Moving countries is a complicated process, with the intricacies of international tax law only adding to the confusion. Recently, those who move abroad face even greater burdens, as countries are adopting targeted measures to tax the wealth of residents who move abroad. Japan is no exception, and wealthy residents of Japan who find themselves leaving the country may find their financial assets heavily taxed as a result. So, who is liable to pay Japanese exit tax, and when must they pay it?
Origins And Purpose Of The Japanese Exit Tax
In March 2015, Japan passed the 2015 Tax Reform Proposal. A significant component of this reform was the introduction of the “Exit Tax Provision”. This tax law aimed to capture unrealised taxable gains on the financial assets of individuals leaving Japan permanently.
This tax mechanism isn’t about making individuals liquidate or sell their assets. Instead, it’s about treating the departure as a hypothetical sale. The government then levies a tax on the “unrealised” capital gains from these assets. In simpler terms, you’re being taxed as if you’ve sold your assets, even if you haven’t. The primary aim is to prevent high-net-worth individuals from moving themselves, and their substantial wealth overseas to avoid Japanese taxes.
Does Everyone Have To Pay Japanese Exit Tax?
The good news is that Japan’s exit tax might not impact everyone. For those it does, however, the implications can be substantial. The specific criteria that determine whether an individual is obligated to pay the Japanese exit tax are based on the following:
- -Nationality and Visa Type: The exit tax can only apply to Japanese citizens or foreign nationals residing in Japan on a non-employment visa. For non-Japanese residents, this typically refers to those living under the “permanent resident” visa or the “spouse” visa.
- –Duration of Stay: Those who meet the visa/nationality requirements are subject to the exit tax if they have resided in Japan for more than 5 out of the past 10 years before their planned relocation.
- -Financial Assets Threshold: In order for the exit tax to apply, the combined value of an individual’s financial assets must exceed 100 million JPY. Note that this means the total value of all financial assets, not just the independent value of individual assets.
The law specifies financial assets, meaning there are non-financial assets that are exempt from the tax. However, determining which is which can get tricky. Some of the exempt assets include fixed assets like real estate. But which assets are subject to the tax?
What Assets Are Subject To The Japanese Exit Tax?
As is the norm with new tax laws, certain aspects of the exit tax provision remain ambiguous (and this is likely by design to avoid any silver bullet tax planning…). For instance, there’s no clarity on whether employee-vested stock options should be included in the tax computation. However, here are a few assets that certainly fall under the exit tax:
- -Securities: These are defined by Japan’s income tax code.
- -Bonds: This includes both corporate and government bonds.
- -“Tokumei-Kumiai” Contracts (匿名組合契約): Commonly referred to as ‘silent partner’ contracts in the financial realm.
- -Unsettled Transactions: Both unsettled derivatives and credit transactions fall under this category.
When Is Japanese Exit Tax Payment Due?
If you’ve taken the step to appoint a Tax Administrator before your departure, the tax will be due on the date of your departure from Japan. In the absence of a Tax Administrator’s appointment, you must settle the exit tax 4 months prior to your intended departure date.
If you exit Japan without either having appointed a Tax Administrator or without having settled your exit tax dues, you’re effectively backdated as a tax delinquent from 4 months prior to your departure. This means that you could immediately become liable for potential penalties and interest on any unpaid taxes from that 4-month pre-departure date.
Is It Possible To Avoid Japanese Exit Tax?
While the simplest way to avoid Japanese exit tax may be to plan your stay in – or departure from – Japan accordingly, those who do not meet the 5-year duration of stay requirement and those who return to Japan within a specified time without selling their covered assets may be exempt from the tax. If this isn’t an option, you may be able to wrap investments in non-taxable insurance contracts or trade them for cash equivalents, as these assets are not subject to the tax. However, the best way to navigate and mitigate Japanese exit tax is to seek advice from a professional.
Whatever your circumstances, an experienced financial adviser can offer invaluable expertise on the Japanese exit tax and other local tax nuances. With their guidance, you can craft a personalized plan that aligns with your financial aspirations, ensuring you meet tax obligations while optimizing your financial position and avoiding unnecessary Japanese taxes. Insight from a professional will help transform intimidating tax challenges into manageable tasks, paving the way for informed decisions, peace of mind, and sustainable wealth growth – wherever you go.