Japanese Exit Tax on stocks

I was asked about EXIT Tax of Japan recently and made some recap. EXIT Tax can potentially be applicable to rich people who has foot steps in both Japan and other countries and owns Japanese stocks.

Capital gain on Japanese Stock are free of tax for non-resident

Capital gain from stock transactions are tax free for non-resident (listed stocks). If one is a Japan resident, it is taxed at the flat tax rate of 20.42%. Capital gain is only become taxable for residents when it is realized (sold). It means that you are not taxed until you sell your stock, if you are a resident. You are never taxed on capital gain from Japanese stock if you are a non resident.

Here it raises a question. What if I have Japanese stock, I move abroad and then sell the stocks?

Marginal case – EXIT Tax

If you have more than 50 million yen in stock and change your tax status from a Japan resident to a non-resident, your stocks are to be deemed as sold and the difference between your cost and its market price are taxed with capital gain tax.

But this rule has an exception. You will be NOT taxed if you are non-permanent resident (a tax terminology, meaning you have been in Japan more than 5 years in the last 10 years). It seems that this exception is meant give a room for non residents, in line with the other income tax exception that allows foreign source income for non-permanent residents to be exempt.

A person who has residences both in Japan and your country, and therefore, there is a chance to be regarded as either a Japan resident or non-resident, needs to be careful in determining when to become a non-resident from a resident for a tax purpose.

居住者と非居住者の区別の仕方

I will write about the distinction between a resident and non-resident soon.

Opening up a branch or starting a company in Japan

It is not difficult to open up a branch or a company here in Japan now a days.

To open a branch

You need to appoint a Japan resident as the representative person of the branch. This person has to be a resident of Japan but his or her nationality does not matter. This person does not have to be a Japanese.

You need to have an affidavit that includes information of the headquarter company such as:

company name,
established date in home country,
address,
capital,
name of director,

and information that are related to its Japanese operations such as:

office address of the Japan office,
date of establishing the branch,
name of the representative person,
method of public notice (gazette or web).

Based on the above information, you need to prepare application form. The template and sample are available in the ministry’s website.

Ministry of Justice website

The other document required is a seal certificate, if this representative is a Japanese or resident with his seal registered or she is not Japanese nationality without his seal registered,

The registration tax is 90,000 Japanese yen and fee to be paid to lawyers or accountants are in average 100,000 to 150,000 yen.

It will take approximately 10 business days to process and complete the registration by the government. It is very simple, isn’t it?

Tax consideration – corporate tax

The tax implication is different between setting up a branch and a corporation. A branch is a part of the company that will create the branch in Japan. Therefore, all the loss or income will be taken into account for your tax calculation in your home country (HQ). In another word, it will be consolidated. On the other hand, if it is a company (subsidiary), it is a legally separate entity. Tax calculation is to be done separately. Expenses or income incurred by the subsidiary should not affect P and L of the parent company until dividends are paid.

Consumption tax

Then you may want to think about consumption tax implication. As a default, small and medium sized corporations (SMEs) are not required to file for consumption tax. But in certain particular situations, this is not the option for you. By becoming a tax filer of consumption tax, you may benefit by getting refund.

Here are more detailed information.

Tokumei Kumiai (TK) what is the point?

You might have heard of the term, Tokumei Kumiai (TK) before if you are in investing industry for some time already. What is it? Is it a good investment vehicle to create one for me?

Overview

TK is not a kind of standard partnership that you would imagine where people have equal voting right based on the invested amount by each of them. It has Principal and Anonymous Investors whose roles are clearly segregated each other.

Principal is a person (either natural person or a company) who accepts investment from investors and manage. She decides the investment strategy like what to buy and what to sell. The ownership of the assets purchased by investment belong to her name.

Anonymous investors will provide capital to Principal. They do NOT have direct control over the assets nor have authority to determine the investment strategy of Principal. They give up their ownership of the investments like when you invest your money on shares of a newly established company. Anonymous investors are not necessarily silent and provide their investment opinions to Principal but they do not have right to touch their assets. They merely receive dividends when the TK makes profit.

TK is merely a private agreement between the two sides, the ownership of the asset belongs to Principal. Therefore, in case Principal falls into insolvency, creditors of Principal can come to the asset of TK. Its assets are not as segregated as you would think like Trust.

tokumei_kumiai_e

Tax

Dividends paid by TK is to be considered as deductible expense for Principal. Therefore, there is no income tax in TK, technically speaking. Principal pays tax on her profit from TK after deducting all the TK dividends as expense.

TK Investors pay income tax in form of withholding tax. Because it is regarded as similar to dividends from shares of a company, the tax rate is flat 20.42%. Because this is not dividends from shares, tax treaties between Japan and other countries are not applicable unless there is special articles.

But from an investor’s point of view, the tax rate of 20.42% is much cheaper than corporate tax, which can reach to 40%. Approximately.

Risks

Because investors do not have direct authority to control their assets, you would think you may want to create a company to become Principal for yourself.

That is a typical risk. By definition, Principal of TK and anonymous investors are separate parties. If the tax authority thinks that Principal comes from the same interest group as Anonymous Investors, they will probably deny its TK scheme and put corporate tax on TK income “before” deducting its dividends, Just as on a normal company. Dividends will not be considered as deductible TK dividends but it will only be normal dividends from a company.

Tokumei Kumiak – TK

Tokumei Kumiai (or TK for short) is a popular structure as an investment vehicle among foreign investors. The direct translation of TK is “anonymous partnership”. It consists of Principal and investor-partner(s). All the assets and the liabilities directly belong to Principal. Investor-partners do hold any rights to its business assets nor take responsibility to its creditors. That is why the structure is called “anonymous partnership”.

There should be two reasons to use the structure but one depends on a country where the investment money comes from.

1) The first reason is its lower tax rate. It is 20.42% withholding tax only, which is better than the tax rate for a company, which is about 30%.

2) The second reason is that a TK is regarded as a “Pass Through” entity. Because TK is a kind of paratnership, loss incurred in a TK should be allowed to allocate to each investors and deductible for the investors to the partnership. Although TK is regarded as a partnership in Japan, it may not necessrily be the case in oher countries. Because TK is legally hybrid nature of a company and partnership, some countries do not regard it as a partnership and thus its loss in the partnership is not deductible.

Points to consider

1) Principal and TK investors cannot be affiliated parties.
2) TK investor should not be involved in decision making process of TK.