The Exit Tax

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This one crept under the radar somewhat. In 2015 the Japanese Diet approved a bill imposing an exit tax on ‘wealthy individuals’.

The amount to qualify as ‘wealthy’ is only 100m yen in worldwide assets. Not pocket change, but not the wealth of Croesus either.

Many RetireJapan readers could conceivably end up with assets equivalent to 100m, especially if the yen weakens in the future and overseas assets become much more valuable in yen terms.

It’s certainly something to understand and be aware of.

The good news is that cash and real estate don’t count towards the 100m limit, only stocks and similar assets that can end up with capital gains.

I was a bit sceptical of this tax until I thought about the scenario it is trying to prevent.

Presumably, before the exit tax, it would be perfectly legal and practical for someone to work in Japan, send all their savings to a tax-free jurisdiction like Singapore or Hong Kong, and invest in something that gains in value but doesn’t produce income.

Then when they are ready to cash out they could then move to Singapore, stop being resident in Japan for tax purposes, sell their assets, realize the capital gains tax free, then move back to Japan with their cash that they wouldn’t owe any tax on.

Bit of a no-brainer for anyone with enough assets.

I can understand why the Japanese government wants to prevent this scenario. Unfortunately, it’s also going to affect normal people who decide to stop living in Japan for other reasons.

So what is the exit tax? 

As far as I understand, the exit tax requires qualified people who are leaving Japan to calculate capital gains on their assets at that time and pay Japanese taxes on those ‘gains’.

When does it start?

It started in 2015, but will only apply to non-Japanese nationals after they have been here for five years from that date, so the first people will be affected in 2020 -get out before then if you need to 😉

It’s definitely worth talking to a professional if you think this will impact you. For those of use who may be impacted in the future, it’s worth keeping in mind.

I am curious as to how Japan is going to know about people’s (undeclared) worldwide assets, and whether they’ll bother going after people who barely qualify.

I guess we’ll find out after 2020 when some case studies will start emerging.

I’m not too bothered about this to be honest. I doubt I’ll end up with much more than 100m yen, and you could always tactically sell some assets to get under the 100m yen limit (as cash doesn’t count) just before leaving.

Any thoughts on the exit tax?

16 Responses

  1. I hate this and will take any steps necessary to avoid having to pay it. It really is disproportionately going to affect expats who are close to retirement and going back in their home countries but not wealthy enough to have a dedicated accountant find the loopholes for them. I also wonder if there is the possibility of double taxation occurring when the assets are actually sold in the home country.

    1. I was wondering about the risk of double taxation as well. If that were to happen then the best move would be to actually sell all your stock, realize the actual capital gain and buy the stock back immediately. This way you do pay the tax to Japan, but are clear on the broker’s paperwork to avoid being taxed a second time for that realized gain.

      1. Or just sell enough to get each family member under 100m.
        Unfortunately (?), I can’t see this ever being a serious problem for our family…
        Would be quite happy to have that kind of problem 😉

  2. Should not need to be too bothered by this tax in my personal opinion, since there are several legal loopholes to nullify it.
    The easiest way that comes to mind is to transfer assets to the Japanese spouse’s name, incorporate an offshore shell company in a no tax jurisdiction, or both.
    Another way would be to gradually rebalance into overseas rental real estate using the capital gains from the stock allocation in the portfolio, so as to keep dodge the 100m yen criteria.
    The pain comes if and when money needs to be wired into a bank account within Japan, therefore triggering income taxation. Then again, even that has various legal workarounds to dodge the taxman =)

  3. I guess the key is to remain under 100m for each family member. If you are over, do you pay the capital gains on all your assets? That seems a little harsh: 99 million = no tax, 100 million = 15% tax on all capital gains?
    In some ways I would like to have this problem, as it would mean my wife and I had over 200 million yen in shares. A nice problem to have 😉

    1. Assets are considered on a worldwide basis, not just those located in Japan, and the 100 million yen threshold is the aggregate of the covered assets held, not for each separate asset holding. Covered assets include:
      Securities (as defined in income tax law) (*3)
      National and municipal bonds
      Corporate bonds
      Tokumei-kumiai contracts
      Unsettled credit transactions and unsettled derivative transactions
      Cash and cash deposits, and non-financial assets such as real estate are not covered assets.
      (*3) The value of vested, but unexercised stock options and unvested Restricted Stock Units may be included in the definition of “securities”. Still waiting for written guidance from the tax authorities about the interpretation of securities for exit tax purposes.

      1. Yep, I took a look at that list and decided the only ones I am likely to ever own are stocks and bonds 😀

  4. Good Article thanks!
    “I am curious as to how Japan is going to know about people’s (undeclared) worldwide assets”
    Good point, but seems this is option is being gradually closed off; I received a letter from my bank in Jersey Channel Islands requesting permission to share my account info with tax authorites here in Japan.
    Seemed Jersey (and I presume all UK), have recently signed up to share account holder informaiton with other countries…

    1. “I am curious as to how Japan is going to know about people’s (undeclared) worldwide assets”
      –> Pretty sure you have a legal obligation to declare it on your tax return when your foreign assets are above 50M yen. So they already know.
      But you mention undeclared wealth: Personally I try to play by the rules and I would feel no victory in my path to financial independence if I achieved it by tricking the government (and ultimately the people of Japan). Just my 2 cents.

      1. Actually, aside from honesty, there is more. Blog post next week about international tax info sharing…

  5. That’s new (and scary). I wonder how that came to pass?
    I had a similar experience a few years ago when NatWest Online Stockbrokers suddenly closed my account after being contacted by the Japanese government.
    They chose to close my account rather than register with the authorities here and do paperwork (sound familiar, US citizens?).

      2. I guess it’s like banks and brokers here asking for My Number even though it’s not required for another couple of years… just trying to get ready in advance.
        I don’t like it though 😉

      3. Thanks for this link. Took a look and noted, with a temporary sigh of relief, that Singapore is not on that list of countries. I am sure it is only a matter of time but it is nice to know that my confidentiality is protected for the next few years at least.

      4. Neither is the USA, which is incredibly hypocritical after pushing FATCA and FBAR down everyone’s throats… 😉