><td>Employees&#8217; Pension + health insurance (larger future benefits; although half of the premium is &#8220;paid by the company,&#8221; for a 100% owner the company&#8217;s share is still your own cost, so compare on a total-burden basis)<\/td><\/tr><tr><td>US filing form<\/td><td>Schedule C + Form 8858 (the Japanese business reported as a foreign branch)<\/td><td>Schedule C + Form 8858 (the GK reported as a foreign disregarded entity)<\/td><\/tr><tr><td>US relief available<\/td><td>FEIE or FTC (Japanese national and local income tax)<\/td><td>FEIE or FTC; the Japanese corporate tax paid by the GK is also creditable to you<\/td><\/tr><tr><td>Self-employment tax<\/td><td>Exempt with a certificate of coverage under the US-Japan totalization agreement<\/td><td>Same<\/td><\/tr><tr><td>US information-reporting risk<\/td><td>Form 8858 must be filed; the basis for any penalty for non-filing should be confirmed for your case<\/td><td>Form 8858 must be filed (with its schedules); the basis for any penalty for non-filing should be confirmed for your case<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\">Japanese side<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">As in the usual domestic comparison, the GK becomes more favorable as profit grows. On consumption tax, typical services for overseas clients, such as consulting, can qualify as exports and be exempt, so the two structures are unlikely to differ much in practice. Having a US client is not by itself decisive, however: there are exceptions for services whose benefit is received directly in Japan and for transactions involving the client&#8217;s Japanese branch, so the treatment needs to be checked for each type of service.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">US side<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">On the US side, a sole proprietorship and a &#8220;GK + DE election&#8221; are treated almost the same. Both are reported on Schedule C, and in most cases the foreign earned income exclusion (FEIE) or the foreign tax credit (FTC) offsets most of the US tax. That is not a guarantee of zero tax, however. Japanese tax on income excluded under the FEIE cannot be credited, the FTC is limited by category, the GK&#8217;s fiscal year and the US calendar year may not line up, and you must choose whether to credit foreign taxes on a cash or accrual basis, so the calculation has to be done case by case. Under the DE election, Japan taxes two layers (corporate tax on the GK and income tax on your director&#8217;s salary), but on the US side both can go on your Form 1116 as taxes you paid. On information reporting, a sole proprietorship operated in Japan is itself a foreign branch that must be reported on Form 8858, so there is little difference between the two.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If the GK is left as a corporation for US purposes, the Japanese corporate tax can no longer be credited directly on your personal Form 1116, the net investment income tax (3.8%) applies to dividends if you are above the income thresholds, and Form 5471 plus an annual high-tax exception election (if you want the inclusion excluded) become necessary. In a case like this one, where the Japanese tax burden is heavier than the US one, there is little to gain from corporate treatment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How US tax law classifies a GK: a common misunderstanding<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Under the US entity classification rules, a kabushiki kaisha (KK) is listed as a per se corporation and must always be treated as a corporation, while a GK is not on that list and is therefore eligible for a check-the-box election. In this respect a GK is more flexible than a KK for US tax purposes.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The default classification, however, needs care. For a foreign eligible entity with a single owner, the default is a corporation if the owner has limited liability and a disregarded entity if the owner has unlimited liability (Reg. \u00a7301.7701-3(b)(2)). A GK member has limited liability, so a GK is a corporation for US purposes unless you elect otherwise. To be treated as a DE, you must affirmatively file Form 8832. You may come across explanations saying a GK is &#8220;automatically&#8221; a DE; that is a confusion with the rule for US domestic LLCs and is not correct.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Make the DE election effective from the date of formation. Form 8832 generally allows an effective date up to 75 days before the date of filing, so the form does not have to be filed on the day of formation, but it is important to file within that window so that the GK is a DE from day one. Changing from corporation to DE later is treated as a liquidation for US tax purposes (\u00a7331), which can trigger tax if the GK has appreciated.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">US reporting if the GK is left as a corporation<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The understanding that &#8220;I only need to report my salary and dividends from the GK, and the GK&#8217;s profit itself is not taxed in the US&#8221; is not accurate. A GK wholly owned by a US citizen is a CFC under US law, and its tested income (GILTI, renamed net CFC tested income under the 2025 legislation) is in principle included in the owner&#8217;s income every year. Income that qualifies for the high-tax exception can be excluded if the election is properly made each year, but the test is not based on Japan&#8217;s nominal tax rate; it uses income and foreign taxes computed under US rules for each tested unit. Given Japan&#8217;s tax rates the requirement is likely to be met, but the calculation and the election must be done every year; nothing happens automatically.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In summary:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Form 5471 must be filed every year (penalty of USD 10,000 and up for a missed filing, and the statute of limitations stays open).<\/li>\n\n\n\n<li>On top of that, if you want the inclusion excluded under the high-tax exception, the election has to be made each year for the income that qualifies.<\/li>\n\n\n\n<li>The director&#8217;s salary is reported as earned income (FEIE or FTC).<\/li>\n\n\n\n<li>Dividends are reported when received. They are qualified dividends if the treaty eligibility and the holding-period and other requirements are met, and the Japanese withholding tax is credited in the passive basket. The net investment income tax (3.8%) applies if you are above the income thresholds.<\/li>\n\n\n\n<li>Under the high-tax exception the profit does not become previously taxed E&amp;P (PTEP), so a later dividend is taxed in the normal way. You cannot have both no inclusion and tax-free dividends.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\">PFIC<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Some owners worry about the passive foreign investment company (PFIC) rules when a GK is treated as a corporation. In the central case of this article, a GK wholly owned by the same US citizen from formation, the first rule to look at is the overlap rule between the CFC and PFIC regimes (IRC \u00a71297(d)). Under that rule, stock held by a US shareholder (10% or more) of a CFC is not treated as PFIC stock during the period it is a CFC. As long as the GK is a CFC, the PFIC rules do not apply to you as its owner, and no Form 8621 is required.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For completeness, a one-person company earning service fees from US clients would in any case normally fail to meet the PFIC income test (75% or more passive income) or asset test (50% or more passive assets). PFIC issues can arise only in limited situations, such as a period before the company became a CFC (for example, an initial holding below 10% that was later increased).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Suggested sequence<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">If your clients agree to the switch, start as a sole proprietor and consider moving to a GK once profit grows, based on a projection. When you form the GK, make the Form 8832 DE election effective from the date of formation.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">If your clients insist on contracting with the US entity<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">If you keep the LLC, your Japanese filing has to follow the routes written in the law: PE taxation and the CFC rules. Each has to be examined on its own, based on the facts of your case.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Japan side: the legal routes<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">After your W-2 salary, the remaining profit is in law examined under two routes:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>PE route. If your home is treated as a PE of the LLC, the LLC files Japanese corporate tax and local tax returns on the profit attributable to the PE (consumption tax is determined separately).<\/li>\n\n\n\n<li>CFC route. If the CFC rules apply, the LLC&#8217;s profit is attributed to you and taxed as miscellaneous income. As for the relationship with PE taxation, both have to be examined on their own (see Reason 3).<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">For a one-person company, maintaining a Japanese corporate tax filing is a heavy burden, and the CFC route requires an annual analysis and shifts the income into the following year. Neither is easy, but these are the statutory filing obligations.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">An approach seen in practice, and its problems<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">In practice, some owners bypass the legal routes and instead report the LLC&#8217;s remaining profit in Japan as their own business income, aligned with the Form 1120-S and Schedule K-1 filing on the US side. At first sight this looks reasonable, since the full profit is reported, but the approach has the following problems:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The taxpayer (under the PE route, the LLC itself), the category of income (under the CFC route, miscellaneous income), and the timing (under the CFC route, the following year) differ from the legal routes. Even if the full profit is reported in Japan, the statutory filing obligations are not satisfied.<\/li>\n\n\n\n<li>If your home is found to be a PE, the LLC has its own corporate tax and local tax filing obligations in Japan (consumption tax is determined separately).<\/li>\n\n\n\n<li>To be creditable in the US, a foreign tax must have been paid as a tax legally owed, and Japanese tax paid under a method that departs from the legal routes will not necessarily be accepted smoothly as a foreign tax credit. How the income and the Japanese tax are matched (foreign branch category, general category, and so on) is also determined under US law for each case.<\/li>\n\n\n\n<li>There is no legal assurance that a later distribution is tax-free because the profit was first reported as business income, and the tax authorities may assert that it is a taxable dividend from a foreign corporation.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">If you keep the LLC, therefore, the starting point must be a filing based on the correct attribution and category of income, which means examining both PE taxation and the CFC rules. For the specific filing method, please consult us after the facts have been reviewed.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Final thoughts<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">If you are living in Japan with a US S-Corp, salary for work performed in Japan is taxable in Japan whether or not it is remitted, and the LLC&#8217;s profit has to be examined, separately from the salary, under PE taxation and the CFC rules. The question is under which attribution and category of income it is reported. If you can move the business to a Japanese entity, do so. If you cannot, start from an examination of both PE taxation and the CFC rules, decide on a reporting method together with a professional, and document every year how the Japanese figures tie to your US returns.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If you are already in Japan and have been reporting only your salary and distributions, or nothing at all, it is better to correct this voluntarily than to wait for an inquiry. Penalties for a voluntary amended return are much lower than for one filed after the tax office contacts you.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p class=\"wp-block-paragraph\">Disclaimer: This article is a general description of the Japanese permanent establishment rules, the Japanese CFC rules, and the US rules on entity classification, CFCs and foreign tax credits. Applying these rules to individual facts, and in particular the relationship between PE taxation and the CFC rules for a one-person US LLC, involves points on which interpretations differ or which require confirmation for each case, and the tax authorities may take a different view.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">This article is intended to help you understand the basic treatment, and some explanations have been simplified for that purpose. Your own situation will depend on facts not covered here, such as your residency history, the terms of your client contracts, and the history of the LLC. Before acting on anything in this article, we recommend that you consult our office or another adviser who handles both US and Japanese tax.<\/p>\n","protected":false},"author":1,"featured_media":973,"parent":0,"menu_order":0,"template":"","meta":[],"topics-cat":[16],"class_list":["post-972","topics","type-topics","status-publish","has-post-thumbnail","hentry","topics-cat-international-taxation"],"_links":{"self":[{"href":"https:\/\/japantaxsupport.com\/en\/wp-json\/wp\/v2\/topics\/972","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/japantaxsupport.com\/en\/wp-json\/wp\/v2\/topics"}],"about":[{"href":"https:\/\/japantaxsupport.com\/en\/wp-json\/wp\/v2\/types\/topics"}],"author":[{"embeddable":true,"href":"https:\/\/japantaxsupport.com\/en\/wp-json\/wp\/v2\/users\/1"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/japantaxsupport.com\/en\/wp-json\/wp\/v2\/media\/973"}],"wp:attachment":[{"href":"https:\/\/japantaxsupport.com\/en\/wp-json\/wp\/v2\/media?parent=972"}],"wp:term":[{"taxonomy":"topics-cat","embeddable":true,"href":"https:\/\/japantaxsupport.com\/en\/wp-json\/wp\/v2\/topics-cat?post=972"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}