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Residence and domicile
How is residence/domicile determined for tax liability purposes in your jurisdiction?
Under the Income Tax Act, a ‘resident’ is an individual who has his or her domicile in Japan or who has resided in Japan for a continuous period of one year or more. ‘Non-resident’ means an individual who is not a resident in Japan.
A resident individual is divided into two further categories:
- permanent residents; and
- non-permanent residents.
Japanese citizens and non-Japanese citizens who have resided in Japan for a cumulative period of five years in the last 10 years, are considered permanent residents. Permanent residents will be subject to income tax on worldwide income from sources in any country. Non-permanent residents are subject to income tax on Japan-sourced income and non-Japan-sourced income paid in or remitted to Japan. Withholding income tax will be withheld at source from certain kinds of income, while assessment income tax will be levied on income on a calendar-year basis. The amount of withholding income tax will be deducted from the amount of assessment income tax up to the amount of tax payable for a calendar year.
A non-resident individual will be subject to Japanese income tax only on income derived from sources in Japan. A non-resident’s tax liability will usually be finally settled by withholding income tax which covers a wider range of income than for a resident. Assessment income tax will be levied on non-residents’ income only in limited cases.
Describe the income tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).
In general, Japan-resident individuals are taxed at regular progressive rates on all types of income under the Income Tax Act, subject to the special tax rules under the Act on Special Measures Concerning Taxation. The marginal tax rate of individual income tax is 55.945% until 2037. Among other things, business income and employment income (including directors’ and officers’ remuneration) are subject to regular progressive taxation. Regarding dividends, if the Japanese corporation distributing the dividends is a private or non-listed corporation, Japan-resident individuals are subject to withholding tax at 20.42% and regular progressive tax which must be reported by filing a tax return. If the Japanese corporation distributing the dividends is a publicly listed corporation, Japan-resident individuals are subject to withholding tax at 20.315%. They will be optionally subject to separate taxation at the rate of 20.315%, to be reported by filing a tax return, provided that – for individual shareholders who own 3% or more of the total issued shares of the publicly listed corporation (typically owners or founders of the business) – the treatment is substantially the same as for a private or non-listed Japanese corporation.
Non-resident individuals are taxed in Japan only on certain specifically enumerated types of Japan-sourced income. Regarding dividends, if the Japanese corporation distributing the dividends is a private or non-listed corporation, non-resident individuals with no permanent establishment in Japan are subject to withholding tax at 20.42%. If the Japanese corporation distributing the dividends is a publicly listed corporation, such individuals are subject to withholding tax at 15.315%, provided that – for individual shareholders which own 3% or more of the total issued shares of that publicly listed corporation – the 20.42% withholding tax rate applies. Such taxation is finalised by the withholding tax and does not require a tax return. This taxation can be modified by an applicable tax treaty between Japan and the country of residence of the non-resident individual.
For year-end tax returns and tax payments for individuals, the tax year is a calendar year and an income tax return must be filed by March 15 of the following year. Taxpayers determine the amounts of their taxable income, deductions and credits, among other things, and report their tax liability and tax payments on a tax return filed with the relevant district tax office. However, in practice, most salaried workers in Japan can satisfy their tax obligations through the tax withholding system and are not required to file tax returns.
Describe the capital gains tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).
Resident individuals are taxed on capital gains arising from the sale of securities (eg, shares – whether private or publicly listed – and bonds – for which sufficient disclosures are made) at the flat rate of 20.315%.
Non-resident individuals with no permanent establishment in Japan are generally not subject to Japanese tax on capital gains arising from sale of shares of a Japanese corporation, unless certain special requirements are satisfied (ie, a non-resident individual who used to own 25% or more of the total shares of a Japanese corporation at any time during the past three years sells 5% or more of such shares during that calendar year (known as the ‘25/5 Rule’) or a non-resident individual sells shares in real estate investment trusts or certain other real property holding corporations). Such taxation can be modified by an applicable tax treaty between Japan and the country of residence of that non-resident individual.
Capital gains from the sale of real property will be subject to income tax, local inhabitant tax and special reconstruction tax (20.315% in total) if the real property has been held for more than five years as of January 1 of the sold year. Meanwhile, it will be subject to income tax, local inhabitant tax and special reconstruction tax (39.63% in total) if the real property has been held for five years or fewer as of January 1 of the sold year. When a non-resident sells real property in Japan, the purchaser will withhold 10.21% of the sales price (10% for income tax and 0.21% for special reconstruction tax) subject to an applicable tax treaty between Japan and the country of residence of that non-resident individual.
Inheritance and lifetime gifts
Describe the inheritance and gift tax regime in your jurisdiction (including tax base, rates, filing formalities and any exemptions, reliefs or deductions).
Inheritance tax and gift tax are imposed based on the Inheritance Tax Act:
- Japanese national and resident taxpayers, if they are an heir or a donee, are subject to Japanese inheritance and gift tax on worldwide (ie, Japanese and non-Japanese) assets acquired by inheritance, bequest or gift.
- Taxpayers who are a Japanese nationals but not Japanese residents are taxed only on Japanese assets, unless either the deceased, heir or donee resided in Japan at any time during the 10-year period preceding the commencement of the inheritance, bequest or gift.
- Taxpayers who are neither Japanese national or Japanese resident are taxed only on Japanese assets, unless the deceased resided in Japan at any time during the 10-year period preceding the commencement of the inheritance, bequest or gift. In an attempt to discourage avoidance of inheritance and gift tax on non-Japanese assets by becoming non-resident or even non-Japanese national, waiting periods have increased:
- from five to 10 years for taxpayers who are Japanese national but not Japanese resident; and
- to 10 years for taxpayers who are neither Japanese national nor Japanese resident.
Since 2015 the marginal inheritance tax rate is 55% of the total value of the inherited assets succeeded to by an heir as a taxpayer exceeds Y600 million. Standard deductions for inheritance tax were also significantly reduced from 2015. The marginal tax rate of gift tax is 55% of the total value of the gifted assets of a donee as a taxpayer exceeds Y30 million.
What taxes apply to individuals’ acquisition and disposal of real estate in your jurisdiction?
On the acquisition of real estate, a real estate acquisition tax will be imposed. The tax rate is 3% for land and residential houses and 4% for non-residential houses. On registration of the transfer of real estate, registration tax will be imposed. The tax rate is 1.5% for transfer of land by sale and 2% for transfer of buildings by sale. In case of transfer by inheritance, the tax rate will be 0.4%. On the disposal of real estate, capital gains tax will be imposed.
Non-real estate assets
Do any taxes apply to the acquisition and disposal of other assets apart from real estate?
The Automobile Acquisition Tax is a special purpose tax used to pay for road maintenance. The tax is collected by the prefecture where the vehicle is usually parked and most of the funds are passed on to local municipalities. The tax rate is 2% for light vehicles and vehicles used for business, and 3% for private-use vehicles. Motorcycles and specified low-emission vehicles are exempt from this tax, as are vehicles owned by the national or local governments. Vehicles acquired by inheritance or succession, or as the result of a corporate merger, are also not subject to this tax. The Automobile Acquisition Tax will be abolished when the 10% consumption tax rate becomes effective.
Other applicable tax regimes
Are any other direct or indirect tax regimes relevant to individuals?
A person or legal person that sells or leases assets with consideration as a business or receives foreign cargo from a bonded area must pay consumption tax. The current rate is 8% and this will be raised to 10% from October 1 2019.
Other notable taxes include:
- registration and licence tax;
- stamp duty;
- fixed property tax; and
- city planning tax.
Are there any special tax planning considerations for individuals with a link to your jurisdiction?
Considering that income tax on financial assets for non-resident individuals is limited when compared to resident individuals (particularly regarding tax on capital gains arising from the sale of shares of a Japanese corporation), there is some motivation on the side of high-net-worth resident individuals to leave Japan in order to be recognised as non-resident so as to avoid tax on capital gains. In order to prevent high-net-worth resident individuals from leaving Japan and preventing any loss of Japan’s tax revenue, an ‘exit tax’ was introduced on July 1 2015 by an amendment to the Income Tax Act. Under this regime, Japanese resident individuals owning certain financial assets (eg, shares, bonds and derivatives) of Y100 million or more (on a fair market value basis) will be taxed on the unrealised gains on these financial assets at the time of the individual’s exit from Japan as though that individual had sold such financial assets. This exit tax is now a significant deterrent for high-net-worth resident individuals migrating to foreign low-tax jurisdictions.
The value of assets for inheritance and gift tax purposes is measured in accordance with the Asset Valuation Basic Circular of the Japanese Tax Authority. Because room for creative tax planning is limited, a major part of planning in practice is to try to reduce the value of the assets, taking advantage of the circular. However, the circular contains a general anti-avoidance provision called General Rule Paragraph Six, which has been actively invoked by the Tax Authority to disallow ‘creative’ (or in the authority’s view, ‘abusive’) tax planning to reduce the value of the assets.
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