Japan's 5 Year Rule and Tax on Overseas Assets and Investment (2024)

Many people have a sinking feeling that they are supposed to declare overseas assets when living in Japan but aren’t 100% sure about how and why. The process is further undermined by a lack of motivation to pursue the potentially costly task, and the fact that the national tax authority, despite insisting upon compliance, is not forthcoming enough to write some of its demands in languages other than Japanese. If you have lived in Japan for more than 5 years you are, for the purpose of tax, a permanent resident (ironic, considering the government immigration office is not so forthcoming in giving you permanent resident status quite so quickly. The tax office however, is more accommodating to your urge to belong...). As a permanent resident you have reporting obligations. Even if you have not lived in Japan for 5 years, there may still be reporting requirements if you have substantial overseas assets or overseas investments. This is the basis of Japan’s “5 year rule”.

Learn More: How Can I Reduce My Tax Bill In Japan?

Japan’s 5 Year Rule & Overseas Asset Reporting (OAR)

There is a new requirement for those with assets outside of Japan with a monetary value in excess of 100 million JPY or foreign currency equivalent. Those living in Japan for 5 years out of the last 10 are required to submit an annual report to the tax office by March 15th, stating the value of said assets as of December 31st the preceding year.

DON’T FORGET: This includes property too, so if you own any property overseas you should consider the market value. For properties with mortgages outstanding, you should subtract your equity (the amount paid down on the mortgage) from the total value to illustrate your current ownership

This OAR is separate from an income tax return and accordingly needs to be submitted by all qualifying persons. Even those who are otherwise not working and submitting tax returns (e.g spouses, students, retirees).

Japan’s 5 Year Tax Rules – Assets And Liabilities Reporting Form (ALR)

Not new, but ongoing is the Assets and Liabilities Reporting form (Zaisan Saimu Chosho) which has to be filed by those with gross annual income in excess of 20 million JPY. Those who qualify for (/are caught under) OAR, do not have to declare the same assets twice, and instead will outline overseas assets in their OAR reporting. The Assets and Liabilities Reporting form came into place in 2015 and replaced the Details Of Assets And Liabilities Statement (Zaisan Saimu Meisaisho). The update in this instance was the stipulation that people with overseas assets of a value of 300 million JPY would have to disclose those worldwide assets, and that failure to report was punishable.

Discover: Why Do Wealthy People Use Financial Advisors?

Implications For Non-Japanese People Living In Japan

For those living in Japan with no intention to settle, the reporting burden will be nominal if using an accountant or Japanese tax representative. It is important to note that presently, overseas asset ownership alone does not create a tax liability. I.e, you will not be taxed just because you own assets overseas. The rationale behind the reporting framework is presumably so that when Mrs. Smith sells her London house in 2019 for 750,000 GBP and makes a capital gain, the tax office will see on the system that the value was 500,000 GBP when she acquired it in 2017, and as such she has a 75,000 GBP tax bill to pay (CGT at 30% for properties owned less than 5 years, 15% if more…). As long as you remain a Japan resident, and as long as no gains are realised, the asset remains un-taxed. This is however not the case for income producing assets, where the proceeds should would be received as income, and in the situation whereby the long-term resident of Japan looks to leave japan (relinquish resident status) with unrealised gains on worldwide assets (with a value of over 100 million yen); at which point “exit tax” rears its ugly head…

Owing to the annual updates from you, the tax authority is able to receive an annual snapshot of your asset base and is able to quantify exactly how much money you may owe in taxes upon disposal of such assets. When utilised in unison with information gathered by the My Number system, detailing all of your expenditure via Japanese financial institutions, it will form an efficient platform to understand your spending habits and gain an impression of your level of wealth. It will ensure that there is no room for forgetfulness when reporting asset values, and essentially creates a quick-list of high net worth individuals who are current tax residents of Japan; who will likely then be the first people whose doors get knocked on during audit season- because the man with 500 million JPY in overseas assets may well be forgetting the other 500 million JPY…

Penalties For Not Reporting Overseas Assets

As is often the case with other G10 countries, the punishment generally fits the crime. If you genuinely were not aware of your obligations to report or there were extenuating circ*mstances behind your reporting delinquency, then the tax office is likely amenable to your plight. If it is concluded that you knowingly and willfully tried to mislead the tax man despite being fully aware of Japan’s 5 year rules, or conceal information, then you are looking at a fine of up to 500,000 JPY or 1 year in prison.

Tax Planning In Japan – Methods & Strategies For Reducing Japanese Tax

Often, even those who retain the services of a Japanese accountant do not receive prudent advice regarding tax planning; more like the service received at a restaurant whereby the man in the suit brings you the bill, and then you pay it. This is doubly true when you are non-Japanese and you have a passport-holding home country with its own set of tax laws and regulations, whose rules you are also supposed to adhere to. The time required in garnering an understanding of your personal financial situation is likely exponentially larger than the financial benefit to your accountant, and as such, not much time is spent optimising. There are a number of strategies to legally and compliantly reduce your tax liability in Japan, even as a high net worth individual, or higher rate tax payer. You should ask your adviser or accountant to check to see that you have covered, at the very least: spousal tax breaks, depreciation expense on fixed assets, financial dependent reductions, interest expense deductions on mortgages, health insurance premium tax deductions and other location specific benefits or allowances to ensure that your finances are tax efficient.