Exit tax Exit tax ordinarily concerns the taxpayer leaving Japan.Even without that person moving, if assets pass Non-resident to a nonresident, similar taxation arises.This is Article 60-3 of the Income Tax Act.

Examples include giving shares to a child or grandchild abroad, having heirs abroad, or making a bequest to a nonresident who is not an heir.Three categories—gifts, inheritance, and bequests—trigger the rule.

Statutory definition

Article 60-3(1) of the Income Tax Act.

resident Where securities and similar assets held by a residentare transferred by gift, inheritance, or bequest,collectively called “gifts and similar transfers” in this Article,to a nonresident,then, for calculating the resident's business income, capital gains, or miscellaneous income, except as otherwise provided,the securities are deemed transferred at that time for an amount equivalent to their value then.

Paragraph (2), unsettled margin and similar transactions, and paragraph (3), unsettled derivative transactions, take a slightly different form. Instead of deeming a transfer, theydeem settlementat the time of the gift or similar transfer,gains or losses arisingand deem the resulting calculated gain or loss to have arisen. The income categories are also limited tobusiness income or miscellaneous income.Capital gains are not included.

The person taxed is the transferor, a resident; for inheritance, the decedent.It is not the nonresident recipient. On inheritance, the heirs succeed to this income tax liability and file the return.

Overview

The ¥100 million test does not concern only what is transferred.Paragraph (5) refers to the total ofAt the time of the gift or similar transfer, the resident holdssecurities held and unsettled margin and derivative contracts entered into.Assets retained by the transferor also enter the total.Even a gift of only ¥30 million can be taxed if total holdings at that time are at least ¥100 million.

“Securities and similar assets” also includes investment interests in silent partnership agreements. Partnership types differ in governing laws and loss treatment. Those differences are explained separately. Four Types of Partnerships Compared: Civil Code Partnerships, Silent Partnerships, LLPs, and LPSs I am organizing with.

The ten-year and five-year framework matches Article 60-2, exit tax. The difference is that the testing time is the gift or similar transfer, rather than departure from Japan.

Payment deferral requirements differ from exit tax

Article 137-3 of the Income Tax Act provides for deferral.The requirements differ between gifts and inheritance.

Paragraph (1): gifts “Gifts” here excludesgifts effective upon the donor's death.The requirement is, as prescribed by Cabinet Order, by the final return deadline for that year's income tax, provision of security equivalent to the deferred tax on the gift.Deferral is available only if that security is provided.」。

Paragraph (2): inheritance and bequests This categoryincludes gifts effective upon death.The heirs provide security and,andby the final income tax return deadline for that year, in relation to that inheritance or bequest,all nonresidents who acquired the covered assets……Tax Agent must have filed the notification.」。

AndParagraph (4) applies to both paragraphs (1) and (2).It requires the final tax return to includean indication that the taxpayer seeks to apply the provisionandanddetails of the deemed transfers or settlements, calculations of the income tax to be deferred, and otherrequired documents as attachments.These are the filing requirements for applying the provision.Paragraph (5), however, provides relief.If the required statement or attachments were omitted, or no return was filed,unavoidable circumstancesmay allow the provision to apply, subject to submission of the documents, if the tax office director recognizes those circumstances.

For inheritance and bequests, deferral is unavailable if even one nonresident who acquired covered assets fails to file the notification.The provision says “all.” The persons counted here arenonresidents who acquired covered assets (securities and similar assets, or contracts relating to unsettled transactions).It does not matter whether they are heirs or legatees. Conversely, nonresidents who inherited only cash or real estate are not included in this “all.”

A tax representative is also relevant in gift cases.Paragraph (10) applies where a person receiving deferral under paragraph (1)subsequently intends to leave Japan.It requires notification of a tax representative by departure. If no notification is filed, paragraphs (8) and (9) apply mutatis mutandis to fix the end of the deferral period.

Deferral expires if ongoing requirements are neglected

Paragraph (7) requires persons receiving deferral to report the covered assets held as of December 31 each year byfiling an annual notification of continued application by March 15 of the following year.Under paragraph (9), if no notification is filed,the date four months after the filing deadlinebecomes the end of the deferral period (paragraph (8) provides relief for unavoidable circumstances).

Paragraph (6) applies if the nonresident recipient, by the reference date for expiration,transfers or settles the assets, or transfers them by gift.The deferral period for that portion then endson the date four months later.This fixes the deadline for that portion.

Expiration reference dateis determined by reference to “the date five years after the gift or similar transfer” and “the date on which the recipient's return to Japan or an heir's return to Japan, or a similar event, occurs.”whichever is earlierThe deferral then continues untilthe date four months after the following day.The five-year period is not automatically extended. Under paragraph (3),it becomes ten years only after the prescribed notification is filed.That is the result.

If the recipient returns to Japan

Article 60-3(6) sets out circumstances in which deemed transfers and similar transactionsmay be treated as never having occurred.These circumstances are as follows.

• Number 1 — The nonresident donee, orall nonresidents who acquired property by inheritance or bequest from the same decedent,withinfive yearsfrom the date of the gift or similar transfer,return to Japan.This is one qualifying case.
• No. 2 — Within five years, the assets received aretransferred by gift to a resident.This is one qualifying case.
• Number 3 — Within five years, the donee or other recipientDeathdies and all individuals receiving the assets by inheritance or bequest are residents, among other cases.

Under paragraph (7), where tax deferral applies, this “five years” is replaced by “ten years,”. The proviso to Article 60-2(6) also applies mutatis mutandis.

Here too, the word is “all.”In an inheritance case, cancellation under item (i) is unavailable if even one nonresident who acquired property does not return to Japan.

Paragraph (4) addresses the treatment of the recipient individual'sAcquisition priceacquisition cost. In principle, the value taxed on the transferor becomes the recipient's acquisition cost.However, paragraph (4) contains a proviso.For income tax for the year of the gift or similar transfer, ifneither a final tax return has been filed nor a determination made,or the deemed transfer gainhas not been included in gross receipts,or the first sentence of paragraph (6) has applied,this rule does not apply.。If the transferor does not file a return, the recipient's acquisition cost does not increase.

Points that require care in practice

• When does the gift occur?There is an issue as to whether this is the contract date or the date of the change in registered ownership.
• What if there are several heirs and only some are nonresidents?The assessment is made for each asset transferred.
• How is the JPY 100 million threshold determined?Paragraph (5) refers to all assets “held at the time of the gift or similar transfer,” not only the assets transferred.
• Could the recipient's country also impose tax?Double taxation relief and the applicable treaty must be checked.
• Are both inheritance tax and income tax imposed?The persons taxed and the governing statutes are different.
• Who will manage the procedures required to maintain deferral?An annual notification of continued application is required.

For people with family overseas, the requirements and procedures for passing on assets differ between gifts and inheritance.Although subsequent cancellation is available under paragraph (6), strict deadlines and conditions apply; the tax is not automatically reversed. Please consult us when you begin planning the transfer of your assets.

Legal basis

• Income Tax Act, Article 60-3 (Special Provisions for Capital Gains and Similar Income Where Assets Are Transferred to Nonresidents by Gift or Similar Transfer), paragraphs (1)–(7)
• Article 60-2 of the Income Tax Act (Special Provisions for Capital Gains, etc., in the Case of Departure from Japan)
• Income Tax Act, Article 137-3 (Deferral of Tax Where the Special Provisions for Capital Gains and Similar Income on Transfers of Assets to Nonresidents by Gift or Similar Transfer Apply), paragraphs (1)–(10)
• Article 137-2 of the Income Tax Act (Tax Deferral in Cases Where Special Provisions for Capital Gains, etc. upon Overseas Transfer Apply)
• General Act of National Taxes, Article 117(2) (Tax Representatives)
• Inheritance Tax Act, Article 1-3 (Persons Liable for Inheritance Tax）

Individual assessments require confirmation of family members' places of residence and the nature of the assets.