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Japan unveils plans to impose 'exit tax' on wealthy emigrants

Thursday, 22 January, 2015

The Japanese government is planning to impose capital gains tax on the unrealised assets of wealthy residents when they leave the country permanently.

A growing number of Japanese citizens and permanent residents are moving to countries such as Singapore or Hong Kong that do not tax capital gains, the government believes. As Japanese tax treaties allocate sole taxing rights to the country where the person resides, this means that a Japanese resident who owns company shares with large unrealised gains can emigrate to one of these countries and sell their shares without paying any capital gain tax (CGT).

The exit tax is set out in the government's 2015 tax reform plan, and is scheduled to take effect from 1 July this year. Only assets above JPY100 million (USD850,000) would be affected.

The charge would apply to taxpayers who have been resident in Japan for five or more of the ten years leading up to their date of departure. The visa category the individual holds will be important for the purpose of determining the five-year residency period.

Emigrants can ask to have the charge deferred for five years if they are leaving Japan only temporarily and do not plan to dispose of their assets while they are abroad. However, to qualify for this deferment they must appoint a tax agent to handle their affairs in their absence. They will also have to pay a returnable deposit to cover the possibility that they never come back.

The proposal is currently being debated in parliament. Certain details are not yet settled, such as provisions for foreign tax credits and a stepped-up cost basis to eliminate the risk of double taxation.

'Employers should consider the potential impact on their mobility programs involving assignees in Japan, including equalization policies and communications with impacted employees', comments Ernst & Young. 'Visa types should also be considered to reduce any potential impact.'