Statutory definition

Adjustments where securities deemed sold under exit tax are also subject to foreign income tax in the destination country span several provisions. Central is the following rule allowing a correction request from the date the foreign tax becomes payable:

“A request for correction may be made to the tax office director within four months after the date the foreign income tax becomes payable.”

This article examines acquisition cost when assets subject to exit tax are actually sold (Article 60-2), correction requests where the destination country also taxes them (Article 153-6), the relationship to foreign tax credits (Article 95), and the distinction from the easily confused Article 60-4. It does not address the system's definition, ¥100 million threshold or deferral procedures.

Overview

Must tax paid on the deemed sale be paid again on the actual sale?

The amount deemed received on transfer at departure becomes acquisition cost when those securities, etc. are actually transferred later (Article 60-2).

This applies where an individual, including heirs, subject to Article 60-2 for the departure year's income tax actually transfers or settles assets held at departure. However, the cost adjustment does not apply if no final return or determination exists for that year, the deemed amount was not included in gross revenue, or exit taxation was reversed because of return to Japan or similar events; consult the precise statutory wording. For deferral procedures, security and continued-application notifications, see What is the tax payment deferral for the exit tax (tax on overseas transfer)?.

What if a tax representative was notified and the assets were sold by the final return deadline?

Where an individual notified a tax representative under the General Act of National Taxes before departure and, by the final return deadline for the departure year, transfers securities continuously held since departure, settles outstanding margin or derivative transactions, or transfers them through inheritance by qualified acceptance or similar succession, substitutions for actual proceeds below departure-date value and similar cases apply mutatis mutandis, whether or not deferral applies (Article 60-2). Consult the provision for the precise substitutions. Article 153-2 governs correction requests in this case, but is not quoted here.

What should be done with the Japanese return if the destination country also taxes the assets?

A person who filed a final return for the departure year's income tax, including heirs, may request correction within four months after foreign income tax becomes payable where Article 95-2 applies to that tax and this brings the year's income tax within Article 153-2 (Article 153-6). Persons receiving a determination are not listed here. To identify the foreign taxes covered by Article 95-2, consult that Article's text, not quoted here.

Can a foreign tax credit be claimed?

Article 95 contains the general foreign tax credit rules. This article does not address calculation of the credit limit. Note its subject restriction: “where a resident becomes liable to pay foreign income tax ... in a year.” Departure means ceasing to have either domicile or residence in Japan (Article 60-2), so whether Article 95 directly applies to foreign income tax becoming payable after departure must be examined against that restriction. Article 153-6 refers separately to Article 95-2, beyond the ordinary foreign tax credit provision.

Article 60-4 operates in the reverse direction

Article 60-4 is easily confused with Japan's exit tax, but operates in the reverse direction. Where a person held securities subject to foreign-law taxation equivalent to Japan's exit tax and sells them after becoming a Japanese resident, the amount included in revenue for the foreign exit tax calculation becomes acquisition cost (Article 60-4). It concerns someone who paid foreign exit tax, came to Japan and sold, rather than someone leaving Japan. For the system's definition, see Exit tax Please refer to.

Points that require care in practice

• The Article 60-2 acquisition-cost adjustment does not always apply. The result depends on the departure year's return or determination status and whether taxation was reversed after return or a similar event, so check the proviso.
• How does Article 95's restriction to a “resident who becomes liable to pay” apply to foreign income tax becoming payable after departure? Check it together with Article 95-2, referenced by Article 153-6.
• What actual date is the “date foreign income tax becomes payable” starting Article 153-6's correction period? Compare the destination country's actual tax-procedure dates with the statutory wording.

Legal basis

• Income Tax Act, Article 60-2(4)(i) (Special capital gains rules on departure) / Quoted wording: “The securities, etc. shall be deemed acquired for the amount specified in the items of paragraph (1) (where paragraph (1) applies pursuant to paragraph (8), the transfer price under paragraph (8) or the value at inheritance by qualified acceptance or similar succession).”
• Income Tax Act, Article 60-2(4), proviso (Special capital gains rules on departure) / Quoted wording: “However, this does not apply to securities, etc., unsettled margin transactions, etc. or unsettled derivative transactions where neither a final return nor determination exists for income tax for the year containing that date; assets or transactions for which the amounts specified in the relevant items of paragraphs (1), (2) or (3) were not included in gross revenue in calculating business income, capital gains or miscellaneous income for that year; or assets or transactions to which the main clause of paragraph (6), including as applied under paragraph (7), applied.”
• Income Tax Act, Article 60-2(9) (Special capital gains rules on departure) / Quoted wording: “The preceding paragraph applies mutatis mutandis where an individual subject to paragraphs (1) through (3) for the departure year's income tax, who notified a tax representative under General Act of National Taxes Article 117(2) before departure, transfers or settles securities continuously held since departure or contracts for outstanding margin or derivative transactions, or transfers them through inheritance by qualified acceptance or similar succession, by that year's final income tax return deadline.”
• Income Tax Act, Article 153-6(1) (Special correction requests where a departed taxpayer pays foreign income tax) / Quoted wording: “A person who filed a final return for income tax for the year of departure under Article 60-2(1) (Special capital gains rules on departure), including heirs, may request correction from the tax office director within four months after foreign income tax becomes payable where tax covered by Article 95-2(1) (Special foreign tax credit rules relating to departure taxation), including as applied under paragraph (2), becomes payable and thereby brings that year's income tax within Article 153-2(1)(i) (Special correction requests upon return to Japan, etc.).”
• Income Tax Act, Article 60-4(1) (Special capital gains rules where foreign exit tax applied) / Quoted wording: “Where a resident transfers securities, etc. subject to foreign exit tax in a transfer prescribed in Article 60-2(4) (Special capital gains rules on departure), the amount deemed received on transfer and included in revenue in calculating income for foreign income tax under that foreign exit tax rule (foreign income tax under Article 95(1) (Foreign tax credit); the same applies in the following two paragraphs) shall be treated as acquisition cost in calculating business income, capital gains or miscellaneous income.”
• Income Tax Act, Article 95(1) (Foreign tax credit) / Quoted wording: “Where a resident becomes liable in a year to pay foreign income tax (tax equivalent to income tax imposed under foreign laws, as prescribed by Cabinet Order; hereinafter the same in this paragraph and paragraph (9)), ...”