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:
- 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.
- 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
- 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.
- 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.
Revisions of procedures for applying Income tax credit for Housing Loan Interest
The procedures for individuals who are seeking to apply for the special credit for income tax on housing loan interest are to be revised as follows:
- Application by individuals to financial institutions
An individual who wishes to apply for income tax credit for housing loan interest on or after January 1, 2023 is required to submit an application form (Application Form) to the financial institution which provides the housing loans, etc., stating the individual's name and address, MyNumber, and other relevant information.
- Submission of reports by financial institutions
Financial institutions which receive an Application Form must by October 31 of each year following the year in which the applicant obtains the income tax credit for housing loan interest (or, for the first year, the following January 31), prepare a report that covers the applicant’s information stated in the Application Form and the housing loan balance, etc. as of December 31 of that year, and submit it to the designated tax office of the financial institution's head office. The financial institutions are also required to record the details of each individual who filed applications and maintain such records.
As a result of the above changes, starting from January 1, 2023, individuals who seek to apply for the income tax credit for housing loan interest through their year-end adjustments, the certificate of year-end balance of borrowings related to housing loans will no longer be required to be attached to a special tax return for their year-end adjustments.
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.
2021 Japan Tax Reforms
Extended deadline due to COVID-19 impact for additional Home Loan Credit
Due to the continuing impact of COVID-19, the application period for the Home Loan Credit has been extended from the end of 2021 to the end of 2022. Furthermore, the scope of houses covered has been expanded to include smaller sized homes. The previous Home Loan Credit is applicable to homes over 50 m², with signed purchase contracts by September or November 2020 (depending on building type) and moved into by the end of 2022. The 2022 update is applicable to homes that meet the below criteria:
- Contract for properties that suffered a 10% consumption tax and is signed between the following dates:
- For newly constructed properties: Contract signed between 1 October 2020 and 30 September 2021.
- For purchasing existing or reformed properties: Contract signed between 1 December 2020 and 30 November 2021.
- Total floor area meets the following criteria:
- Income over 10 million Japanese yen (JPY): Total floor area is over 50 m².
- Income of JPY 10 million or less: Total floor area is over 40 m² and under 50 m².
- Homeowners move in by the end of 2022.
If the above conditions are met, taxpayers can claim the Home Loan Credit for upwards of 13 years.
Adjustment of taxation on retirement income (effective 1 January 2022)
In light of the current status of retirement benefits and the labour market fluidity, taxation of earned retirement income has been adjusted to the amount over JPY 3 million after the retirement income deduction that is paid to an individual (who is not a director) who has not more than five years of service by not qualifying for the 50% income exclusion.
Previously, the following formula has been used to calculate retirement income:
- Taxable retirement income = (gross retirement income - retirement income deduction) x 50%
Under the new regulations, for employees with five years or less of service, the taxable portion of retirement income after the retirement income deduction exceeding JPY 3 million is no longer calculated at a rate of 50%.
The formula is separated as follows for those who receive JPY 3 million or less, and those who receive more:
- JPY 3 million or less after retirement income deduction:
- Taxable retirement income = (gross retirement income - retirement income deduction) x 50%
- Over JPY 3 million after retirement income deduction:
- Taxable retirement income = JPY 1.5 million + (gross retirement income - [JPY 3 million + retirement income deduction])
- The JPY 1.5 million is the retirement income related to the portion of gross retirement income under JPY 3 million.
Updates to the self-medication tax deduction policy
The self-medication tax deduction policy was introduced as a way to promote health and prevent diseases. The deduction was available for individuals whose medical expenses on switch over-the-counter (OTC) drugs exceeded JPY 12,000, upwards to a maximum of JPY 100,000.
The update to the self-medication deduction policy will place focus more on effective drugs, simplify the procedure for application, and provide an extension of five years. In particular, less effective switch OTC drugs will be excluded, while drugs that show high efficacy will be included even if they have ingredients out of the scope of switch OTC ingredients.
The specifics are currently being discussed through the Ministry of Health, Labour, and Welfare's (MHLW’s) Expert Study Group on the Promotion of Self-Medication.
Tax exemption for government-provided childcare subsidies (effective for 2021 Japan Tax Return and onwards)
Childcare subsidies received from the government and local municipalities are exempt from taxation. The scope is limited to fees related to childcare facilities and services.
The following scope of services is included:
- Subsidies for the use of babysitters.
- Subsidies for the use of unlicensed childcare facilities.
- Subsidies for the use of facilities that care for children, such as temporary care and sick children’s care.
Subsidies used in tangent for the above services are also included (e.g. life support service, housework support, transport costs).
Revision of taxation on interest on bonds issued by a family corporation
Interests on corporate bonds issued by a family corporation that is paid to 'individuals with a special relationship to the corporation' and their relatives, etc. will be included as ordinary income instead of taxed separately. In addition, redemptions of bonds issued by a family corporation to be paid to individuals and their relatives, etc. will also be included as ordinary income.
'Individuals with a special relationship to the corporation' refers to individuals who own more than 50% of the outstanding shares of a corporation.
This amendment will apply to interest and redemption of bonds payable on or after 1 April 2021.
Additional requirements for the special tax exemption for foreign partners in investment partnership agreements (effective 1 April 2021)
Non-residents who are partners in an investment partnership agreement can apply to receive special tax exemption on income attributable to permanent establishments (PEs) held through said partnership. The tax update has added requirements to the special provision so that non-resident partnership holders can apply if the below are met:
- The investor is a limited partner.
- The investor does not engage in any business activities within the partnership.
- The investor’s ownership percentage is less than 25%.
- The investor is not involved in any special relationships with the general partners of the partnership.
- In the event that the partnership does not conduct business through PEs, the investor does not have any income attributable to PEs.
Tax treatment of carried interest income
The Japan Financial Services Agency issued a notice, along with an associated checklist and calculation sheet, to provide more clarity on when they believe carried interest income could be taxed separately as capital gains income.
Inheritance and gift tax exemption on overseas assets transferred by foreigners residing in Japan (effective 1 April 2021)
In an effort to promote the employment of highly skilled foreigners in Japan, the gift and inheritance tax laws have been adjusted to reduce the scope for gift and inheritance tax on transfers of foreign assets between foreign nationals. Effective 1 April 2021, the transfer of overseas assets from foreign nationals, without regard to their length of period of residence in Japan, to 'temporary foreigners' or foreigners outside of Japan is exempt from Japan gift and inheritance tax if the foreign national transferor holds a Table 1 visa.
This updated exemption and disregard with respect to the length of period of residence in Japan does not apply to foreign national resident recipients of gifts and inheritances of overseas assets. Foreign national resident recipients still need to have had jusho in Japan of not more than 10 years out of the past 15 years and hold a Table 1 visa in order to be considered 'temporary foreigners' and be exempt from Japan gift and inheritance tax on overseas assets received from foreign national transferors. Also, to clarify and confirm, the updated law does not provide an exemption on the transfer of overseas assets if either the foreign national resident transferor or transferee holds a Table 2 visa. This continues to be unchanged from before.
Extended gift tax exemption for real estate acquisition-based funds (effective 1 April 2021)
The gift tax exemption for real-estate acquisition-based funds (for real estate suffering consumption tax at 10%) set from April 2020 to March 2021 has been extended to last until the end of March 2021. The exemption, which was initially only available for homes with a total floor area of 50 m² or more, has also been expanded to include homes of 40 m² or more, provided the owner’s annual income is JPY 10 million or less.
The prior limit of exemption of JPY 12 million for earthquake-resistant, energy-saving, and barrier-free housing and JPY 8 million for any other housing has been raised to JPY 15 million and JPY 10 million, respectively, starting April 2021.
Revision of gift tax exemption on education, marriage, and childcare funds (effective 1 April 2021)
In an attempt to prevent the usage of the gift tax exemption as a means of tax-saving, the following revisions have been made, and the applicable period has been extended for two years until 31 March 2023.
- For lump-sum gifts of education, marriage, and childcare funds, regardless of the number of years that have passed since the gift was made, the balance at the time of the donor’s death will be added to the total of inherited assets.
- If the recipient is a grandchild of the donor, a 20% surtax will be applied to the inheritance tax on the balance at the time of the donor’s death. The 20% surtax will not be applied to cases where the heir is under 23 years of age or is enrolled in school.
Revision of the maximum number of months for lump-sum withdrawal payment from pension insurance for foreign workers (effective 1 April 2021)
In light of the 2019 addition of the Specified Skill 1 visa (maximum period of stay of five years) and the increasing number of foreign nationals staying over three years in Japan, the maximum number of months possible for lump-sum withdrawal under the National Pension and Employees’ Pension Insurance has been raised from 36 months (three years) to 60 months (five years).
Prior to the update, individuals who leave a company could only receive a maximum of 36 months’ worth of lump-sum withdrawal payment no matter the length of employment. The update now allows a maximum of 60 months’ worth of lump-sum withdrawal payment.
As before the update, the withdrawal request may be made within two years from the date of residency ceasing in Japan.