The Journal The Authority on Global Business in Japan

At long last, the much-discussed Japan exit tax was passed into law on March 31, 2015. Effective on July 1, 2015, it will assess a capital gains tax (15.315 percent) on unrealized gains of certain financial assets (e.g. securities) when an individual permanently leaves Japan. What does this mean for US taxpayers?

Whom it affects
The following individuals, in addition to Japanese nationals, are subject to the exit tax: non-Japanese (US and other nationals), who are residents holding non-employment visas (such as permanent residents and spouses of Japanese nationals) for five years or longer within the past 10 years, and who have the equivalent of ¥100 million or more in financial assets (excluding cash, insurance, and real estate) when they depart from Japan.

However, the good news contained in the Enforcement Order is that the five-year clock for these individuals will start from July 1, 2015.

Therefore, this condition will not apply to foreign nationals with one of the above visas before June 30, 2020. Holders of other visas are exempt from the exit tax altogether.

Note that in the case of Japanese nationals (including those with dual citizenship), the five-year period of residence may be satisfied before July 1, 2015.

Why it matters to you
The Japan exit tax is triggered by an individual’s permanent departure from the country, and not by the sale of assets. Thus, there are no exit capital gains to be reported for US taxation.

Japan taxes paid can be carried forward for 10 years for US tax credit purposes, and if not used earlier, will be available once the assets are sold and capital gains are reported on a US tax return.

So, is this just a timing issue, or are there other inherent problems?

Unfortunately, US taxpayers who had intended to leave these financial assets to their heirs—and who might have qualified for zero US income tax on the assets’ appreciation—now face additional costs as a result of Japan’s exit tax.

Other issues must also be considered, including exchange rates and the ability to cite a foreign source for the gains in order to claim a foreign tax credit on the US income tax return.

There could also be double taxation if assets are sold more than 10 years after someone’s departure from Japan. If US taxpayers file for an extension to pay the exit tax—which in most cases would be sensible—they need to appoint someone in Japan to be their tax representative, which may incur a fee.

Taxpayers must also provide the Japan tax authorities with collateral against the exit tax (involving more costs) and must submit annual reports to those authorities to prove the assets have not been sold.

The end result is that US taxpayers could incur unexpected costs as a result of the exit tax, regardless of whether they are able to fully utilize foreign tax credits against the US income taxes on the eventual sale of the financial assets.

In short
While the Japan exit tax is complicated, imperfect, and impossible to fully convey in such a limited space, it is important to know that if you are subject to the exit tax, it could represent a real cost.

Take advantage of the five-year window until 2020 to plan ahead and take steps to avoid the tax or reduce its impact, so that when you eventually leave Japan your exit will be a happy one.

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Paul Houston is a director in the International Assignment Services group of PwC Japan Tax.

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