Key points when foreigners apply for permanent residency in Japan(①): “Exit Tax from Japan” on unrealized capital gains.

According to a report by the Nikkei Shimbun on August 21st, the Japanese government will take budgetary measures to allow foreign residents to apply for permanent residence online from fiscal 2025.

The government aims to attract more foreign workers and expects to increase the number of applications for permanent residency.

Indeed. We will see increased applications.

However, applying for permanent residence is a tough decision for foreign nationals.

I am receiving more questions from foreigners in Japan on work visas, like skilled professionals and business managers, asking about switching to a permanent visa (i.e. Long-Term Resident, etc. )and its potential tax implications.

Foreign nationals may face:

  • inheritance and gift tax on properties outside Japan,
  • and income tax on unrealized capital gains on financial assets, etc., if they move out of the country.

Many are aware of the former, but few know about the latter.

This blog provides information about the latter from the perspective of foreign nationals considering switching visa status.

Taxation on unrealized gains of financial assets when leaving Japan: Exit Tax from Japan.

The seller's country usually imposes a capital gains tax when selling securities or other specific assets.

However, some individuals have avoided this by transferring assets with huge unrealized gains to zero or low-tax countries.

In July 2015, Japan introduced a taxation system to impose income tax on stipulated residents(※)moving out of the country who own securities, unsettled derivatives, or other financial assets worth 100 million yen or more on a market value basis, even if there was no actual transfer of these assets at the time of leaving.

(※)The Income Tax Act stipulates that individuals who have a "Jusho" (domicile) or own a "Kyosho" (residence) continuously for one year or more are classified as residents.

The financial assets subject to this rule include those owned outside of Japan.

Foreigners may find this harsh.

Additionally, holdings with unrealized losses or securities in NISA accounts are counted toward the 100-million-yen threshold.

Type of Visa Categories and Exit Tax from Japan

Let’s put the 100-million-yen threshold aside.

Residents subject to this tax are those with a domicile or residence in Japan for more than five years within ten years before leaving Japan, excluding the duration of staying in Japan under visa categories listed in the Attached Table 1 of the Immigration Control and Refugee Recognition Act.

The point here is the latter part.

The law defines visa categories based on status of activity or residence status, as shown in Tables 1 and 2.

◯ Status of residence list
[Table 1:status of activity]

Employment Qualification, etcDiplomacy, Official, Professor, Highly Skilled Professional, Business Manager, Medical Services, Researcher, Specified Skilled Worker, Technical Intern Training, etc.
non-working status, etcCultural activities, Temporary Visitor, Student, Trainee, Dependent
OtherDesignated Activities

[Table 2:residence status]

Long-Term Resident,Spouse or Child of Japanese National,Spouse or Child of Permanent Resident,Long-Term Resident

Let‘s assume a foreign national, Mr. A, who renews his residency status listed in Appendix 1 and continues living in Japan.

His stay does not count towards the period of domicile or residence in Japan for this tax purposes.

Next, let's consider this scenario: Mr. A can become a "Long-Term Resident" in Table 2 when his residency in Table 1 expires or if he marries a Japanese national and becomes a "Spouse of Japanese National."

In either case, the duration of his stay in Japan with visa status in Table 2 shall be counted as the period of having a domicile or residence in Japan.

So, if he has lived in Japan for over five years in the past ten years, he will be taxed unless the total value of his related assets is less than 100 million yen.

Note: If a person's residence status was listed in Appended Table 2 before June 30, 2015, that time will not count towards their residency in Japan.
It was before the implementation of this taxation.

Additional information about the Exit Tax from Japan

Individuals leaving Japan and subject to taxation can defer tax payments for up to 5 or 10 years under certain circumstances.

They must appoint a tax representative in Japan and provide a collateral deposit to cover tax liabilities.

If they return to Japan within five years (or ten years in some cases) after moving out, they can cancel taxation on qualified assets they still hold.

In addition, individuals under the tax deferral can receive foreign tax credits in Japan if they sell securities and pay income tax in the country they moved to.

However, I will not elaborate on the specifics of these topics at this time.

At the end

Thank you for reading until the end.

It would be helpful to have online procedures for residency status applications, including permanent residence visas(I wonder how much support there is in languages other than Japanese).

On the other hand, there seems to be little information about how a foreign national's choice of residency status impacts their taxes.

In a future opportunity, I would also like to discuss how it affects inheritance tax.

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