Tax Surge Ahead
How an upcoming income tax increase will impact high-net-worth individuals and business owners.
A new measure to be introduced in 2025 will increase taxes on high-income individuals. With the effective income tax rate set to rise to 22.5 percent or higher, business and real estate owners who plan to realize gains from the sale of real estate or stocks should be aware of the impact on their taxable income after January 1, 2025.
Income tax in Japan consists of aggregate taxation on certain types of income. These include employment income, business income, and real estate income. The total from each type is summed and taxed at progressive rates. The national income tax rate ranges from five to 45 percent (plus 10 percent for local taxes).
Income from the transfer of real estate, and some financial income, is subject to separate taxation. Income from the transfer of real estate (long-term holdings) and stocks is taxed at a flat rate of about 15 percent (plus five percent local tax).
This can give rise to a phenomenon where the portion of total income derived from the transfer of real estate and stocks increases while the actual overall tax rate decreases, thus lowering the effective income tax burden for high-income earners. From the viewpoint of a fair taxation system, the tax burden rate will be raised to 22.5 percent (for the national tax portion), and possibly higher for incomes above a certain level.
How It Works
First, the standard income amount is calculated by totaling the amount of income (both aggregate assessment income and separate income) for which a tax return is filed each March and adding financial income that is not included on the tax return. This includes income where the withholding tax suffered is treated as the final liability, such as dividends from listed stocks, small dividends from unlisted stocks, and income from special accounts.
Special accounts are those which the taxpayer has selected to hold listed stocks. The dividend income, as well as income from the transfer of listed stocks, suffers withholding tax at the source. This is treated as the final liability for these types of income, so they are not included on an income tax return.
Next, the standard income amount is multiplied by 22.5 percent (national tax) after deducting the special deduction (¥330 million). If the total exceeds the regular tax amount, the difference will be levied as additional tax due.
In addition to those who plan to sell real estate or stocks, individuals with high financial income from special accounts will be affected by this amendment.
Even for non-residents of Japan, the tax increase will apply to transfers of real estate located in Japan and transfers of Japan-sourced stocks.
Corporate owners and major investors who plan to sell their companies, individuals who plan to sell their real estate, and high net worth individuals who have large amounts of financial income are advised to understand the impact of this tax increase and consider how to respond.
For more information, please contact Grant Thornton Japan at info@jp.gt.com or visit www.grantthornton.jp/en
Disclaimer: Opinions or advice expressed in the The ACCJ Journal are not necessarily those of the ACCJ.