Relevant Period:This explanation was prepared in a later year using materials from the system's introduction on July 1, 2015. Consult current legislation and guidance for present decisions.

When moving your home overseas, income tax can arise even without selling your shares. Introduced by the FY2015 tax reform,Exit taxapplies to departures from Japan on or after July 1, 2015. It is commonly called exit tax.

When certain individuals cease to have a domicile or residence in Japan, covered assets are deemed disposed of or settled and unrealized gains are taxed. This is not a tax imposed each time someone travels abroad. Article 60-2 of the Income Tax Act, introduced by the 2015 amending Act, sets out the basic framework.

First Check the JPY100 Million Covered-Asset Threshold and Residence Period

The system applies to residents meeting both of the following conditions.

• The assets heldhave an aggregate covered-asset value and related amounts of at least JPY100 million.This satisfies the first exemption.
• The total period of having a domicile or residence in Japan during the ten years before departure ismore than 5 yearsThat is the condition.

The JPY100 million threshold refers neither to total wealth nor to unrealized gains. Covered assets include securities such as shares and investment trusts, silent partnership interests, and unsettled credit and derivatives transactions. Unlisted shares in your own company also require review. Real estate, cash, and deposits themselves are excluded. Unsettled transactions are assessed using deemed settlement gains or losses, rather than contract amounts.

For foreign nationals, certain residence periods are excluded based on status of residence. Periods under statuses in Appended Table I of the Immigration Control Act, and periods through June 30, 2015 under statuses in Appended Table II, are excluded from the Japanese residence period. Review residence history, rather than nationality alone, following page 2 of the NTA's May 2015 guide.

Prepare to Pay Tax Even Without Sale Proceeds

For example, if all other conditions are met and shares acquired for JPY40 million are valued at JPY120 million, the unrealized gain to consider is JPY80 million. This is a simplified illustration of the system; the actual tax depends on asset type, acquisition costs, and other factors.

If you move without selling, the question is how to fund the tax. The system therefore providespayment deferral for five years in principle, extendable to a maximum of ten years by notification.Requirements include notifying a tax agent before departure, filing on time with prescribed documents, and providing security covering income tax and interest tax. Annual continuation notifications are required during deferral, and interest tax is payable when the deferred tax is paid. The Ministry of Finance's outline of the 2015 amendment bill also sets out this framework.

Filing deadlines also require attention. If a tax agent is notified before departure, filing and payment are generally due by the following year's final return deadline. Without that notification, a departure-period tax return and payment are required by departure. The NTA's procedural guidance from that time should be used to prepare before departure.

Returning to Japan Does Not Automatically Cancel the Tax

If you return within five years in principle, or within ten years where the deferral period has been extended, taxation can be canceled for covered assets continuously held until return. To reduce the tax, you must submita request for correction within four months after returning.The system does not automatically cancel tax on assets already sold. Page 3 of the guidance from that time sets out the conditions and procedures.

Also Consider Gifts and Inheritances to Family Members Abroad

Income tax on unrealized gains also applies when covered assets pass from certain residents to nonresidents through gift, inheritance, or bequest. Even where the owner does not move abroad, transfers of shares to children living overseas require review. Article 60-3 of the Income Tax Act under the amending Act provides for this system.

When considering relocation or asset succession, assemble an asset list, acquisition costs, valuations, and Japanese residence history, and begin by planning pre-departure notifications and funding.