October 05, 2015 00:00:00
By Winstone Group Inc. | Attorney Salazar, Alberto
The recent "Exit Tax" has significant implications for permanent residents, long-term foreign residents and expatriating Japanese nationals.
The intention of this exit tax is to plug the gushing flow of individuals holding stocks and equities with unrealized gain from escaping Japanese individual income tax by relocating to such countries as Singapore, Hong Kong, Switzerland or anywhere outside Japan.
This article will provide a brief overview of the EXIT RULE, who's impacted by it, AND A FEW CASES TO CONSIDER.
GENERAL RULE. A resident of Japan is subject to a 15.315% exit tax if she expatriates from Japan on or after July 1, 2015, with a combined value of assets of at least JPY 100 million (approximately USD$833,333; CAD $1,097,333 using 3 Oct 2015 exchange rates). The tax is on unrealized gain from certain securities. An unrealized gain is a profitable position that has yet to be cashed in, such as a winning stock position that remains open.
SCOPE. The rule traps any person who: is a Japan resident, an individual whose principal place of residence (Jusho), or temporary place of residence (Kyosho) has been Japan for a period of time exceeding five out of the last 10 years prior to expatriation; AND has assets with a combined value of at least JPY 100 million.
The five-year residency period applies on a prospective basis to non-Japanese individuals on the following visa statuses: Permanent Resident, Long-Term, Spouse or Child of Japanese National, Spouse or Child of Permanent Resident. Therefore, you will NOT be potentially trapped if you were to leave Japan before July 1, 2020. From July 1, 2020, you're trapped with the exit tax and the inheritance tax, if you die in Japan. For Japanese nationals, the five-year residency test is applied retroactively, i.e., if one departs today, he's hit with the exit tax.
ASSETS. Assets exposed include, but not all inclusive, the following: government bonds, corporate stocks and bonds, investment trust beneficiary certificates, shares in a Japanese LLC, foreign stocks, bonds and stock option certificates.
ASSET VALUATION. The value of assets is determined by using the fair market value on the date of expatriation from Japan, if you have appointed a tax representative. Otherwise, use the fair market value on the date three months prior to expatriation from Japan.
EXIT TAX ON INHERITANCE. If you, as a Japan resident, lived in Japan for more than 5 years in a 10 year period prior to your demise; AND you had assets valued at least JPY 100 million; AND your heir is a non-resident; THEN the EXIT TAX would be imposed on unrealized gain at the time of inheritance. Therefore, there's a double taxation of exit tax on the deceased and inheritance tax on the heir. No double tax relief is available in this case.
STRATEGIES. If you are running your company in Japan on a spousal visa, then consider a change to an investor visa.
If you are an employee of a foreign company with a permanent resident or spousal visa, then change it to an intra-company transferee.
If you are holding significant assets in financial centers such as in Hong Kong, Singapore, Switzerland while living in Japan, it's important to consider the Exit Tax before expatriating from Japan.