Japan

Individual - Significant developments

Last reviewed - 08 August 2022

2022 Japan Tax Reform Proposals

Clarification of taxation on income derived from settlement of derivative transactions for non-residents

The 2022 tax reform proposals clarify that income arising from the settlement of market derivative and over-the-counter (OTC) derivative transactions under the Financial Instruments and Exchange Act are not classed as ‘investment and holding income of domestic assets’; and thus should not be regarded as domestic source income stipulated in the income and corporate tax laws for any party who is a non-resident without a permanent establishment (PE) in Japan.

A similar conceptual approach will be taken when determining what is foreign source income for foreign tax credit purposes for residents.

Revisions of the taxation requirements of individuals as major shareholders holding shares in listed domestic corporations

Dividends paid by listed domestic corporations, etc., to an individual shareholder are subject to separate taxation as financial income if the shareholder’s holding ratio is less than 3%, whereas an individual shareholder is subject to comprehensive taxation if the shareholding ratio is 3% or more.

In order to cover the scenario where an individual shareholder directly holds less than 3% in a listed domestic corporation, nevertheless whose actual holding (indirectly) ratio is 3% or more, such as when investing through other controlling corporations, the following measures will apply:

  1. Dividends paid by listed domestic corporations, etc., to a resident individual (Target person) will be subject to comprehensive taxation if the percentage of the total number of outstanding stocks, etc., held by the Target person and a corporation that falls within a family corporation of the Target person (Shareholding ratio) is 3% or more.
  2. A listed domestic corporation that distributes dividends shall submit a report describing the names, individual numbers, Shareholding ratio, and other matters of the Target person whose Shareholding ratio is 1% or more on the dividend record date to the Japanese tax authority within one month from the date on which the payment is determined.

The amendments are effective for dividends payable by listed domestic corporations, etc., on or after October 1, 2023.

Reforms of the NISA System

  1. Simplifying the checking process of an existing account

Individual investors who wish to open a Nippon Individual Savings Account (NISA) in a financial institution must verify by self-assessment whether they have any existing NISA in another financial institution. In order to streamline this confirmation process, investors will be able to check whether they have any existing NISA through access to the relevant database themselves.

  1. Introduction of New NISA system

From 2024, a new dual account system (i.e., two accounts for each individual, one designed for cumulative investments (First Account) and the other for regular investment (Second Account)) will be introduced under the NISA system. The account holders must make an investment in the First Account and the Second Account in the same calendar year. Under the 2022 tax reform proposals, the account holders may make an investment in the Second Account in the next calendar year after their investment in the First Account is made, provided this is done so within six months of that First Account investment.

Inheritance, gift and other property taxes

The following measures were proposed for the 2021 Japan Tax reform:

a)     The application deadline for gift tax exemption measures when receiving a gift of funds, such as the acquisition of property will be extended by two years until December 31, 2023.

b)     The property tax burden adjustment measures for land will be reviewed only for 2022.

c)     The application period for the preferential stamp duty rate related to contracts for the transfer of movables will be extended by two years.

d)     The deadline for submitting special succession plans under the business succession tax regime (currently March 31, 223) will be extended by one year.