Japan’s ‘exit tax’ becomes effective 1 July 2015. How will it affect you?

Exit TaxJapan is introducing a new wealth tax on 1 July 2015. Under proposed legislation almost certain to become law, wealthy permanent residents will have to pay an exit tax when they move abroad.

If you are a short-term resident who has been in Japan fewer than 5 out of the past 10 years, you will be unaffected by the new ‘exit tax’. Stay any longer and you must pay the tax on departure.

Japanese nationals are similarly affected. However, a carve-out for foreigners allows them to exclude years during which they held visa types other than a permanent resident visa. For example, the years that you lived in Japan on a temporary visitor visa, a spousal visa, a professional visa, or an investor/business manager visa would not be counted. That should provide some relief to those on short-term assignment to Japan.

Only individuals owning global ‘financial assets’ above a total threshold of ¥100 million (about $850,000) are subject to the new tax. Financial assets are broadly defined as stocks, bonds, derivatives (including credit and hedging transactions). Cash, real estate and insurance are specifically excluded from the definition. Under the present proposal, wealthy individuals can currently escape taxation by rebalancing their portfolio.

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Financial assets will be taxed on the basis of their unrealized capital gains under the new tax. The value date on which the gains calculation is made is either the date of departure or three months earlier, depending if a tax administrator was employed. For most, the exit tax must be paid before departure. But those subject to the tax must pay it earlier when gifting or bequeathing an inheritance to someone living outside Japan.

For those on rotational assignment who might return to Japan, a carve-out allows for the deferred payment of the exit tax for a maximum of ten years. An initial 5 year payment extension is available which can be renewed for a subsequent 5 year period. To qualify for an extension you must appoint a tax administrator and you must also provide collateral to the tax authorities before departing Japan. During the extension, interest accrues on deferred taxable amounts and the individual must also file an annual report of financial assets. Should you return to Japan while the extension is in force, the exit tax is waived.

There are other benefits to holding an extension. Extension holders can apply for a downward assessment on their financial asset’s fair value, should it be lower than the exit tax valuation on the date their extension terminates. Termination results from the sale of financial assets or expiration of the extension through the passage of time.

Professional advisers say the exit tax creates the potential for complications that should be avoided if possible. Complications might arise because of phantom taxation (a tax on earnings not yet received), double taxation, gifts and inheritances, etc. One possible way to avoid the tax is to switch from a permanent resident visa to another form of visa such as a specialist in the humanities/international services visa. Barring that, they advise leaving the country before 1 July 2015.

Details of the proposed legislation are still under discussion. Check with your professional adviser before acting on this article. Note our full disclaimer to the right.  Japan’s exit tax has since been amended. It does not apply to foreigners until June 2020. Check with your adviser.

Shinichi Takagi

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