For those in Japan holding overseas assets and overseas owners of Japanese real estate or stock market investments
Nakamura Tax Consultation Office provides the following services for reporting of foreign assets and to support cross-border human-resource deployment.
- Preparation of documents for the Report of Foreign Assets, including real estate or other investments (for tax returns and Report of Assets and Liabilities, as required).
- Consultation regarding the eligible assets for exit tax purposes (hereafter referred to as "Exit Tax"); the taxation system when leaving Japan to live overseas.
- Tax returns for investors in stock markets, foreign exchange, real estate, etc.
- Consultation regarding inheritance and gift or donation tax.
- What is the reporting system like for foreign assets?
- In recent years, there have been increasing numbers of residents of Japan who own assets overseas such as real estate, stock market investments, etc.
The foreign asset reporting system is intended to be a system for recording the type and value of assets overseas in a report submitted to the Japanese tax office, at a fair market value so that taxpayers can proceed with their tax filings properly.
- Please tell me the criteria for reporting of foreign assets.
- For people residing in Japan (excluding those not determined to be permanent residents), in possession of a total value of foreign assets (based on the value at the current market rate) exceeding 50 million Japanese Yen (JPY) on December 31st of that financial year, a Report of Foreign Assets is required. The deadline for submission is ordinarily March 15th of the following year.
- If a Report of Foreign Assets is not submitted, is there a legal penalty?
- If a valid reason is not given for reporting of assets by the deadline, or if the Report of Foreign Assets submitted is found to contain incorrect information, then a penalty of either a fine of up to 500,000 JPY or a prison sentence of up to one year may be imposed. (However, if a report is submitted after the deadline, depending on the circumstances, this will be excused in some cases).
- What kind of report is the Report of Assets and Liabilities?
- With the tax reform of 2015, the previous "Detailed Report of Assets and Liabilities" was redesignated as "Report of Assets and Liabilities" and the criteria for submission was also changed.
The criteria for submission of the "Detailed Report of Assets and Liabilities" was previously that the individual's total income as declared in their tax return exceeded 20 million JPY, whereas the criteria for submitting the new "Report of Assets and Liabilities" are; firstly, that total income exceeds 20 million JPY for the calendar year, and secondly, that either the total value of assets as of December 31st of that calendar year is at least 300 million JPY or the total value of eligible assets for exit tax purposes as valued at December 31st of that calendar year is at least 100 million JPY.
This means that there are cases where both the "Report of Assets and Liabilities" and the "Report of Foreign Assets" are required for submission.
- What is the system for "Exit Tax”?
- "Exit Tax" is a system whereby people who were previously living in Japan depart to live overseas are assessed for taxation based on their eligible assets: stocks, shares and other securities; unsettled derivative transactions; unsettled margin transactions; unsettled when-issued transactions; other unrealized capital gains.
The criteria for reporting for this system are that the value of an individual's portfolio of eligible assets such as securities etc., calculated based on value at the point in time of departure (or as of 3 months prior to the scheduled departure date) is 100 million JPY or more, and that the person has lived in Japan for at least 5 years out of the 10 years preceding the departure date.
- If the "Exit Tax" system is based on taxation of unrealized capital gains on securities etc., why was this system established?
- Under tax treaties between Japan and foreign countries, capital gains from stocks and shares etc. could be taxed in the owner's country of residence when the assets were sold, but if there was no taxation in the country of source where the capital gains originated, individuals could hold onto large amounts of assets with unrealized capital gains and move to a territory such as Hong Kong where there was no taxation of capital gains for non-residents and sell the assets there, thus escaping capital gains tax. To prevent this kind of tax avoidance, countries such as Germany, France, the USA, etc. had already implemented a special system for capital gains tax of unrealized capital gains, but Japan introduced this on July 1st, 2015.
- Does the "Exit Tax" system apply even to short term stays?
If an individual leaves Japan but subsequently returns, without selling their stocks and shares, will they still be subject to this system of taxation?
- This taxation system is based on whether the individual "will cease to have an address in Japan" or not. Therefore, when it comes to stays of a matter of months, unless objective facts change such as residence status in Japan, occupation, location of assets, residence status of relatives, nationality, etc. then this taxation system can be considered not to apply.
Furthermore, where an individual has paid exit tax based on their having left Japan, but subsequently returns within 5 years from the date of departure from Japan, and the individual files a request for correction within 4 months from their date of return to Japan, they can obtain a refund for previously paid exit tax on assets for which they have retained ownership.
- I have heard that a system like "Exit Tax" has been adopted for taxation of gifts or donations, and inheritance, received by non-residents. Please can you give a short explanation?
- There is a similar taxation system for Gift/Donation and Inheritance “Exit Tax”.
For exit tax on a gift or donation, when a resident of Japan who owns securities, etc. gives them to someone who is a non-resident (having lived outside of Japan for more than 5 years out of the 10 years preceding the gift), the assets are valued as if they had been sold at the time of the gift, and in this system the person making the gift or donation is taxed.
For exit tax on inheritance, if the deceased has lived in Japan for 5 years or more out of the 10 years preceding the date of their demise, and the inheritance (including bequests) consists either wholly or in part of securities, etc. and is inherited by a non-resident of Japan, it is assumed that the eligible assets have a value equivalent to the value at the time of inheritance (death), and tax is levied on the person inheriting.
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