Many foreign nationals come to Japan every year for work. Some stay permanently, while others leave within a few years. But leaving Japan might not be as simple as it seems – especially if you own substantial assets. If you are a wealthy individual planning to leave Japan and you haven’t already heard of the Japanese exit tax, your wealth may be at risk…
The Japanese “Exit Tax Provision” – What It Is And How It Works
The “exit tax provision” was part of Japan’s 2015 Tax Reform Proposal passed by the Japanese government. In essence, this provision sought to levy a tax on the unrealized capital gains of financial assets when an individual permanently leaves the country. The purpose was to prevent wealthy individuals from moving large sums of wealth overseas in an effort to evade Japan’s taxes. Here is an overview of the key points to understand about the exit tax:
- -Who it affects: Primarily, the law applies to high-net-worth individuals, targeting those with financial assets exceeding 100 million JPY.
- -When it applies: The exit tax provision was passed in 2015, but for foreign residents living in Japan, it wouldn’t apply until 5 years after its passage (i.e., starting from June 20, 2020).
- -What it taxes: The tax is based on the market value of specified financial assets at the time of leaving Japan. This marked-to-market value is then used to calculate a capital gains tax.
- -How it works: It’s important to note that the government won’t force an individual to sell their assets. They are simply treating the departure as if it was a sale of assets, and subsequently taxing the “hypothetical” capital gains. (So yes- if the value of the investment later goes down, you have paid capital gains tax on an investment that did not make money).
- -Uncertainty of the law: As with most new tax laws, some aspects remain unclear. For example, it hasn’t been determined if employee-vested stock options should be included in the exit tax calculation. Furthermore, the threshold for the application of the exit tax could potentially be lowered in the future, encompassing a wider demographic.
This tax is part of a larger international trend of levying exit taxes to prevent tax base erosion. As this is a relatively complex matter, those potentially affected are encouraged to seek professional advice to understand how it may impact their financial situation.
Who Is Required To Pay Exit Tax When Leaving Japan?
Upon leaving Japan, you may be subject to Japanese exit tax if you meet certain conditions. First, you must hold Japanese citizenship or be a resident holding a non-employment visa (such as a “permanent resident” visa or a “spouse” visa). Second, and perhaps more obviously, you must be leaving the country with no remaining residence in Japan. Third, you must have stayed in Japan for more than 5 out of the previous 10 years leading up to your relocation.
Beyond these conditions, the value of your financial assets must surpass 100 million JPY (roughly equivalent to $850,000 USD). It’s important to note that the government considers the aggregate value of all financial assets to determine if a person is over the threshold, not just a single asset or class of assets. Covered assets include the following:
- -Securities (as defined by Japan’s income tax code
- -Corporate and government bonds
- -Tokumei-Kumiai contracts (‘silent partner’ contracts)
- -Unsettled derivatives
- -Unsettled credit transactions
- -Certain gifts and inheritances
Note that real estate and other fixed assets are excluded, likely due to the difficulty of moving such assets overseas. Similarly, cash holding and insurance policies are also not included in the calculations of asset values. These excluded assets are important to note, as they can be used for financial planning to protect your assets.
How Can You Legally Avoid or Reduce Japanese Exit Tax?
Legally avoiding Japan’s exit tax requires careful planning and consideration. Without a plan, an individual could potentially become deemed tax delinquent and be subject to penalties and/or interest on taxes owed. As such, it’s important to work with your financial adviser. Together with your adviser, you can consider strategies such as:
- Securing your assets in insurance contracts: Insurance contracts are not included in the list of taxable assets under Japan’s exit tax rules. Therefore, wrapping your investments in an insurance contract could protect your assets from the exit tax if you decide to leave Japan.
- Avoiding permanent residency: If you remain a resident for under five years, you will not fall under the exit tax law. Similarly, working under a short-term visa can also exempt you from the tax. You could even change your current visa status to an employment or investment visa…
- Deferring your tax payments: You can defer the tax for 5-10 years. However, this requires providing collateral and appointing a Tax Administrator, not selling any assets during the deferment period, and accepting that interest will accrue on the unpaid tax.
- Planning a temporary departure: If you move from Japan temporarily and then return within five years without selling covered assets, you can be exempt from the exit tax, and any collateral provided for deferred tax payment can be refunded.
- Considering cash equivalents for your assets: Cash holdings are not included in the threshold calculation for the exit tax. Therefore, maintaining substantial cash holdings can help an individual stay below the 100 Million JPY threshold for the exit tax.
- Making Japan your permanent home: If you enjoy living in Japan and can see yourself settling here, this may be the simplest option to avoid the Japanese exit tax, as the tax applies only when leaving Japan. However, this decision should be carefully weighed against other future plans and the financial impact of staying in the country long-term.
Make A Financial Plan That Works For You
Working with a professional financial adviser is crucial for navigating your unique financial situation in Japan. An experienced professional will possess expert knowledge of complex tax regulations like the Japanese exit tax and other substantial taxes in Japan. As such, they can provide personalized planning based on your financial goals, and recommend strategies to legally minimize your tax liability.
Remember, while taxes like Japan’s exit tax can seem daunting, with proper planning and expert advice, it’s possible to navigate these challenges effectively. Seeking professional advice will help you make effective financial decisions, alleviate stress, and build long-term wealth.
