business

Japan takes a bite out of wealthy foreigners

29 Comments
By Christopher S Thomas for EURObiZ Japan

In the Japanese government’s attempts to revitalise the economy, political leaders have been taking great pains to attract foreign investment. Efforts have included rewriting regulations and liberalising government practices that were clogging the business environment.

At the same time, a gap in the tax law allowed rich taxpayers who left Japan to take up residence in lower-tax locations and take substantial capital gains with them, to avoid being taxed on their gains.

In an attempt to rectify this problem, the government has announced a new exit tax, to take effect on July 1, 2015. Under the new legislation, any Japanese national — and foreign long-term resident with a permanent or spouse visa — would be subject to a 20.4% capital gains tax on assets of ¥100 million or more when leaving Japan. For Japanese, this means the tax loophole is closed. For foreign nationals, this is effectively an “exit tax” imposed when they return to their home country or their next assignment overseas.

The problem is that wealthy foreigners (e.g., European spouses and taxpaying citizens) get swept up in the letter of the law along with the scofflaws, and sometimes get taxed twice — by Japan when they leave and by their own country when they arrive home.

This is not fair, according to Hans-Peter Musahl, chairman of the EBC Tax Committee. Musahl believes the tax violates the government’s efforts to attract investment, since it could discourage people from moving here. “As Europeans, we have to admit we have such laws as well,“ says Musahl.

The problem is not the exit tax itself, but rather the legislation as written that could lead to premature taxation of foreign residents on profits they have not even realised. And this, in turn, could result in highly skilled or wealthy individuals opting not to come here, in effect undermining the Abe government’s efforts to revitalise the economy. The EBC, therefore, is calling for foreign nationals to be exempt from the new exit tax.

The Japanese government believes that the new tax will impact only about 100 people, Japanese and foreign. However, the EBC notes that there are more than 1 million foreign residents in Japan, among them 7,000 Europeans who hold visas in the target categories, which include holders of spouse visas and permanent residents.

“If only 1% had, or will have saved, financial assets of ¥100 million by the time of their exit from Japan, more than 1,000 people would be affected by the new exit tax rule — not only a few foreigners among the total number of 100 Japanese and foreigners assumed by the Ministry of Finance,” Musahl says.

He is quick to point out that people who trusted in the law as written to avoid taxation in the past should not be called tax “cheats”. “If you have taxation rules not addressing an exit, and people follow these rules, then it’s not cheating,” he continues. “The government needed to change the rules, and they did; but they overdid it, in our view.”

Under domestic tax law, Japan retains the right to tax capital gains when its residents depart to foreign countries, as do most countries. Tax treaties, concluded for the avoidance of double taxation, often provide that where a taxpayer moves from one country to another, only the country to which the taxpayer has moved is allowed to tax the capital gains.

As Paul Hunter of the International Banking Association notes: “We are concerned that the [new law] might lead to a fragmented system, and does not take into account how the country and economy might — and should — develop.”

For example, Hunter says the new regulations apply to people in all sectors, but the financial industry will be disproportionately affected — again, undermining the government’s efforts to energise the economy. “In an environment in Japan where we are encouraging people to invest in financial instruments, it seems odd to penalise people for embracing this new environment,” he adds.

The government is considering amendments to the new legislation that would exclude people with certain types of visa, such as intercompany transfers, management and business. “We think this is a good step to exclude a range of people who might get caught up by this tax law [and] who it is not intended to capture,” says Musahl. This would include people who could contribute to the growth of Tokyo as a financial centre, as well as foreign nationals who may want to engage in further direct foreign investment in Japan. “We think this will … discourage them from contributing to the growth of Tokyo as a financial centre and from galvanising the wider economy.” It could also, in some cases, keep people from accepting assignments in Japan, if there could be difficulties leaving with their assets intact.

“Foreign [people] should be able to go home at any time without being accused of tax avoidance,” Musahl says. “Tax law shouldn’t be telling me where to spend my time.”

Foreign exemptions

The government has announced modifications to the exit tax legislation:

Foreign residents under visa category II (e.g. permanent resident, spouse visas) may apply for a category I visa (e.g. investor, intra company, etc) — and thereby avoid the exit tax — if their period of stay was prior to July 2015.

Only those who will have lived in Japan for more than five years from July 2015 (under visa category II) will be liable for the tax.

© Japan Today

©2019 GPlusMedia Inc.

29 Comments
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I guess I won't be putting my money in at NISA.

2 ( +3 / -1 )

Many issues with the "exit tax" remain unclear:

1) Non-Japanese who have Permanent Resident status are allow to retain that status and not live in Japan. How would the law be applied? 2) Non-Japanese who have the PR status and have JPY 100,000,000 in non-real estate assets may have already paid tax in their respective countries. Is that retroactively applied? 3) As it is a new law, no country has included it in their "Tax Totalization Treaty" with Japan. How will this be applied going forward? 4) Non-Japanese residents who have Permanent Resident status and go back and forth between another country and Japan and have residences in both countries. How would the law be applied? 5) Non-Japanese residents who have Permanent Resident status in Japan and retire in Japan with assets earned before retirement in excess of JPY 100,000,000 earned prior to the enactment of the law. Would they be required to pay tax if they exit Japan?

The article is correct in the notion that the "exit tax" will act as a deterrent for non-Japanese to settle in Japan.

5 ( +5 / -0 )

Exactly, this would only apply to someone actually exiting Japan and letting the PR go, or married wealthy couples. and JeffLee , Nisa only goes to half a mil so that doesnt affect you at all

0 ( +0 / -0 )

Interesting, Alex. How do you know it is only for PR holders who exit AND let their PR status lapse? What happens to someone who, upon renewal of the PR status after 7 years, is not renewed by Japan (for whatever reason)? BTW, the article implies it is for people with a PR status who remain a resident for 5 years from July 1, 2015 that are affected. My understanding is that is incorrect and is cumulatively 5 years out of the past 10 years holding the PR status.

1 ( +2 / -1 )

I suspect that even though the class of people the law applies to is defined by their immigration status, the tax actually bites at the moment your residency for tax purposes changes. That's usually how it works elsewhere. So for example, you might still have PR immigration status after leaving Japan 2 years ago, but you are no longer a resident of Japan for tax purposes.

0 ( +0 / -0 )

Seems a bit vague. How would they define "Exit" if, for example, you are a permanent resident and you shuffle here and somewhere else for family and business?

1 ( +2 / -1 )

I wish I had this problem,,, I can barely afford my toupee maintenance as it is...

11 ( +11 / -0 )

would be subject to a 20.4% capital gains tax on assets of ¥100 million or more when leaving Japan

I would love to see a definition what this really means. Does this apply only to income from investments or are they going to nail people who have saved money(that they already paid taxes on) & would then be nailed again if they decide to leave Japan for elsewhere. What if one has real estate that lets say you bought for 30million but sold a couple decades later for LESS than 30million, if your overall assets are over 100million are they going to steal, sorry tax another 20%??

I am sure lots of other have questions, hell this could make us financial prisoners, sounds messed up

AND YES this will definitely ENSURE highly skilled people would avoid Japan like the PLAGUE!!

1 ( +3 / -2 )

This is somewhat unclear. If I keep my permanent resident status, move my assets out of Japan, and then leave Japan myself, how can they tax me? I could claim to have left "temporarily" and never come back. This exit tax only really works if you want to return to Japan at some point, which might be true for Japanese nationals, less so for non-Japanese.

1 ( +1 / -0 )

@Scrote, if you have a large amount of cash in Japan and try to send it out you may trip a certain limit and invite special attention from the bank. I would suggest you move money abroad in small amounts each month prior to departure.

4 ( +4 / -0 )

"Under the new legislation, any Japanese national — and foreign long-term resident with a permanent or spouse visa — would be subject ..."

"The government is considering amendments to the new legislation that would exclude people with certain types of visa, such as intercompany transfers, management and business. "

I found this article very confusing, as exemplified by the above two quotes. Judging from the first quote, the visa types mentioned in the second quote were already excluded, so what does this mean?

@David Wagner "What happens to someone who, upon renewal of the PR status after 7 years, is not renewed by Japan "

Permanent residency status can be revoked if the holder is found guilty of committing a crime, or stays out of the country without a re entry permit too long, but renewal is not required.

3 ( +3 / -0 )

I'm virtaually surrounded by wealthy foreigners. Believe me, they're not worried one bit about where their next meal or how their half million yen-plus luxury apartment rent money is going to be paid for, lol.

-2 ( +1 / -3 )

Well then Serrano you must be doing ok too then to be living in the Golden Ghetto!!!

3 ( +3 / -0 )

Educator 60 - You DO have to renew your PR status every 7 years.

Also, the article is wrong concerning a five year grace period. In fact, one has to have have lived in Japan 5 out of the past 10 years with the status of PR.

-1 ( +0 / -1 )

@ David Wagner at Mar. 15, 2015 - 09:06PM JST "Educator 60 - You DO have to renew your PR status every 7 years."

Sorry, but you must be confusing this with something else, perhaps the renewal of your residence card, which is another matter entirely. I obtained a permanent resident visa 20 years ago and have never had to renew.

2 ( +2 / -0 )

fiscal residency and visa status are two completely different things.

one can even be a Japan fiscal resident while residing in another part of the world. what matters is your "financial center of interest", ie where you have your bulk of assets/business/family etc...

-4 ( +0 / -4 )

Sorry, but you must be confusing this with something else, perhaps the renewal of your residence card, which is another matter entirely. I obtained a permanent resident visa 20 years ago and have never had to renew.

I'm not a permanent resident, but I've never heard of anyone having to renew it, and most of my friends do have PR.

0 ( +0 / -0 )

@ Fagui Curtain at Mar. 15, 2015 - 09:59PM JST "fiscal residency and visa status are two completely different things."

That is correct but this article talks only about people with different types of visa status and doesn't say anything about fiscal residency, or the permanent residency designation for determination of taxation category, which has nothing to do with visa status.

0 ( +0 / -0 )

This is not fair, according to Hans-Peter Musahl, chairman of the EBC Tax Committee. ... “As Europeans, we have to admit we have such laws as well,“ says Musahl.

Is it fair that EU wants to collect tax on gains earned in other countries? Why shouldn't the country where the money was earned be the country applying the tax?

Let the EU drop their entrance tax, instead.

1 ( +1 / -0 )

Japan sure knows how to attract wealthy elite foreigners! And to get round this, just send a portion of your assets out of the country each month, under 100M, for as long as necessary. Unless you have to leave Japan in a hurry for some reason, you can beat this stupid measure.

1 ( +1 / -0 )

There's Japan taking another step in the wrong direction.

The more rich people in Japan, the better. The government gets that it's good for Japan when Chinese tourists come here to spend ridiculous amounts of money. So why would they stop there? Does America as a whole suffer or benefit for having entreprenuer billionaires like Mark Zuckerberg resident there? Geez.

The Japanese government believes that the new tax will impact only about 100 people

And yet they are wasting time and resources on this measure. They should be going in the opposite direction. Make Japan an attractive option for rich people to come to.

2 ( +2 / -0 )

The way governments all think it is their right to take as much of our hard earned as they can is terrible. so much is squandered on totally stupid spending. The philosophy of some of the smaller city states (singapore, HK) is way better. Leave money in taxpayers pockets at source but tax consumption. admittedly easier in a smaller country, but principle is sound. Anyway, this tax sounds like it is a cinch to get around......

2 ( +3 / -1 )

Way to go Japan. Do you think copying America et al. by introducing exit taxes is going to help the economy? Should people work hard and sacrifice themselves for the benefit of the nation alone? A sure way to stymie entrepreneurship! Bureaucrats hate rich people because they will never be rich themselves.

2 ( +2 / -0 )

Anyway, this tax sounds like it is a cinch to get around......

Yeah, not so easy to come up with 100 million of assets for most people :)

But it sounds like the key for the rich foreigner folks will simply be don't keep all your assets in Japan where they can be tracked. I don't think the rich foreigners would bother bringing all their assets here in the first instance.

Apparently one is supposed to report to the tax agency when you have more than 50 million of assets overseas, but I don't see how they can effectively monitor that either, where foreigners are concerned.

Bureaucrats hate rich people because they will never be rich themselves.

They suck up plenty, don't you worry about that.

0 ( +0 / -0 )

Query 1: Is not the income already taxed? Query 2: Is not the interest on savings already taxed? Query 3: Is not thus the new tax tantamount to double or triple-taxation? Query 4: Won't foreign nationals resident in Japan be forced to remit a part of their income on a regular basis so that there will be none left when they exit Japan for good to attract the new tax? Query 5: Won't this discourage future foreign investments in Japan which will be detrimental to the otherwise long time unhealthy Japanese economy?

3 ( +3 / -0 )

Is not thus the new tax tantamount to double or triple-taxation?

Arguably worse. The tax will be on unrealized capital gains. They are going make people pay tax, before they even see any profits. At least with double/triple taxation you actually made some money, but under this system there is no such guarantee.

You could have a situation where someone leaves the country, paying tax on their unrealized profits, then is unfortunate enough to suffer a markets meltdown after leaving, and loses not only their unrealized profits, but the tax they'll have paid will have been a big penalty as well. Hardly endearing them to the country they left.

It would be possible to avoid this if you were to realize your profits when you leave, but what does that say about freedom of capital in Japan?

It's even worse for foreigners who have investments when they come to Japan, and want to liquidate them after they leave. For them Japan becomes like a Hotel California financial blackhole for investments.

All because some 100 or so rich people each year decide they want to live elsewhere, (possibly?) in order to not pay 20% capital gains tax on those profits, should they take those profits in future? Does "taking up residence in a foreign country" sound like a serious tax avoidance scheme? It's ridiculous - moving overseas is a huge decision, tax isn't going to be the only consideration in it.

I can only imagine the government neglected to do a proper cost/benefit analysis of this idea, and it only reinforces the perception that the government here is flat broke and desperate for cash to music playing a little bit longer.

2 ( +2 / -0 )

If you're wealthy or successful in Japan or plan to be, GET OUT NOW. Besides this new financial chain, inheritance tax, already obscenely high, will be at 60-70% within a few years, and things will only go downhill. I am making my plans now.

Seriously, if you are in your 30s or 40s and plan to have high income at any time in your life, start the move to Singapore or wherever now before you have assets that Japan can use to hold you prisoner.

In any normal country with lawyers and courts that did things, this would be struck down, or at least subject to a decade of legal wrangling while it was decided. The Japanese government announced this in November last year and are rushing to execute it as of July of this year, before tax professionals can even prepare or tell their clients.

Note that America has a similar system in place -- one of the themes of Japan is that they will always, always take their ideas from America or Europe 5 years after they're first implemented -- I don't believe it applies to, say, someone who gets a green card and resides there for a few years, but only to wealthy American citizens who exit the country entirely, giving up their citizenship. I am fearful that I could be taxed once, leave for 5 years, come back to Japan in order to take care of my wife's elderly parents, and be subject to this tax again.

Japan is starting to get crazy. What color is your lifeboat?

2 ( +2 / -0 )

The Japanese government ought to reform its tax regime instead of penalizing people for protecting their hard earned money. If Japan, and many other countries, had more responsible tax laws, then the number of people leaving for better business environments would certainly decrease.

The Japanese government, like many others, collects a gargantuan amount of revenue from taxpayers. The problem is the government imposing taxes without any regard for the economy. Taxation doesn't help economies; it hurts them. It forces investors to move their capital away from where its needed. It

-1 ( +0 / -1 )

PR is a status, there is no 7 year renew period, only renewal of the card... it has nothing to do with status. The PR status will only lapse if you commited a crime warranting its removal or left Japan for over few years letting it lapse, in which case if you rich enough to still hold assets - those will be taxed...

0 ( +0 / -0 )

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