Paying Dividends to a Foreign Parent: Withholding Tax and Treaty Forms

When a Japanese company pays a dividend to a foreign parent, it must withhold income tax and special income tax for reconstruction at the time of payment. For dividends from an unlisted Japanese company, the domestic rate is 20.42%. If the parent is a mainland China company, the Japan–China tax treaty caps the rate at 10%; for a Hong Kong company, the Japan–Hong Kong tax agreement caps it at 5% or 10%. If an application form is filed by the day before the first payment date, the reduced rate can be applied from the time of payment.

Corporate law steps to confirm before paying a dividend

Before turning to withholding tax, confirm that the company is in a position to pay a dividend under Japan’s Companies Act. The main rules on distributions of surplus by a kabushiki kaisha (KK) are as follows.

• Shareholders’ resolution: in principle, the general meeting of shareholders decides the type of dividend property, the total amount and the effective date.
• Within the distributable amount: dividends may be paid only up to the distributable amount calculated under the Companies Act.
• ¥3 million net asset restriction: a company with net assets of less than ¥3 million cannot pay dividends.

A KK with a board of directors may, if its articles of incorporation so provide, pay one interim dividend during a financial year by board resolution.

Even if the parent is the sole shareholder, always prepare minutes of the resolution. A dividend exceeding the distributable amount can later give rise to issues such as an obligation to repay. As a rule, set the dividend amount once the financial results are final.

Japanese withholding tax rates on dividends

Dividends paid to a foreign company are Japan-source income. The Japanese company withholds tax at the time of payment and pays it to the tax office by the 10th of the month following payment. The applicable rates depend on where the parent is located.

Where the treaty rate is at or below the domestic rate, special income tax for reconstruction does not need to be added. For a mainland China parent, tax is withheld at exactly 10%. Note that the FY2026 tax reform created a special defense income tax: for income arising on or after 1 January 2027, the special defense income tax (1% of the income tax amount) and the special income tax for reconstruction, with its rate lowered to 1.1%, will be withheld together with income tax. Because the two rates combined remain the same as the previous 2.1%, the National Tax Agency advises that the method of calculating the withholding amount does not change.

Mainland China and Hong Kong are covered by different treaties; the Japan–China treaty cannot be used for a Hong Kong company. For an overview of the Japan–China treaty, see Key points of the Japan–China tax treaty.

Worked example: a ¥10 million dividend to a mainland China parent

• With the form filed: withholding tax is ¥1 million (10%), and ¥9 million is remitted to the parent.
• Without the form: withholding tax is ¥2,042,000 (20.42%), and ¥7,958,000 is remitted. The difference is reclaimed later through a refund claim.

Withholding tax is the parent’s tax, which the Japanese company collects and pays on its behalf. It is not an expense of the Japanese company.

When a declared dividend is not paid

If a dividend remains unpaid one year after the date payment was fixed, it is deemed paid on the day that year elapses, and tax must be withheld. Note that even if you defer the remittance to the parent, you cannot defer payment of the withholding tax.

Filing the treaty application

To apply the reduced treaty rate from the time of payment, the parent prepares the “Application Form for Income Tax Convention (relief from Japanese income tax and special income tax for reconstruction on dividends)” (Form 1). The filing process is as follows.

1. The parent prepares a form for each payer of dividends (each Japanese company)
2. The parent submits the form to the Japanese company
3. The Japanese company files it with the competent district director of the tax office by the day before the first payment date
4. The Japanese company withholds and pays tax at the treaty rate

The form states the parent’s name and address, the number of shares held and other details. If a Hong Kong parent is applying the 5% rate, confirm that the shareholding percentage and holding period requirements are met.

When using a tax treaty with a limitation-on-benefits clause, an attachment form for limitation on benefits (Form 17) and a certificate of residence from the other jurisdiction are also required. Check in advance which documents the treaty for the parent’s jurisdiction requires.

If the form is not filed in time

If the form has not been filed by the deadline, the Japanese company withholds at the domestic rate of 20.42%. Even then, filing an “Application Form for Refund of the Overpaid Withholding Tax” under the tax convention later allows a refund of the difference from the treaty rate. A refund does, however, take time. We recommend preparing the form before the first dividend.

FEFTA reporting on remittance

When a Japanese company, as a resident of Japan, makes a payment to its non-resident parent, it must observe the reporting requirements under the 外為法 (Foreign Exchange and Foreign Trade Act, FEFTA). If a single payment exceeds the equivalent of ¥30 million, a “Report on Payments or Receipt of Payments” must be submitted. For remittances through a bank, use the form submitted via the bank or other institution.

The reporting obligation falls on the Japanese company as the resident; the non-resident parent has no reporting obligation. Whether the ¥30 million threshold is exceeded is judged by the amount actually paid in each payment. For payments in foreign currency, a method of converting to yen is prescribed for determining whether a report is required.

The bank may ask for documents showing the dividend resolution (such as minutes) as evidence of the purpose of the remittance. Keep all documents from resolution to remittance together.

Dividends, royalties and interest compared

Dividends are not the only way to return funds from a Japanese company to its parent. The main methods compare as follows.

Royalties and interest are deductible, but if the price of transactions with the parent differs from what independent parties would agree, the deduction may be denied under transfer pricing rules. For the approach, see Transfer pricing basics. An overview of the taxes on Japanese companies is in Overview of taxes on Japanese companies.

Taxation on the parent’s side

How dividends withheld in Japan are taxed where the parent is located, and whether the Japanese withholding tax can be credited, depend on the tax system of that country or region. Confirm this in advance with the parent’s tax team as well. Comparing the tax on both the Japanese and parent sides before setting the timing and amount of dividends makes it easier to choose how to return funds.

Records to keep after paying a dividend

Dividends to a foreign parent are transactions that tax audits often examine. Keep the following documents together for each financial year.

• Minutes of the general meeting of shareholders (or board meeting) that resolved the dividend
• Financial statements supporting the calculation of the distributable amount
• Copies of the Application Form for Income Tax Convention
• Copies of the payment slips for withholding income tax
• Remittance records and copies of FEFTA reports

Check that the dividend amount, withholding rate and remittance amount are consistent across these documents. If you applied a treaty rate, also make sure the documents show that the form was filed before the first payment date.

How TIMOA can help

Paying a dividend to a foreign parent involves four linked procedures: the corporate law resolution, calculating and paying withholding tax, the treaty application and FEFTA reporting. The treaty application in particular must be filed by the day before the first payment date.

Together with partner certified tax accountants and judicial scriveners, TIMOA supports you in setting the dividend amount, preparing minutes, preparing the treaty application, paying withholding tax and organising remittance documents. We can also handle communication with your parent company in Chinese. For details, see Accounting, Tax & HR.