Expatriate tax ebook - Japan

What taxes?

Capital gains tax
Inheritance, estate and gift taxes
Investment income
Local taxes
Real estate taxes
Social security taxes
Stock options
Wealth taxes
Other specific taxes

Capital gains tax 
Gains on sales of stocks and real property are taxed separately from other income. As noted below, taxpayers who are resident in Japan for tax purposes are subject to a slightly higher rate due to a local inhabitant tax component.

Capital gains on real property held for more than five years as of January 1 of the year of the sale are taxed at the long term rate of 20% (15% national income tax, 5% local inhabitant tax). Gains on real property held for a shorter period are taxed at 39% (30% national, 9% local).

Capital losses from the sale of real property can be deducted only from capital gains on real property. Capital losses on the taxpayer’s principal residence can be carried forward 3 years. Otherwise, there is generally no carry forward of capital losses on real property for individuals.

Taxation of capital gains from the sale of foreign listed shares
The tax rate on capital gains from foreign listed shares sold through a securities company located in Japan is 10% (7% national, 3% local). For foreign listed shares not sold through a Japan brokerage, the tax rate is 20% (15% national, 5% local). In addition, capital losses on sales of listed shares traded through a Japan brokerage can be carried forward for 3 years.

Capital loss from the sale of listed shares on or after January 1, 2009
A capital loss from the sale of shares can be deducted from any capital gains from the sale of shares in the same calendar year. If after making above deduction a capital loss still remains it generally cannot be deducted from other types of income. For example, you are not allowed to deduct the capital loss on the sale of shares from salary income. However, if the loss mentioned above contains a capital loss from the sale of listed shares sold through a securities company located in Japan, this portion can be deducted from dividend income paid by listed companies if the Separate Taxation System on dividends has been selected.

Carry forward of capital loss from the sale of listed shares
If a capital loss from the sale of listed shares through securities company remains after making the deductions mentioned in the previous paragraph, this deficit can be carried forward to the following three years by filing a tax return. The carried forward deficit will be deducted from capital gains arising from the sale of shares and dividend income paid by listed companies for the following three years. Please note that you need to file a tax return every year in order to apply this carry forward, even if you have no obligation to do so.

Inheritance, estate & gift taxes

• Inheritance tax
  Japan’s Inheritance Tax (IHT) is based on the residence status of the beneficiary and/or the location of the assets inherited. Beneficiaries domiciled in Japan are subject to IHT on property they receive, while beneficiaries not domiciled in Japan are subject to IHT on assets inherited that are located in Japan. IHT is levied at progressive rates on the fair market value of the property inherited, less related expenses. Further deductions are allowed, depending on the status of the heir. A specific spousal allowance is also available. The net value of the inheritance is taxed as follows.

• Gift tax
  Japan’s gift tax is an obligation for the recipient of the gift.

Basic deduction  ¥1.1m every year

Investment income
A person who receives investment income in the form of interest, dividends, or royalties, is subject to withholding income tax at source if it is paid in Japan. Applicable tax rates differ depending on the tax resident status of the recipient, or the existence of a tax treaty between Japan and the investor's home jurisdiction. Generally, a tax rate of 20% applies unless a more beneficial tax rate is available under an applicable tax treaty.

Real estate tax
Fixed asset tax and city planning tax are levied by municipalities on land, buildings, and other depreciable property located in the municipality. The annual tax rates are respectively 1.4 and 0.3% of the assessed value of fixed assets.

Social security taxes
An employer (either a corporate entity or a sole proprietorship with five or more employees) with a Japan payroll is required to join Japan’s social security plan, which is comprised of insurance components for health (and nursing care for employees ages 40 and above), welfare pension, employment, and workers’ accident compensation. Both the employer and employee are required to contribute. Withholding rates for employees (employers) are, approximately, as follows:

Stock options
Stock options granted to an employee resident in Japan will be subject to tax in Japan. Non-qualified stock options are taxed as regular salary income at the date of exercise on the difference between the exercise price and the price at grant. Tax on capital gains made upon the sale of the stock will be levied on the difference between the sale and exercise price.

Qualified stock options are taxable only upon sale, with capital gains tax being levied on the difference between the sale price and the price at grant. A number of conditions must be met to qualify, including that the stock options be issued by a Japanese company.

Wealth tax
There is no wealth tax in Japan.

Other specific taxes
Permanent residents in Japan are taxed on their worldwide income. Non-permanent residents are taxed on their Japan source income in addition to any foreign source income remitted (or brought or paid) into Japan. This means that for non-permanent resident taxpayers, cash remitted into Japan will be taxed at Japan’s marginal income tax rates if the taxpayer has any foreign source income in the same calendar year. Taxpayers with income from non-Japan sources should be aware of the tax implications when remitting any funds into the country.

Information about Japan:

• introduction
• facts and figures
• basis of taxation
• what taxes?
• tax planning opportunities