My blog post of March 2 raised the alarm that the Japanese government was considering a new “Exit Tax” on the wealthy who say “sayonara” and move elsewhere. Now, it’s definite. As from July 1, 2015, Japan will impose its new “Exit Tax” on both Japanese nationals and non-nationals present in Japan if they meet certain requirements.
Briefly, an “Exit Tax” or a so-called “Departure Tax” is a tax imposed upon termination of tax residency in a country. Generally, the tax is typically assessed on the built-in, but yet unrealized capital gains on property held by the individual at departure. Canada and the United States are notable exceptions to the general rule that not many countries have this type of “Exit” or “Departure” Tax. The US tax regime imposed on those expatriating is quite harsh and has been the subject of much publicity as the number of those giving up US citizenship or green cards held for significant time periods continues to rise. More information about the current US expatriation tax regime can be found on my tax blog posting here.
Japan’s Exit Tax Will Take Effect from July 1, 2015
Japan’s Diet passed its 2015 tax legislation, which was promulgated on March 31, 2015. The tax legislation includes something brand new – an “Exit Tax”, indicating Japan is following in the footsteps of both Canada and the US. Japan’s exit tax will apply to both expatriating Japanese nationals resident in Japan and certain long-term foreign residents of Japan. It’s goal is to prevent wealthy individuals holding securities with unrealized gain from dodging Japan’ s individual income tax by moving to countries that impose little or no tax on capital gains, such as Hong Kong and Singapore. The new rule will apply not only to “exits”, but also to gifts and inheritances of property, made by a Japanese resident to a Japanese nonresident on or after 1 July 2015.
Who? What? When?
Individuals subject to Japan’s Exit Tax are certain residents of Japan whose “financial assets” at the time of departure have an assessed value of JPY 100 million (approximately US$850,000) or greater, and who meet certain residency requirements. Note, unlike the US and Canada, the Exit Tax is not assessed on all assets, but only specially defined “financial assets”, more fully discussed below.
With respect to departure, the rules are tough – an extensive trip for business outside of Japan or time spent studying outside of Japan that lasts for one year or more would be considered an “expatriation” for purposes of the Japanese Exit Tax.
The Exit Tax would apply only to taxpayers who have been resident in Japan for five or more of the ten years at their date of departure. Significantly, for non-Japanese nationals, the visa category the individual holds will be important for the purpose of determining this five-year residency period. Visa holders under Table 1 of the Immigration Control and Refugee Recognition Act can escape the tax because in determining the duration of residence in Japan, time spent while the individual is under these visa categories will not be counted. These include, for example, visas in the following categories — Investor/Business Manager and Intra-Company Transferee. These are visas under which expatriate employees are typically assigned to Japan. They also include visas for Temporary Visitors and Specialists in Humanities/International Services. Therefore, the Exit Tax will not apply to expatriates who have resided in Japan on such visas regardless of the number of years they have been present in the country.
The five-year period applies to non-Japanese nationals physically present in Japan under a visa status specified under Table 2 of the Immigration Control and Refugee Recognition Act. The visa statuses set out under Table 2 include permanent residents and spouses of Japanese nationals, for example. Thus, non-Japanese nationals living in Japan with a visa status categorized under Table 2 are potentially subject to the new Exit Tax.
For Japanese nationals, the five-year residency test will be applied retroactively from the July 1, 2015 effective date of the new Exit Tax rules. However, the five-year residency period will be applied to non-Japanese nationals holding a visa under Table 2 (generally those with permanent residency) only on a prospective basis. Thus, for example, the non-Japanese national with a visa under Table 2 will count his residency years only beginning from July 1, 2015. The non-Japanese national who has been present in Japan under a Table 2 visa status for more than five years on July 1, 2015, can still escape the Exit Tax if he ceases residency before the passage of five years from the effective date of July 1 2015.
Unlike the US Exit Tax which is assessed on worldwide assets, Japan’s “Exit Tax” targets only “financial assets”: securities stipulated in the Income Tax Law (cash or cash deposits are not included); contributions under a Tokumei-Kumiai (silent partnership) agreement; unsettled derivatives transactions; unsettled margin transactions; unsettled when-issued transactions (e.g., trading transactions in advance of shares being issued). Non-financial assets such as real estate are not subject to the Exit Tax.
Can I Come Back?
Unlike the US expatriation rules, which include the so-called Reed Amendment under the US Immigration laws, there are no provisions in the Japanese Exit Tax rules for possibly banning those who depart Japan and who are subject to the Exit Tax. In fact, if an individual who was previously taxed under the Exit Tax rules returns to Japan within five years of the initial expatriation and still owns the financial assets at that time, he can apply to have the Exit Tax cancelled. The rules also permit grace periods of 5 or 10 years for payment of the Exit Tax in certain circumstances, including provision of acceptable collateral for the Exit Tax. If a taxpayer has received a 10-year grace period with respect to payment of the Exit Tax, his repatriation to Japan can be increased from five-years, as described above, to ten years.
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