Naturalizing for Taxes

[cooper]

I'm American, getting close to 40, and have a reasonable income (around JPY 40m) in Japan. I am anxious about taxes and the US and Japan not recognizing various tax-advantaged vehicles (IRAs, NISA, etc.). I've always told myself that it's good to have a US passport "just in case" something happens, or I want to move home someday. With a house, kids, and an entire life in Japan, the chances of that happening seem slim. Also, with my skills, if I did want to go to another country, I could do that through an employer. I've spent half my life in Japan (including some schooling) and am fluent in Japanese, so much of my identity is tied up in Japan now, too.

The new NISA makes giving up my citizenship and naturalizing to Japan more tempting. Like many of my colleagues, I also want to make a KK to manage personal assets to reduce my tax burden.

Has anyone here given up their US citizenship solely on the merits of taxes? Were there any surprises? Or regrets (not just financially)?

[RetireJapan]

Great question, hope we get some answers. You might also check out the Turning Japanese website, they have lots of case studies: https://www.turning-japanese.info/

[adamu]

I don't know what your visa status is but if it's not a "table 2" one, the exit tax could be a consideration (although it doesn't sound like you're planning on exiting).

https://retirewiki.jp/wiki/Exit_tax

[Tkydon]

So, you currently only have US Citizenship?

Do you have Japan PR?

Whether you have Japan PR - Eijuken - or not, if you have been in Japan for more than 5 years in the last 10 years, you are a Permanent Resident for Tax Purposes (not related to your Immigration Status).

If you were to Naturalize to become a Japanese Citizen, you would have to relinquish all other Nationalities / Citizenships. (Some people apparently do not, but there is the risk of getting caught and having Japanese Citizenship revoked.)

US does not make it easy to relinquish US Nationality, and you may be on the hook for Exit Tax in the US, and possibly ongoing tax reporting obligations for 10 years after relinquishing US Nationality, if the IRS determines that you are doing so solely for Tax purposes.
You should consult a professional.
(I regularly see ads on FaceBook. I will post if/when I find them)

As far as income tax goes, being Tax Resident in Japan, Japan has first call on your taxes. You need to file a US Tax Return every year, but probably do not need to pay any tax in US due to the Foreign Earned Income Exemption (FEIE). If you do have to pay tax in the US, you should be able to claim the Foreign Tax Credit in Japan for the taxes paid in the US under the Japan US Tax Treaty to avoid double taxation.

https://www.mof.go.jp/tax_policy/summar ... _ST_en.pdf

However, as a US Citizen you will probably find it difficult to invest in Japan as Japanese Finance Firms do not want to have to deal with the US reporting obligations, and you need to be aware of the restrictions under Passive Foreign Investment Company (PFIC) Rules.
There are many threads discussing these issues.

As you already know, Roth Plans and NISA may be Tax Free in their respective countries, but are not Tax Free in the other country.
They should be Post-Tax In, Tax Free Out, but instead they become Post-Tax In, Taxable Out, so no different to a regular Investment or Tokutei Account.

Tax Advantaged Pension Investment Plans on the other hand are deductable against you Taxable Income, so are Tax Free In, Taxable Out, but at a much lower marginal rate of tax in retirement, if you can work out how to use them and especially work out how to avoid PFIC.
You should consult a professional specializing in US Japan investments and taxes.

[SLW]

In what way does Japan not recognize US retirement accounts? The technical explanation of the treaty by the US Treasury states the IRAs (and all other similar accounts) are considered “Pension funds” under the treaty (see https://www.irs.gov/pub/irs-trty/japante04.pdf Page 11). While it is not the opinion of the NTA, it is clearly what the US Treasury understood it to mean when the tax treaty was signed. This would imply that IRA’s and the like would not be an issue for the NTA until they start distributing, at which point taxes would be due. The only problem for a US resident of Japan is that you would not benefit from the Roth IRA tax free treatment of distributions. Japan would levy taxes on that. Seems like giving up citizenship for such a small thing is a bit extreme; especially given the exit tax the US would probably hit you with. Most high income earners I know leave Japan - since the tax regime is quite bad for high net worth people - not the other way around.

[cooper]

Great question, hope we get some answers. You might also check out the Turning Japanese website, they have lots of case studies: https://www.turning-japanese.info/

Thanks, I've looked into some of the information there. I'm curious to see if there are normal/average people who so this. I'm no Donald Keene, JR Sakaragi or one of those "I'm Japanese why don't you accept it" weirdos on the internet.

I don't know what your visa status is but if it's not a "table 2" one, the exit tax could be a consideration (although it doesn't sound like you're planning on exiting).

https://retirewiki.jp/wiki/Exit_tax

I'd be a target for the Exit tax (if I had enough assets), but I plan to retire here.

So, you currently only have US Citizenship?

Do you have Japan PR?

Yes, I only have US citizenship and I'm a PR. I've been here for around 20 years.

Whether you have Japan PR - Eijuken - or not, if you have been in Japan for more than 5 years in the last 10 years, you are a Permanent Resident for Tax Purposes (not related to your Immigration Status).

If you were to Naturalize to become a Japanese Citizen, you would have to relinquish all other Nationalities / Citizenships. (Some people apparently do not, but there is the risk of getting caught and having Japanese Citizenship revoked.)

US does not make it easy to relinquish US Nationality, and you may be on the hook for Exit Tax in the US, and possibly ongoing tax reporting obligations for 10 years after relinquishing US Nationality, if the IRS determines that you are doing so solely for Tax purposes.
You should consult a professional.
(I regularly see ads on FaceBook. I will post if/when I find them)

As far as income tax goes, being Tax Resident in Japan, Japan has first call on your taxes. You need to file a US Tax Return every year, but probably do not need to pay any tax in US due to the Foreign Earned Income Exemption (FEIE). If you do have to pay tax in the US, you should be able to claim the Foreign Tax Credit in Japan for the taxes paid in the US under the Japan US Tax Treaty to avoid double taxation.

The FEIE is good, but it runs out and I've ended up paying a few thousand dollars and also have to pay a CPA specializing in expat taxes which costs money too... If I try to reclaim the tax, do I do that after my kakutei shinkoku? I though I always had to pay the "difference" in the US.

https://www.mof.go.jp/tax_policy/summar ... _ST_en.pdf

However, as a US Citizen you will probably find it difficult to invest in Japan as Japanese Finance Firms do not want to have to deal with the US reporting obligations, and you need to be aware of the restrictions under Passive Foreign Investment Company (PFIC) Rules.
There are many threads discussing these issues.

As you already know, Roth Plans and NISA may be Tax Free in their respective countries, but are not Tax Free in the other country.
They should be Post-Tax In, Tax Free Out, but instead they become Post-Tax In, Taxable Out, so no different to a regular Investment or Tokutei Account.

Tax Advantaged Pension Investment Plans on the other hand are deductable against you Taxable Income, so are Tax Free In, Taxable Out, but at a much lower marginal rate of tax in retirement, if you can work out how to use them and especially work out how to avoid PFIC.
You should consult a professional specializing in US Japan investments and taxes.

The limits on these pension investment plans are quite limited in contribution (24man?) and what you can invest in.

In what way does Japan not recognize US retirement accounts? The technical explanation of the treaty by the US Treasury states the IRAs (and all other similar accounts) are considered “Pension funds” under the treaty (see https://www.irs.gov/pub/irs-trty/japante04.pdf Page 11). While it is not the opinion of the NTA, it is clearly what the US Treasury understood it to mean when the tax treaty was signed. This would imply that IRA’s and the like would not be an issue for the NTA until they start distributing, at which point taxes would be due. The only problem for a US resident of Japan is that you would not benefit from the Roth IRA tax free treatment of distributions. Japan would levy taxes on that. Seems like giving up citizenship for such a small thing is a bit extreme; especially given the exit tax the US would probably hit you with. Most high income earners I know leave Japan - since the tax regime is quite bad for high net worth people - not the other way around.

I have some limited IRA accounts, but spoke with a financial planner who explained to me that it's better not contribute to it if I plan to retire in Japan because of the reasons that Tkydon mentioned. He told me that it'd get taxed as income, and it's better to invest in a taxable account because the capital gains tax would be lower.

That said, I don't want to leave Japan for tax reasons. I could make a lot more in the US, but I enjoy my life here and it's my home at this point, so I'd like to limit taxes.

[RetireJapan]

Well, I am thinking of naturalising as a UK citizen. There are absolutely no financial reasons to do so

[TokyoWart]

I have friends who gave up their US citizenship because of the difficult tax issues faced by expats. They were very high income earners and did so in order to gain Singapore citizenship and enjoy its better tax situation. They seem very happy with their choice, although they considered Japan to be an extremely high tax country and shortened their time here in order to avoid Japanese tax issues.

At the income level you mentioned you are likely a "covered expatriate" which makes the process more difficult and potentially expensive. As hinted in Tkydon's response, you do not want to give as your reason for renunciation avoiding future US taxes because that makes the process more adversarial.

https://www.irs.gov/individuals/interna ... iation-tax

[Tkydon]

In what way does Japan not recognize US retirement accounts? The technical explanation of the treaty by the US Treasury states the IRAs (and all other similar accounts) are considered “Pension funds” under the treaty (see https://www.irs.gov/pub/irs-trty/japante04.pdf Page 11). While it is not the opinion of the NTA, it is clearly what the US Treasury understood it to mean when the tax treaty was signed. This would imply that IRA’s and the like would not be an issue for the NTA until they start distributing, at which point taxes would be due. The only problem for a US resident of Japan is that you would not benefit from the Roth IRA tax free treatment of distributions. Japan would levy taxes on that. Seems like giving up citizenship for such a small thing is a bit extreme; especially given the exit tax the US would probably hit you with. Most high income earners I know leave Japan - since the tax regime is quite bad for high net worth people - not the other way around.

That is exactly what I meant.

US Social Security is taxable in Japan, but qualifies for the Public Pension Deduction of about Y1.2M per year...
US Government, Military and Federal Pensions are not taxable in Japan.
Article 18 Paragraph 2(a) refers.

https://www.mof.go.jp/tax_policy/summar ... _ST_en.pdf

"Article 18
2. (a) Any pension and other similar remuneration paid by, or out of funds to which contributions are made by, a Contracting State or a political subdivision or local authority thereof to an individual in respect of services rendered to that Contracting State or a political subdivision or local authority thereof, other than payments made by the United States under provisions of the social security or similar legislation, shall be taxable only in that Contracting State."

Whilst the US Japan Tax Treaty Article 17 states that the beneficial owner of a pension or annuity will only be taxed in the country of residence,

"ARTICLE 17
1. Subject to the provisions of paragraph 2 of Article 18, pensions and other similar remuneration, including social security payments, beneficially owned by a resident of a Contracting State shall be taxable only in that Contracting State.
2. Annuities derived and beneficially owned by an individual who is a resident of a Contracting State shall be taxable only in that Contracting State. The term “annuities” as used in this paragraph means a stated sum paid periodically at stated times during the life of the individual, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration (other than services rendered)."

Article 1 says that US Citizens will be taxed anywhere in the world.

"ARTICLE 1
4. (a) Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4) and, in the case of the United States, its citizens.

(b) Notwithstanding the other provisions of this Convention, a former citizen or long-term resident of the United States may, for the period of ten years following the loss of such status, be taxed in accordance with the laws of the United States, if the loss of such status had as one of its principal purposes the avoidance of tax (as defined under the laws of the United States)."

Disbursements of Roths and of NISA would be Tax Free in their country of origin, but taxable in the other country.

[Nancy]

I just relinquished US citizenship for Japanese and it is a bit time consuming but very doable. The good thing about Japan is that real estate does not increase in value, so your chance of being considered a covered expatriate is much lower than in other countries (if you have over 2 million dollars in assets the US government actually taxes you, besides having to pay the 2400 dollar fee. )You can't say that you are relinquishing for tax purposes though... but think of another reason to write on your application to the US government.