For Individuals leaving Japan on or after July 1, 2015 –New Exit Tax Regime
Do you know that new taxation system called ‘exit tax’ will be introduced from July 1, 2015? In this column, we will provide information about the new exit tax.
2. What is ‘Exit Tax’?
Exit Tax is a new tax regime imposed on unrealized capital gains on financial assets held by an individual at the time of leaving Japan (i.e. no longer possesses either domicile or residence in Japan).
This new tax regime was introduced under the 2015 Tax Reform. The exit tax will be applicable from July 1 2015.
The exit tax was introduced in order to prevent wealthy individuals from escaping tax on capital gains in Japan by moving overseas with certain financial assets and subsequently selling those assets.
An individual who is subject to the exit tax will be required to file the income tax return. Special treatment such as grace period or tax reduction will be allowed by appointing a tax agent and satisfying certain conditions.
3. Eligible persons and eligible assets
An eligible person is a resident individual leaving Japan with the following conditions:
(1) An individual has eligible assets with a total value of JPY100 million or more.
(2) In principle, the person has lived in Japan for more than 5 years in the last 10 years before departure.
Eligible assets are as follows:
● Securities as defined in the Income Tax Law
● Contributions under Tokumei-Kumiai agreement
● Unsettled derivative transactions
● Unsettled when-issued transactions
● Unsettled credit transactions
4. Filing tax return and tax payment
(1) In case of appointing a tax agent
The income tax return should be filed by March 15 of the following year, assuming that capital gains/losses on eligible assets were realized at the time of leaving Japan at the value of eligible assets as of departure.
If collateral is provided by the filing due date, extension of tax payments is applicable. If not, the payment due date is March 15 of the following year.
(2) Other than above (1)
The income tax return should be filed by the date of departure, assuming that capital gains/losses on eligible assets were realized at the time of leaving Japan at the value of the eligible assets as of the day 3 months before the expected departure date.
The payment due date is also the date of the departure. If a tax agent is not appointed, extension of tax payment is not applicable.
5. Extension of tax payment
If an individual subject to exit tax appoints a tax agent by the time of leaving Japan, he/she will be allowed to extend the tax payment up to 5 years (with an application of extension, maximum of 10 years) under the following conditions:
(1) The individual must file the income tax return with an attachment of an application for grace period with certain details of calculating the amount of extended tax payment.
(2) The individual must provide collateral equivalent to the amount of the income tax and the interest tax for the grace period by the due date of filing the income tax return.
In addition, during the grace period, the individual is required to submit a report of the eligible assets as of December 31 of each year to the competent tax office by March 15 (due date) of the following year. In case when the individual does not submit the report by the due date, the grace period will be terminated on the date 4 months after the due date, and he/she must pay the deferred income tax and interest tax.
6. Tax reduction (when appointing a tax agent )
If an individual subject to the exit tax is allowed to extend the tax payment mentioned in above 5, he/she will also be able to take tax reduction under the following conditions:
(1) If the selling price of an eligible asset is lower than the fair value of the asset at the time of departure, the exit tax will be reduced by filing a request for correction within 4 months after the sale.
(2) When capital gains on the sale of an eligible asset is taxed in an foreign country and the double taxation is not eliminated in the foreign country, the foreign tax credits will be applicable in Japan by filing a request for correction within 4 months after when the foreign income tax is imposed.
(3) If the value of the eligible assets at the time of termination of grace period is lower than that of the departure date, the exit tax will be reduced by filing a request for correction within 4 months after the termination.
However, if the individual dismisses his/her tax agent or the collateral is in short, he/she will have to pay income tax and interest tax for the grace period and is no longer applicable to the tax reduction.
7. Tax reduction (Not required a tax agent)
In the case where an individual repatriates to Japan within 5 years (in case of extension, 10 years) from departure, the exit tax will not be imposed on unsold assets, and the paid tax will be recovered by filing a request for correction within 4 months after the return to Japan. This treatment is also applied to the cases where the eligible assets are sold, gifted, or inherited to resident individuals in Japan.
8. Exit tax on gift, inheritance, and bequest to non-residents
The exit tax will also be applied for the cases where an individual transfers the eligible assets mentioned in above 3 to non-resident individuals (e.g. his/her relatives living outside Japan) by gift, inheritance or bequest from July 1, 2015.
Thus, please note that the exit tax might be applied when transferring the securities with certain amount of unrealized gains or giving owners’ treasury stocks to non-resident individuals.
In this column, we have given an overview of the new exit tax.
Please note that this article is only prepared for the purpose of introducing general contents and no professional advice is included.
Therefore, please don’t make any judgment based on this article without an advice from any professionals.
If you have any further questions, please feel free to contact us.
Website of Ministry of Finance Japan, “FY2015 Tax Reform (Main Points)”