Source: https://rivet.global/blog/japan-smes-paying-overseas-contractors-withholding
Published: 2026-10-20 · Updated: 2026-10-20 · By Rashidatou K.

# Japanese companies paying overseas contractors and freelancers: withholding and payments

When a Japanese company pays a contractor abroad, withholding depends on what is paid and where the work is done. The 20.42 percent rule and treaties.

## Key takeaways

- Payments to non-residents for services performed entirely outside Japan are generally not Japanese-source income and carry no withholding.
- Royalties and payments for personal services performed in Japan can be Japanese-source and subject to 20.42 percent withholding, including the reconstruction surtax.
- Tax treaties often reduce or remove withholding; the payee files the treaty application form before payment.
- Paying contractors in their own currency on local rails delivers the agreed amount.

A Tokyo e-commerce company works with eight developers in Ho Chi Minh City, three designers in Manila and a UX consultant in Berlin. It also licenses illustrations from an artist in Seoul. Its accountant treats them differently: the development, design and consulting done abroad carry no Japanese withholding, while the illustration licence is a royalty and may.

## Where the work happens

Japan taxes non-residents on Japanese-source income. For services, the place where the work is performed decides the source:

- services performed entirely outside Japan are generally foreign-source, with no Japanese withholding,
- services performed in Japan, for example during a visit, can be Japanese-source.

## Royalties

Payments for the use of copyrights, designs, software rights and similar are royalties. Royalties paid to non-residents are generally Japanese-source when used in Japan and subject to withholding at 20.42 percent: 20 percent plus the reconstruction surtax.

## Treaties

Japan's tax treaties often reduce or remove withholding on royalties and on business profits. To apply them, the non-resident completes an application form for income tax convention, which the payer submits to its tax office before payment. Without it, the domestic rate applies and the payee must claim a refund.

## Paying well

Yen by SWIFT to Ho Chi Minh City or Manila is converted by the contractor's bank, often with fees, and can take days. Paying dong to Vietnamese developers and pesos to Filipino designers on local rails delivers the agreed amount. Agree the currency in the contract.

## Paying into Japan: the local rail

| What | Detail |
|---|---|
| Local rail | Zengin System |
| Run by | Japanese Banks' Payment Clearing Network (Zengin-Net) |
| Settlement | Within the day in core hours; the More-Time System settles around the clock for participating banks |

Source: [Zengin-Net](https://www.zengin-net.jp/en/). Checked when this guide was last updated; the scheme's own page has the current figures.

## Where Rivet fits

A Rivet business account accepts registered companies after verification, including Japanese companies, and pays contractors in 120+ countries in local currency where available. Bulk payouts send the month together, rates show before you confirm, and from the Growth plan a second approver can be required. Rivet is not a bank; regulated partner institutions hold the funds.

See [paying a remote team abroad](/blog/paying-a-remote-team-abroad).

## Questions

### Does a Japanese company withhold tax on payments to an overseas freelancer?

Usually not, when the services are performed entirely outside Japan. Royalties, and services performed in Japan, are different. Check each type.

### What is the 20.42 percent rate?

The 20 percent national income tax withholding on certain payments to non-residents plus the 2.1 percent reconstruction surtax on that tax.

### How are treaty benefits claimed?

The non-resident submits an application form for income tax convention to the payer, which files it with the tax office before payment.

### Should we pay in yen?

Paying in the contractor's local currency usually leaves them with more, since their bank does not convert and charge.