Japan–New exit tax introduced
26 January 2015
The Japanese authorities announced in the latest tax reform proposals released on December 30, 2014, that Japan would implement an exit tax effective 1 July 2015. The following explains the scope of the exit tax as based on information available at the time of writing and may be subject to change depending on the final regulations as enacted into law.
Certain high-profile cases have been identified where individuals with significant unreleased gains could break Japanese tax residence; relocate to a country, such as Hong Kong or Singapore; and through a combination of the tax treaty and Japanese domestic law, sell shares of Japanese companies and not pay any tax (either to Japan or to the country of residence). The Japanese authorities determined that the introduction of an exit tax on such gains would be the appropriate measure to discourage such tax planning and perceived abuse of tax treaties, a view consistent with the current focus on treaty tax planning in the BEPS debate.
Scope of exit tax
The exit tax is applicable to the following taxpayers:
- Individual is a resident of Japan and breaks tax residency
- Individual has been a resident of Japan for more than five years* in the 10 years up to point of breaking residency (regardless of nationality).
*Certain periods may be excludable when counting years of residence based on the type of visa held by the taxpayer.
- Individual has financial assets with a value of 100 million yen (around $1 million at 100 JPY:$1) at the time he or she breaks residency.
Where a resident taxpayer of Japan meeting the above conditions attempts to break residency from Japan, the taxpayer is deemed to have disposed of all financial assets on the final day of residence. Losses and gains are realized on the basis of a sale on the final day of residence and the taxpayer is required to pay tax on the net gains at a rate of 15.135%. Note that the exit tax is only applicable for national tax purposes.
Scope of financial assets subject to exit tax
Our expectation is that all shares, debentures, traded options, and similar assets will be subject to the exit tax. Assets, such as real estate will not be subject to the tax. Pension assets could also be subject to the exit tax, but this will depend on the detailed provisions that are yet to be announced. Assets that would be subject to tax not at the capital gains rate, such as options awarded as part of an employment, we would expect to be exempt from the exit tax but this will depend on the actual provisions drafted.
Deferral of exit tax
The tax reforms also mention that a taxpayer should be able to defer payment of the exit tax, where due, by appointment of a tax representative and by posting of a bond or other security against the gain. The election to defer the gain will be an annual election and so this will increase tax administration for any taxpayer wanting to defer the gain.
Savings clauses to reduce double taxation
The draft provisions also include a wide range of savings clauses to prevent taxpayers being subject to double taxation due to the exit tax deferral. For example:
- Where an asset subject to the exit tax is taxed in another jurisdiction and no foreign tax credit is available for the exit tax paid, then Japan will reduce the exit tax by the foreign tax paid.
- Where the actual gain is lower than the amount on which the taxpayer has paid the exit tax based on, the exit tax can be reduced to the amount as calculated on the actual gain.
- Where losses are higher on actual sale than in the exit tax calculation, then these can be reflected and the exit tax amount due reduced.
These are broad concessions and should be good news to taxpayers who are subject to tax on gains in their country of residence and are inadvertently caught by the exit tax.
Claims for refunds of the exit tax can be made for up to five years, but must be made within four months of the sale of the asset.
If the exit tax is paid at departure and the taxpayer returns to Japan within five years, he/she can make a refund claim to decrease the tax on any assets retained for at least four months after returning to Japan. Where the exit tax payment is deferred, the five-year period to return to Japan is extended to 10 years.
It is not clear as to what documentation will be needed from taxpayers to substantiate assets subject to the exit tax to claim foreign tax credits or reduction in assessed gains. However, it is clear that the administrative burden will be high and taxpayers will need to work closely with tax advisors in Japan when assets are sold to ensure that where gains can be reduced that relevant claims are made within the required time limits.
Given the wide range of provisions that will be included to relieve double taxation for taxpayers, it is clear that provided managed correctly, taxpayers who are subject to a tax of at least 15.135% on the gain from financial assets should not have an increased tax burden provided the reliefs can be claimed. However, the need to deal with the provisions, post security to defer gains, etc., will be a not insignificant burden for taxpayers leaving Japan.
Employers with tax-equalized executives in Japan will also need to address treatment of the exit tax from an operational and a policy point of view.
If you have any questions concerning the issues in this GES NewsFlash, please contact a GES professional at our Deloitte offices as follows:
+81 3 6213 3979
+81 3 6213 3983
Be sure to visit us at our website: www.deloitte.com/tax.