When moving overseas,income tax may apply to shares you have not yet sold. This is taxation on departure from Japan, commonly known as exit tax.

In Recent Years, This Has Become One of the First Systems to Check When Considering Relocation to Singapore or Dubai.

Statutory definition

Article 60-2, paragraph (1), of the Income Tax Act.

A person departing Japan (meaning ceasing to have both domicile and residence in Japan; the same meaning applies throughout this Article) who is a resident and holds securities or interests under a silent partnership agreement described in Article 174, item (ix), at departure … is, for calculating business income, capital gains, or miscellaneous income, treated as having disposed of those securities or interests at departure for the amount specified for the applicable category below:the securities or interests are deemed transferred.

An Asset Is Deemed Sold Even Though No Sale Occurred.The tax applies to unrealized gains.

Overview

The Covered Assets Are Securities and Similar Assets.Real estate, cash, and deposits are not listed as covered assets in this provision.

“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.

Tax Deferral Requires Some Steps Before Departure

Article 137-2, paragraph (1), of the Income Tax Act provides for payment deferral.In the same paragraph,It Lists Two Requirements.

The resident must,by the time of departure,file a tax agent notification under Article 117, paragraph (2), of the Act on General Rules for National Taxes, andandprovide security equivalent to the deferred income tax by the final income tax return deadline for that year, as prescribed by Cabinet Order, as conditions of relief.

The deferral deadline isExpiration reference date(the earlier of the date five years after departure and the date of return to Japan or another qualifying event)whichever is earlierfour months from the day following that date. Filing the notification under paragraph (2) extends “five years” to “ten years.”That notification itself must be filed by five years after departure, or by the day before a return or other qualifying event occurs.

The Tax Agent Notification Must Be Filed by Departure.Filing After Departure Does Not Satisfy This Requirement.

Paragraph (3) further requires that the final tax return state the intention to claim relief and have the detailed documents attached,as a condition of application. Including this, there are three requirements. Paragraph (6) also requires, during the deferral period,submission of a continued-application notification by March 15 of the following year covering the eligible assets held as of each December 31. If it is not submitted, paragraph (8) ends deferral four months after the filing deadline. Paragraph (7) addresses cases in which the tax office director recognizes unavoidable circumstances.

Departure Is Not the End: Annual Procedures Continue.

If the recipient returns to Japan

Article 60-2, paragraph (6), provides that, where a person returns within five years of departure, the deemed disposal of assets held continuously until return ismay be treated as never having occurred.. A proviso applies. If the deferral period has been extended, paragraph (7) replaces five years with ten years.

However, the Tax Does Not Disappear Automatically.Article 153-2, paragraph (1), of the Income Tax Act requires a correction claim to obtain this treatment,“within four months from the date on which the case falls within any of the items of that paragraph.”Simply Returning to Japan Is Not Enough.

Points that require care in practice

• When Is the JPY 100 Million Test Applied, and to Which Assets?The calculation must follow the categories in paragraph (5).
• How Are Your Own Company's Unlisted Shares Valued?The valuation method is a key issue.
• Which Periods Count for the Five-Years-or-Less Test Within Ten Years?The statute refers to periods prescribed by Cabinet Order.
• What If Share Prices Fall After Departure?The treatment of the difference between the taxed value and subsequent value becomes relevant.
• Could the Destination Country Also Tax the Assets?Double taxation adjustments and tax treaty must be checked.
• What If Family Members Leave at the Same Time?Each individual is assessed separately.

Your Options Under This System Are Limited Once You Have Left Japan.The deadlines for tax agent notification and provision of security fall at departure or the final tax return deadline.

Consult us as soon as relocation is planned, preferablybefore deciding your asset composition.

Legal basis

• Article 60-2 of the Income Tax Act (Special Provisions for Capital Gains, etc., in the Case of Departure from Japan)
• Article 60-3 of the Income Tax Act (Special Provisions for Capital Gains and Other Income Where Assets Are Transferred by Gift or Similar Means to Non-resident)
• Article 137-2 of the Income Tax Act (Tax Deferral in Cases Where Special Provisions for Capital Gains, etc. upon Overseas Transfer Apply)
• Article 153-2 of the Income Tax Act (Special Provisions for Correction Claims Following Return to Japan and Similar Events)
• Article 117, Paragraph (2), of the Act on General Rules for National Taxes (Tax Agent Notification)
• Capital gains provisions of the relevant tax treaties

An individual determination requires verification of the facts.