Accumulating ETFs

[Fraussie]

Hi guys

I've been back in Tokyo for a little while now and I'm starting to think about Japan taxes. I haven't been in Japan for 5 years yet so I am only taxed on my Japan sourced income (lucky me!). Most of my retirement savings are invested in low costs ETFs outside of Japan - I've got an account with Interactive Brokers.

I'm getting a bit worried that those investments are going to generate tax liabilities when I hit the 5-year mark. I don't intend to sell unless I have to do so CGT should not be too much of an issue. I'm more worried about dividends. The ETFs I hold are accumulating ETFs (by opposition to distributing) - does that mean I won't get taxed on dividends in Japan on the basis that I never receive dividends? I know some countries treat accumulating and distributing ETFs in the same way arguing that dividends are dividends and that it doesn't matter whether they are automatically reinvested.

[RetireJapan]

That's a great question. My understanding is that accumulating ETFs, as they don't distribute dividends, do not result in a taxable event, and thus as long as you don't sell there is no need to report or pay taxes in Japan.

However, I am not 100% sure of that. Anyone know different?

[rasselbiluga]

Fraussie, did you eventually find out about that? As far as I understand, for Japanese investment trusts that reinvest internally (i.e. those with 0 yen distributions) you don't need to pay taxes as long as you don't sell. So it would make sense that the same applies for accumulating ETF hold with a foreign broker, as RetireJapan says. Does anyone know for sure that that's the case? I am considering to put parts of my portfolio into an ETF with a non-Japanese broker (for flexibility, since I am not sure how long I will stay in Japan), but would like to understand the tax implications first.

[TokyoWart]

These are not taxed in Japan until you sell the shares. It is one of the reasons they get recommended by Japanese financial advisors on Youtube videos. For US investors this is one of the characteristics of a PFIC which needs to be accounted for when filing US taxes so you are required to calculate the imputed dividend payment which was reinvested so this is generally a bad choice for US passport holders.

[rasselbiluga]

Very useful to know, thanks TokyoWart! My Japanese is not yet at a level to understand Japanese youtube videos

[Fraussie]

Thank you TokyoWart!

[Fraussie]

These are not taxed in Japan until you sell the shares. It is one of the reasons they get recommended by Japanese financial advisors on Youtube videos. For US investors this is one of the characteristics of a PFIC which needs to be accounted for when filing US taxes so you are required to calculate the imputed dividend payment which was reinvested so this is generally a bad choice for US passport holders.

@TokyoWart what do you call an accumulating ETF in Japanese? I'm trying to find some info on that in Japanese but can't seem to go anywhere with my basic Japanese.

[TokyoWart]

I think that would be 再投資型etf. I looked back over this thread and I think what I should have mentioned is that the usual advice is to choose that setting for mutual funds (投資信託) but when I look further now it looks like those are also being taxed when outside a NISA account. I found the following (in Google translate first then the original Japanese)*

We are often asked if there is a tax difference between receiving distributions and reinvesting, but there is no difference in the tax. As mentioned above, distributions are treated as once received for both "receipt" and "reinvestment", so if they are ordinary distributions, tax withholding will be applied in the same way.

分配金の受取と再投資で、税金面で違いはあるのかというご質問もよくいただきますが、どちらもかかる税金に違いはありません。前述の通り、分配金は「受取」でも「再投資」でも一度受け取った扱いとなるため、それが普通分配金であればどちらも同じように税金が源泉徴収されるためです。

https://www.chibabank.co.jp/blog/fund-dividend.html

[RetireJapan]

I think that would be 再投資型etf. I looked back over this thread and I think what I should have mentioned is that the usual advice is to choose that setting for mutual funds (投資信託) but when I look further now it looks like those are also being taxed when outside a NISA account. I found the following (in Google translate first then the original Japanese)*

We are often asked if there is a tax difference between receiving distributions and reinvesting, but there is no difference in the tax. As mentioned above, distributions are treated as once received for both "receipt" and "reinvestment", so if they are ordinary distributions, tax withholding will be applied in the same way.

分配金の受取と再投資で、税金面で違いはあるのかというご質問もよくいただきますが、どちらもかかる税金に違いはありません。前述の通り、分配金は「受取」でも「再投資」でも一度受け取った扱いとなるため、それが普通分配金であればどちらも同じように税金が源泉徴収されるためです。

https://www.chibabank.co.jp/blog/fund-dividend.html

That is very interesting. I wonder how funds like eMaxis Slim all-country (which don't pay out dividends at all, regardless of whether you choose reinvesting or distribution when you buy them) are treated?

[Fraussie]

This is so confusing. I've asked the tax accountant who is currently preparing my tax return whether one would have to include in their tax return dividends from accumulating ETFs and her answer is yes... Although I am not sure she understands what a accumulating ETF is. I tried to describe as best as I could that dividends are never paid into my brokerage account - she said that it does not matter. But again, her English is very limited and my Japanese is even more so...

I just don't know what weight to give to the advice... This is very annoying.