Hello, this is Yoshio Yamaguchi of YG international tax accounting firm.
I would like to see when non-permanent residents will be taxed in Japan when they transfer their shares and earn income. Simple question, but the answer would be unexpectedly complicated.
Non-permanent residents are individuals who do not have Japanese nationality and who have had an address or residence in Japan within the past ten years for a total of 5 years or less (Article 2, Paragraph 1, Item 4 of the Income Tax Law).
The scope of taxation for non-permanent residents is as follows;
(1) Income other than foreign source income (non-foreign source income)
(2) Foreign source income paid in Japan or remitted from abroad
That is, in principle, they are not taxed if the income is a foreign source, and they are taxed except on foreign source income.
The transfer of shares generating foreign source income is limitedly enumerated in the Income Tax Law, so if it falls under this list, it will not be taxed in Japan; otherwise, it will be subject to tax in Japan.
The transfer of shares listed as foreign source income is one of the following:
1) Certain transfer of shares in the foreign financial instruments market (Article 7.1 (2) of the Income Tax Law, Article 17 (1) of the Enforcement Order)
2) Certain transfer of shares issued by a foreign corporation that will be subject to tax in that country where the foreign corporation’s head office is located (Article 225-4, Paragraph 1, Item 4 of the Income Tax Act enforcement order)
3) Transfer of shares of foreign real estate related corporations (Item 5)
4) Transfer of shares of corporations that own or operate golf courses outside Japan (Item 6)
5) Transfer of the Right to use golf courses and other facilities outside of Japan (Item 7)
In this article, we will look at the detail regarding 1) certain transfer of shares in the foreign financial instruments market.
First, the stocks here include both shares issued by Japanese companies and shares issued by foreign companies (Article 17, Paragraph 1 of the Ordinance for Enforcement of the Income Tax Law) Parentheses).
Next, the transfer of shares in the foreign financial instruments market means the following;
A: Transfer in the foreign financial instruments market
B: Transfer which is made by consignment to foreign financial instruments business operators
C: Transfer that is outsourced to an account provided by a foreign financial instruments business operator, etc.
“Foreign financial instruments business operators” include foreign securities companies (foreign corporations) as well as foreign branches of Japanese securities companies (domestic corporations). On the other hand, a transfer by a Japanese branch of a foreign securities company, etc. or a domestic sales office of a Japanese securities company, etc. does not correspond to a transfer by outsourcing to a “foreign financial instruments business operator” (Commentary on Ministry of Finance 2017 Tax Revision).
Foreign-source income differs depending on the resident status and the timing the shares were acquired.
|Purchase withing a non-permanent resident period||Purchase within other than non-permanent resident period|
|Purchase within 10 years|
(d) Purchase after April 1, 2017
→ Non-foreign source income (taxable)
(a) Foreign source income (Not subject to tax)
(c) Acquired before March 31, 2017
→ Foreign source income (Not subject to tax)
|Purchase more than 10 years ago||(b) Foreign source income (Not subject to tax)|
Even if “foreign source income”, it will be taxable if it is paid domestic or remitted from abroad.
This table shows the provisions of Article 17 (1) of the Income Tax Act Enforcement Ordinance, Article 3 of the Supplementary Provisions (March 31, 2017), and Basic Circular 7-1.
How to read the above table.
(a) If you acquired the shares during a period of other than a non-permanent residence. Regardless of how many years ago you purchased it, the income from the transfer is foreign source income and is not taxable. (the income will not be taxed if you purchased the shares before you become a non-permanent resident).
(b) Acquisition of shares during the period of non-permanent residents and the purchase was more than 10 years before the transfer. The income from the transfer is foreign source income and is not subject to tax. (the income will not be taxed if you purchased the shares 10 years ago even though purchased after becoming a non-permanent resident.
(c) Acquisition of shares during the period of non-permanent resident and acquisition within 10 years before transfer and purchase before March 31, 2017. The income from the transfer is foreign source income and is not subject to tax.
(d) Acquisition of shares during the period of non-permanent resident and acquisition within 10 years before transfer and purchase after March 31, 2017. (Roughly, transfers of shares acquired after coming to Japan that were acquired relatively recently are taxed in Japan).
To summarize, the transfer of shares issued by a foreign corporation, whether listed or unlisted, would be subject to tax in Japan if the capital gain is not taxed abroad. Shares listed on foreign markets would be taxed in Japan if they were acquired on or after April 1, 2017, during the period of the non-permanent resident.