Statutory definition

Japan’s exit tax treats a person as having transferred securities and similar assets at the time of departure and taxes the deemed transfer (see What Is Japan’s Exit Tax? for details). Article 60-2 provides that, if a person subject to this tax meets certain conditions, the taxation may be treated as though it had not occurred. The statute describes one ground for cancellation, a gift, as follows:

“If the individual, by the date five years after the departure from Japan, transfers by gift (excluding a gift to a trustee of a charitable trust; the same applies in this item) to a resident securities or similar assets held at the time of departure, or contracts for unsettled margin transactions or unsettled derivative transactions entered into at that time: the securities or similar assets, unsettled margin transactions, or unsettled derivative transactions so transferred by gift.”

In addition to a gift, Article 60-2 identifies return to Japan and a transfer by inheritance or bequest following the individual’s death as grounds for cancellation. Cancellation applies only to securities and similar assets continuously held until the relevant event. The statute also deems securities and similar assets acquired after departure through specified events, such as a share exchange or exercise of stock acquisition rights, to have been continuously held. A separate regime imposes a new tax when securities and similar assets are transferred to a nonresident by gift or inheritance; that regime is discussed in Exit Tax on Gifts and Inheritances.

Overview

Does returning to Japan, by itself, cancel the tax?

Article 60-2 lists return to Japan as one ground for cancellation. The provision applies, however, only to securities and similar assets continuously held until the return. Any portion already transferred or settled after departure is ineligible even if the individual returns. The deadline for cancellation is the date five years after departure; if the tax payment deferral has been extended, this period is read as ten years. Whether the period is five or ten years depends on the status of the deferral, so it is necessary to check whether an extension notice has been filed, as discussed in What Is the Tax Payment Deferral for Japan’s Exit Tax?. The statute defines “return to Japan” as coming to have a domicile in Japan or a residence there continuously for one year or more up to the present. Merely having a short-term place of residence does not qualify. The test of residence should also be checked against Who Is a Resident under the Income Tax Act? (Determining Domicile).

Can a gift or inheritance also result in cancellation?

A gift can qualify if it meets the statutory conditions, including a transfer to a resident and that the securities or similar assets in question were transferred by the gift. For inheritance or bequest, the heirs or legatees who receive securities or similar assets on the individual’s death must fall within the circumstances specified by the statute. Article 60-2 also provides detailed rules where there are multiple heirs or legatees. The statutory wording must be checked in each case to determine who must have what status, and by when, for cancellation to apply. Whether by gift, inheritance, or bequest, cancellation is confined to the particular securities or similar assets transferred; a portion already transferred before that event is not included. Whether the recipient is a resident is also a factor in determining eligibility.

What procedure applies, and what is the deadline?

Cancellation is not reflected automatically; a procedure before the tax office director is necessary. Article 151-2 permits an amended return within four months after the date on which the ground for cancellation arises. Article 153-2 permits a request for correction within the same four-month period. Which procedure applies depends, under the statutory provisions, on whether the amount in the return already filed is excessive or insufficient when compared with the amount of income after cancellation. For either procedure, the period starts on the date the cancellation ground arises, not on the departure date or the original tax return deadline. Procedures concerning transfers, settlements, qualified acceptance of inheritance, and similar matters while a tax payment deferral is in effect have different statutory starting points and are discussed in What Is the Tax Payment Deferral for Japan’s Exit Tax?.

Points that require care in practice

• If there are multiple heirs or legatees and only some return to Japan, or if the composition of the heirs or legatees changes following division of the estate, the relevant time for assessing cancellation conditions must be checked against Article 60-2’s inheritance and bequest rules.
• The wording of the proviso to Article 60-2 must be checked to determine the extent to which amounts involving concealment or fabrication are excluded from cancellation.
• Whether the conditions for an amended return or a request for correction are met must be assessed individually against the rules on final returns in the Act on General Rules for National Taxes and the Income Tax Act.

Legal basis

• Income Tax Act, Article 60-2(6)(i) (cancellation upon return to Japan). Quoted text: “If the individual returns to Japan (meaning that the individual comes to have a domicile in Japan or a residence there continuously for one year or more up to the present; the same applies in this paragraph and paragraph (6) of the following Article) by the date five years after the departure from Japan: securities and similar assets continuously held until the time of that return, or unsettled margin transactions or unsettled derivative transactions that have not been settled.”
• Income Tax Act, Article 60-2(6)(ii) (cancellation upon gift). Quoted text: “If the individual, by the date five years after the departure from Japan, transfers by gift (excluding a gift to a trustee of a charitable trust; the same applies in this item) to a resident securities or similar assets held at the time of departure, or contracts for unsettled margin transactions or unsettled derivative transactions entered into at that time: the securities or similar assets, unsettled margin transactions, or unsettled derivative transactions so transferred by gift.”
• Income Tax Act, Article 60-2(6)(iii), main clause (scope of transfers by inheritance or bequest). Quoted text: “If, by the date five years after the departure from Japan, the individual dies and securities or similar assets held at the time of departure, or contracts for unsettled margin transactions or unsettled derivative transactions entered into at that time, are transferred by inheritance (excluding inheritance subject to qualified acceptance; the same applies in this item) or bequest (excluding a bequest to a trustee of a charitable trust and a universal bequest subject to qualified acceptance; the same applies in this item), and one of the following cases then applies: the securities or similar assets, unsettled margin transactions, or unsettled derivative transactions so transferred by inheritance or bequest.”
• Income Tax Act, Article 60-2(6)(iii)(a) (cancellation upon inheritance or bequest). Quoted text: “If, by the date five years after the departure from Japan, all individuals who are heirs and legatees receiving securities or similar assets, or contracts for unsettled margin transactions or unsettled derivative transactions, through that inheritance or bequest (including individuals who in turn receive those securities or similar assets or contracts from such an individual by inheritance or bequest; the same applies in (b)) become residents.”
• Income Tax Act, proviso to Article 60-2(6) (exclusion of amounts based on concealment or fabrication). Quoted text: “Provided, however, that this does not apply to an amount corresponding to business income, capital gains income, or miscellaneous income from the transfer of the securities or similar assets, business income or miscellaneous income from settlement of the unsettled margin transactions, or business income or miscellaneous income from settlement of the unsettled derivative transactions (hereinafter in this paragraph referred to as the ‘amount of capital gains and other income relating to securities and similar assets’) that is based on facts concealed or fabricated, where all or part of the facts forming the basis for calculating that income was concealed or fabricated, and, because a final return was filed on the basis of that concealment or fabrication or no final return was filed, a determination or reassessment was made, or a late return or amended return was filed, for that individual by the date five years after the departure from Japan (excluding a case in which a late return or amended return was filed by that date without anticipation, as a result of an income tax audit, of a determination or reassessment of that income tax).”
• Income Tax Act, Article 60-2(7) (reading five years as ten years). Quoted text: “In applying the preceding paragraph to an individual to whom paragraphs (1) through (3) applied for income tax for the year that includes the date of departure from Japan, and who is receiving the tax payment deferral under Article 137-2(1) pursuant to Article 137-2(2) (Tax Payment Deferral Where the Special Rule for Capital Gains and Other Income on Departure from Japan Applies), ‘five years’ in the preceding paragraph is read as ‘ten years.’”
• Income Tax Act, Article 60-2(11) (deemed continuous ownership of securities and similar assets acquired through a share exchange, etc.). Quoted text: “For purposes of applying paragraph (6) through the preceding paragraph, securities and similar assets acquired by an individual after the time of departure from Japan through any of the following events are deemed to have been continuously held by that individual.”
• Income Tax Act, Article 60-2(12) (delegation to Cabinet Order). Quoted text: “In addition to the matters prescribed in paragraph (6) through the preceding paragraph, matters necessary for the application of paragraphs (1) through (5) are prescribed by Cabinet Order.”
• Income Tax Act, Article 151-2(1) (special rule for amended returns). Quoted text: “A person (including that person’s heir) who has filed a final return or received a determination of income tax for the year that includes the date of departure from Japan under Article 60-2(1) (Special Rule for Capital Gains and Other Income on Departure from Japan) may file an amended return with the tax office director, only within four months after the date on which a case listed in an item of Article 60-2(6) comes to apply, if the amount of gross income for the year covered by that return or determination includes an amount of capital gains and other income relating to securities and similar assets under the main clause of Article 60-2(6) (including where applied pursuant to paragraph (7)) and, as a result, a ground listed in an item of Article 19(1) or (2) of the Act on General Rules for National Taxes (Amended Returns) arises for income tax for the year that includes the date of departure.”
• Income Tax Act, Article 153-2(1) (special rule for requests for correction). Quoted text: “A person (including that person’s heir) who has filed a final return or received a determination of income tax for the year that includes the date of departure from Japan under Article 60-2(1) (Special Rule for Capital Gains and Other Income on Departure from Japan) may request a correction from the tax office director within four months after the date on which a case listed in an item of Article 60-2(6) comes to apply, if the amount of gross income for the year covered by that return or determination includes an amount of capital gains and other income relating to securities and similar assets under the main clause of Article 60-2(6) (including where applied pursuant to paragraph (7)) and, as a result, a case listed below arises in respect of income tax for that year.”