2020 Japan Tax Reforms
Exit tax on foreign nationals - effective July 1, 2020
Effective July 1, 2020, exit tax rule applies to foreign national residents holding “Table 2” visas (permanent resident visa and spouse of Japanese national visa being two common examples of Table 2 visas) and meet the conditions below:
- Individuals who hold certain financial assets with a total value of JPY 100 million or more upon their departure from Japan; and
- Individuals who had maintained a jusho or kyosho in Japan for more than five years during the 10-year period immediately prior to the Japan departure.
The following assets are subject to the exit tax:
- Securities defined in the Income Tax Law (Article 2(17)) such as stocks, mutual funds, bonds and others.
- Ownership of tokumei-kumiai contracts.
- Unsettled derivative transactions.
- Unsettled credit transactions.
- Unsettled hedging transactions for stock risks trading.
Cash or cash deposits do not fall within the definition of securities and non-financial assets such as real estate properties are not subject to the exit tax. It is important to note that the 100 million yen threshold for the exit tax rule applies to the aggregate value of the financial assets, rather than each asset (or asset class) individually.
Special measures for aggregation of profits and losses of real property income derived from second-hand overseas buildings
Japanese permanent resident taxpayers are subject to taxation on income from rental properties located overseas. As part of operating a rental property, taxpayers can claim depreciation expenses to reduce their rental income, which is calculated based on the statutory useful life(s) of the depreciable properties used for rental activities. As rental income is within the general taxation category and taxed on an aggregate basis, rental losses can offset other income, such as employment income, under the general taxation category to reduce a taxpayer’s taxable income.
With the new rule , it attempts to mitigate the excessive tax reductions through operations of overseas rental properties. The following methods are to be disallowed in order to prevent rental loss by claiming depreciation expenses on overseas used properties:
- Using simplified method to calculate or estimate the useful statutory life of a property that has expired its useful life
- Using simplified method to calculate or estimate the useful life statutory life of a property that has partially expired useful life
- Providing an estimated useful life, unless attaching documents that substantiates the appropriateness of the estimate to the tax return
The rule is to be effective from 2021 tax year.
Rules for reporting overseas assets acquired by inheritance
Under the current tax laws, a permanent resident who acquires inheritance is required to include the overseas assets acquired by inheritance in the Overseas Assets Reporting form for the year in which the inheritance commenced.
From the tax reform, permanent residents who are required to include the overseas assets obtained by inheritance will no longer be required to include the assets under the Overseas Assets Reporting form for the year the inheritance commenced. instead, they will be required to include the newly inherited assets in the form by March 15th, two years after the year of inheritance commenced.
Amendments to special measures for additional taxes
Taxpayers are required to keep transaction records of their overseas investment. Following penalties are to be assessed if the taxpayer is not able to provide the necessary transaction details about their assets that should be included in the Overseas Asset Report within the time frame requested by the National Tax Agency:
- If the assets are correctly reported on the Overseas Asset Report but the income was not reported or understated in the tax return, the 5% penalty that was previously in place will remain the same.
- On the other hand, if the assets were not correctly reported on the Overseas Asset Report and the income was not reported or understated in the tax return, additional penalty of 10% will be imposed (previously 5%).
Dependent deduction for family members living overseas
Under the new rule which is applicable for 2023 and thereafter, non-resident dependents who are 30 years old or older and younger than 70 years as of December 31st of the reporting year will not be eligible for dependent deduction unless one of the three conditions are met.
- If the non-resident dependent is studying abroad and if the taxpayer can provide sufficient evidence or verification of documents issued by the foreign government.
- If the non-resident dependent has a disability.
- If the non-resident dependent receives living and education expense that JPY 380,000 or more in year from the resident taxpayer.
2019 Tax Reform
Extension of the income tax credit for housing loans for individuals who acquire a qualified residence that will be subject to the 10% consumption tax rate
Under the current rules, resident taxpayers who have home mortgages and are eligible for the home loan credit can enjoy up to 500,000 Japanese yen (JPY) of credit from their annual income tax for a period of ten years. In conjunction with the increase in consumption tax rate to 10% (from the current 8%) in October 2019, the credit will be extended for an additional three years on 2% of the building’s price for those who enter into a new home purchase and move into the residence between 1 October 2019 and 31 December 2020. The table below demonstrates the annual applicable credit for the period from the 11th year through the 13th year.
|Qualified Long-Life Housing /
Qualified Low-Carbon Housing
|A||Year-end loan balance (limited to JPY 40,000,000) x 1%||Year-end loan balance (limited to JPY 50,000,000) x 1%|
|B||Acquisition cost for the building excluding consumption tax
(limited to JPY 40,000,000) x 2% ÷ 3
|Acquisition cost for the building excluding consumption tax
(limited to JPY 50,000,000) x 2% ÷ 3
|Annual Credit||The lesser of A or B||The lesser of A or B|
Reduction in the rates for annual automobile tax and repeal of one-time acquisition tax
In conjunction with the increase in consumption tax rate, the automobile acquisition tax will be abolished at the end of September 2019 and will be replaced by an automobile environment performance tax. The automobile environmental performance tax rate will range from 1% to 3%, depending on the automobile’s fuel efficiency; however, a reduction of 1% in the tax rate will be allowed for the purchase from 1 October 2019 to 30 September 2020. In addition, the annual automobile tax imposed on car owners will be reduced by JPY 1,000 to JPY 4,500 per year.
Revision of the scope and applicable requirements for tax-exempt measures applied to dividend income or capital gains arising from Nippon Individual Savings Accounts (NISAs)
The scope and applicable requirements for tax-exempt measures applied to dividend income or capital gains arising from NISAs will be revised. The changes include the ability for the account holders to maintain the tax-exempt NISAs while they are temporarily out of Japan (up to five years). Currently, individuals leaving Japan need to move their financial products in a NISA to a taxable account, and such products cannot be moved back to the NISA once they return to Japan.
Revision of the scope and applicable requirements for tax qualified stock options
For qualifying businesses, the applicable person for tax qualified stock options (i.e. the treatment of deferred income arising from exercising the tax qualified stock options) will be expanded to include those other than directors or employees of the company issuing the stock options ('issuer'). The issuer must be a designated venture company pursuant to the revised Small and Medium Enterprises Management Reinforcement Law. If an individual who acquired the stocks by exercising the tax qualified stock options would depart from Japan, such individual would be subject to Japanese income tax as if the stocks were disposed of at a fair market price when the options were exercised.
Clarification of the income tax treatment of income from virtual currencies
For individual income tax purposes, income from virtual currencies is generally classified as miscellaneous income. In regards to sales and transfers of virtual currencies, the method of calculating the acquisition costs is clarified to be the moving average method or the gross average method. If an election was not made, the acquisition cost is calculated under the gross average method.
Introduction of stricter guidelines to municipalities participating in the hometown tax donation (furusato nozei) programme
Furusato nozei is a programme that allows people to donate to a municipal or prefectural government of their choice and, in return, receive tax deductions/credits (and gifts from such localities in most cases).
Under the new rules, the value of gifts provided by the municipalities must be limited to no more than 30% of the donation and must be produced within the municipality receiving the donation in order for the donation to be qualified for the full tax benefit. Those qualified municipalities must be designated by the Ministry of Internal Affairs and Communications.
The above changes are effective for donations made on or after 1 June 2019.
Step-up in cost basis for assets subject to a treaty country’s exit tax
When a Japan resident taxpayer disposes of assets that were subject to an exit tax in a treaty country, and such treaty would include provisions to adjust double taxation for such dispositions, the cost basis will increase to the amount subject to such treaty country’s exit tax.
Three-year extension on My Number notification to financial institutions for those who opened accounts by 31 December 2015
Taxpayers who opened their brokerage accounts before Japan’s My Number (unified tax and social security number) system began on 1 January 2016 had a three-year grace period (until 31 December 2018) to provide their My Numbers to their brokers. The 2019 Tax Reforms grant another three-year grace period to the taxpayers.
A tax payment grace period (postponement) of inheritance or gift tax levied on assets acquired through business succession for individual business operators
The 2019 Tax Reforms have introduced a grace period for the payment of inheritance or gift tax in the event that a successor acquires certain business assets through inheritance or gifting and succeeds the respective business. The amount of tax deferred under the new rule is 100%. The qualified business assets include land, building, and certain depreciable assets. The new rule is similar to existing tax rules for corporate business succession, and, as in the case of a corporate business succession, a succession plan must be prepared and submitted to the designated district authorities.
The above changes are effective for business assets acquired between 1 January 2019 and 31 December 2028.
Extension of the period of tax-exempt lump-sum gifts for marriage, childcare, or education
Special gift tax exemptions that are available until April 2019 for cash gifts into a Japanese trust intended to cover costs associated with children’s education, marriage and household expenses, and childcare will be revised and extended by another two years. While extending the eligible period, the 2019 Tax Reforms have also introduced a new income limit to the recipients of these gifts. If the donee’s annual income for the year immediately preceding the year of gift exceeds JPY 10 million, the tax exemption will not apply. Also, educational costs other than those paid to schools (such as a tuition for after-school lessons) are generally not qualified for the exemption if the donee is 23 years old or older.
The above changes on the income threshold are effective for gifts paid into a qualified trust on or after 1 April 2019. The above changes on the qualified educational costs are effective for educational expenses paid on or after 1 July 2019.
Inheritance and gift tax law changes following amendments to the Civil Code to lower age of majority from 20 to 18 years old
Following the above change, inheritance and gift tax rules will be adjusted to reflect 18 years of age instead of 20. Two examples of these changes are as follows:
- The age of the child at which an heir is eligible for child credit on inheritance tax is adjusted from younger than 20 years to younger than 18 years.
- The requirements to qualify for the special system of 'settlement of taxes at the time of inheritance' where taxpayers can make irrevocable election to integrate inheritance and gift tax will be impacted with the change in age of lineal descendants from 20 to 18 years or older.
The changes will come into force for bequests and gifts made from 1 April 2022.
2018 Japan Tax Reforms
The 2018 Japan Tax Reforms include the following changes to Japanese individual income tax.
Decrease in the earned income deduction for employees by JPY 100,000 and the income level deduction cap reduced to JPY 1.95 million
Resident taxpayers are eligible for a deduction against earned income (which is a so-called ‘earned income deduction’) based on the percentage of their employment income. Currently, the earned income deduction has a minimum deduction amount of JPY 650,000, and it is capped at JPY 2.2 million.
Under the 2018 Tax Reforms, the earned income deduction for employees will be decreased by JPY 100,000, and the income level deduction cap will be reduced to JPY 1.95 million; however, the reduced deduction cap will not apply to taxpayers with dependent children under age 23 or those taking the special disability exemption.
The following changes, effective January 2020, will apply to the earned income deduction for a permanent resident and/or non-permanent resident employee:
|Taxpayer’s annual salary||Earned income deduction|
|JPY 1,625,000 or below||JPY 550,000|
|Over JPY 1,625,000 and up to JPY 1,800,000||Gross income x 40% - JPY 100,000|
|Over JPY 1,800,000 and up to JPY 3,600,000||Gross income x 30% + JPY 80,000|
|Over JPY 3,600,000 and up to JPY 6,600,000||Gross income x 20% + JPY 440,000|
|Over JPY 6,600,000 and up to JPY 8,500,000||Gross income x 10% + JPY 1,100,000|
|Over JPY 8,500,000||JPY 1,950,000|
For taxpayers with gross employment income over JPY 8.5 million with dependent children under age 23 or those taking the special disability exemption, the current rate (10%) will apply (up to gross employment income of JPY 10 million; the deduction is capped at JPY 2.1 million).
Increase in the personal exemption by JPY 100,000 but reduction of all personal exemptions at income levels between JPY 24 million and JPY 25 million and elimination of the personal exemptions for income levels over JPY 25 million
Resident taxpayers are entitled to a personal exemption for themselves (so-called ‘basic exemption’, which is currently JPY 380,000 for national tax and JPY 330,000 for local tax). Currently, there is no income threshold to be eligible for the basic exemption and all taxpayers can take the same level of exemption.
The following changes, effective January 2020, will apply to personal exemptions. For the first time, the basic exemption will be abolished for taxpayers with total annual income over JPY 25 million.
|Taxpayer’s total annual income||‘Basic exemption’ for national tax||‘Basic exemption’ for local tax|
|Below JPY 24,000,000||JPY 480,000||JPY 430,000|
|Over JPY 24,000,000 and up to JPY 24,500,000||JPY 320,000||JPY 290,000|
|Over JPY 24,500,000 and up to JPY 25,000,000||JPY 160,000||JPY 150,000|
|Over JPY 25,000,000||None||None|
Decrease in the public pension income deduction by JPY 100,000 and an introduction of a cap on the deduction at JPY 1,955,000 for seniors whose annual pension income exceeds JPY 10 million
Taxpayers are entitled to a deduction against qualified public pension income. Currently, this deduction is not limited by the taxpayer’s income level.
Under the 2018 Tax Reforms, the public pension income deduction will be capped at JPY 1,955,000 when the gross public pension income reaches JPY 10 million. Furthermore, the public pension income deduction will be reduced for taxpayers with income other than public pension income of over JPY 10 million in two phases (for further details, please see the footnotes in the table below).
The following changes, effective January 2020, will apply to the public pension income deduction:
|Recipient’s age (years)||Amount of pension received (A)||Public pension income deduction|
|Under 65||Below JPY 1,300,000||JPY 600,000|
|Over JPY 1,300,000 and up to JPY 4,100,000||(A) x 25% + JPY 275,000|
|65 and above||Below JPY 3,300,000||JPY 1,100,000|
|Over JPY 3,300,000 and up to JPY 4,100,000||(A) x 25% + JPY 275,000|
|All ages||Over JPY 4,100,000 and up to JPY 7,700,000||(A) x 15% + JPY 685,000|
|Over JPY 7,700,000 and up to JPY 10,000,000||(A) x 5% + JPY 1,455,000|
For individuals who have income other than public pension income of over JPY 10 million and up to JPY 20 million, the pension deduction from the table above is reduced by JPY 100,000 (the maximum deduction of JPY 1,855,000).
For individuals who have income other than public pension income of over JPY 20 million, the pension deduction from the table above is reduced by JPY 200,000 (the maximum deduction of JPY 1,755,000).
Decrease in the ‘blue form’ tax return deduction by JPY 100,000 and increase in the ‘blue form’ deduction by JPY 100,000 for filing and maintaining tax returns and accounting documents electronically
Under the 2018 Tax Reforms, effective January 2020, the maximum ‘blue form’ deduction for taxpayers with business income will be reduced by JPY 100,000 from the current JPY 650,000. As an incentive for taxpayers to file 'blue form' tax returns electronically, taxpayers who do so or maintain accounting documents electronically will receive an additional JPY 100,000 'blue form' deduction (i.e. JPY 650,000 in total).
Japan non-permanent residents to be taxed on sale of personal property outside of Japan
Effective 1 January 2017, there is an increase in scope of taxation of non-permanent resident taxpayers of Japan. Income from the sale of personal property located outside of Japan will be taxable in Japan even if the proceeds are not remitted to Japan.
The 2017 Japan Tax Reform provided an exemption on the issue of capital gains taxation on certain foreign-listed securities sales for non-permanent residents, but the new rule on income from sale of other personal property will still apply.