Japan’s Exit Tax

Don’t get ambushed on the way out of the door

If you are planning to leave Japan, there might be one more thing you need to take care of. We made a YouTube video about this last week, but I wanted to get a blog post up as well for reference (we didn’t really explain how the tax was applied very well in the video, so this is a chance to elaborate too).

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Whether it’s for a new job, retirement, or simply a change of scenery. You’ve got your moving checklist: cancel contracts, pack boxes, say your goodbyes. But have you factored in Japan’s “exit tax” (国外転出時課税 kokugai tenshutsuji kazei)? If you’ve built up a decent nest egg here, this is one leaving-Japan present you’ll want to understand and potentially plan for well in advance.

This isn’t a tax on your last paycheck or your pension. It’s a tax on unrealized capital gains on certain financial assets. Think of it as Japan wanting its cut of your investment profits before you and those profits leave its tax jurisdiction.

Let’s break down what this means.

A Little Bit of History and Why It Exists

The exit tax came into effect on July 1, 2015. The main purpose? To prevent wealthy individuals from simply moving to a country with lower (or no) capital gains taxes just before cashing in their investments, thereby avoiding Japanese tax on gains accrued while they were residents here. Japan, like many other countries, taxes its residents on their worldwide income. Before the exit tax, if you left Japan and then sold your assets, Japan generally couldn’t tax those gains. The exit tax aims to close this loophole for certain individuals.

How Does It Work in Practice?

In essence, if you’re subject to the exit tax, the Japanese tax authorities will deem you to have sold your covered financial assets at their fair market value on the day you depart Japan. You are then taxed on the unrealized gains – the difference between the market value at departure and your acquisition cost.

The tax rate is a flat 15.315% on these deemed capital gains (this includes 0.315% as the special reconstruction surtax). Basically the national share of capital gains tax but not the local.

The Process:

1. Determine if you’re liable: (More on this below).
2. Valuation: Your assets are valued as of your departure date.
3. Calculation: The unrealized gain for each covered asset is calculated.
4. Tax Return: You (or your appointed tax administrator) will need to file a special income tax return (準確定申告 – jun kakutei shinkoku, if filing before year-end due to departure, or a regular one if departure aligns with year-end and you have a tax administrator) and pay the tax.
   • If you file before leaving Japan, the assets are valued three months before your scheduled departure date.
   • If you file after leaving Japan (through a tax administrator), the assets are valued on your actual departure date.
5. Payment: This is usually due by your departure date unless you arrange for a tax administrator and potentially a tax deferral.

Who Has to Worry About This?

Not everyone leaving Japan needs to panic. You’re potentially on the hook for the exit tax if you meet ALL of the following conditions:

1. Residency Period: You have had a “jusho” (domicile) or “kyosho” (residence) in Japan for more than 5 years out of the last 10 years leading up to your departure.
   • Crucially: Time spent in Japan on a visa listed in Table 1 of the Immigration Control and Refugee Recognition Act (e.g., most work visas like “Engineer/Specialist in Humanities/International Services,” “Intra-company Transferee,” “Student,” “Dependent” of someone on a Table 1 visa) is generally excluded from this 5-year count.
   • Time spent on visas listed in Table 2 (e.g., “Permanent Resident,” “Spouse or Child of Japanese National,” “Spouse or Child of Permanent Resident,” “Long-Term Resident”) does count towards the 5 years.
   • This is a key point for many long-term foreign residents. If you’ve been here for, say, 8 years on a work visa and then 2 years as a Permanent Resident, you would likely not meet the residency requirement.
2. Asset Threshold: You own covered financial assets (more on which assets below) with a total current market value of ¥100 million or more at the time of your departure. This is the combined value of assets in Japan and overseas.

Who Might Be Off the Hook?

You likely won’t have to pay the exit tax if:

• You haven’t lived in Japan for more than 5 of the last 10 years under the qualifying visa types (e.g., you’ve been on a work visa for your entire 7-year stay).
• The total value of your covered financial assets is less than ¥100 million.
• You are leaving Japan temporarily with a clear intention to return, and you meet certain conditions (though this can be complex and usually involves maintaining tax residency).

What Gets Taxed? And For How Much?

The exit tax specifically targets certain financial assets. The good news is that not everything you own is up for grabs.

Covered Assets (Subject to Exit Tax if total value ≥ ¥100 million):

• Securities*: This is the big one. It includes:
  • Stocks (listed and unlisted)
  • Bonds
  • Investment trusts (投資信託 – toushi shintaku)
  • Beneficiary certificates in trusts
• Interests in certain partnerships (e.g., Tokumei Kumiai – TK)
• Outstanding derivative transactions (e.g., futures, options, CFDs)
• Outstanding unsettled margin trades

One potentially serious aspect of this is that your capital gains will likely be calculated based on your original purchase price, not the value of the investments when you became a Japanese tax resident.

* Remember that you are likely to have to sell any shares held in a Japanese brokerage when you leave Japan so those would probably not be included in any exit tax calculations.

Assets Generally NOT Subject to Exit Tax:

• Real Estate: Your house or investment property in Japan (or elsewhere) is not subject to the exit tax. (Though selling it will, of course, trigger regular capital gains tax if there’s a profit).
• Cash: Money in your bank accounts (yen or foreign currency) is not subject to the exit tax.
• Retirement Accounts: Generally, vested benefits in defined contribution (iDeCo, corporate DC) or defined benefit pension plans are not subject to the exit tax at departure, but rather taxed when received as benefits. This could include retirement accounts abroad like 401k and IRA accounts in the US, or similar accounts in other countries. However, how these are treated can be complex, especially for foreign plans, so professional advice is wise.
• Personal Use Assets: Things like your car, furniture, jewelry (unless held as an investment).
• Cryptocurrencies (Potentially): This is a grey area. As of the last major guidance, crypto wasn’t explicitly listed as a covered asset for exit tax purposes. However, tax laws can change, and their treatment for other tax purposes is evolving. If you have significant crypto holdings, this is definitely something to clarify with a tax professional closer to your departure.

The Tax Rate: As mentioned, it’s 15.315% on the unrealized gains of the covered assets.

Mitigation Strategies

If you think you might be liable, don’t despair. There are a few strategies, though some are more practical than others:

1. Tax Deferral (納税猶予 nōzei yūyo)
   • This is the most significant relief measure. You can apply to defer the payment of the exit tax for 5 years (extendable to 10 years upon application).
   • Conditions:
     • You must appoint a tax administrator (納税管理人 nōzei kanrinin) in Japan before you leave. This person (can be an individual or a corporation, often a tax accountant) will handle your tax affairs in Japan after you depart.
     • You must provide collateral to the tax office for the amount of tax deferred (plus interest tax). This can be Japanese government bonds, real estate in Japan, or a guarantee from a suitable guarantor.
     • You need to file the necessary applications with your tax return.
   • What happens during deferral? If you sell any of the assets for which tax was deferred, you’ll generally have to pay the deferred tax on that portion within 4 months.
   • Returning to Japan: If you return to reside in Japan within the 5 (or 10) year deferral period and still own the assets, you can apply to have the exit tax cancelled for those assets. This is a crucial aspect for those who might return.
2. Manage Your Asset Threshold:
   • If you’re close to the ¥100 million threshold for covered assets, you might consider legally reducing this amount before departure.
   • One way is to sell some assets. Of course, this will trigger normal capital gains tax (currently 20.315% for most securities gains for residents). This might be higher than the exit tax rate, but it gives you control and certainty. You could strategically sell assets with minimal gains or even losses to bring the total value of covered assets below the threshold.
   • Convert assets: Shift from covered financial assets to non-covered assets (e.g., cash, real estate -though buying real estate just to avoid exit tax has its own significant risks and costs).
3. Timing Your Visa Status (More for long-range planning):
   • Understanding how time on Table 1 vs. Table 2 visas counts can be part of very long-term planning if you anticipate leaving eventually but haven’t yet switched to Permanent Residence, for example.
4. Gifting (Careful!):
   • Gifting assets before departure could reduce your holdings, but Japan has gift taxes. Gifting to a non-resident might also trigger the exit tax for the donor on those gifted assets if the donor meets the exit tax criteria. This is complex and needs expert advice.
5. Foreign Tax Credits:
   • If you pay the Japanese exit tax and then later sell the assets in your new country of residence and pay tax there, you may be able to claim a foreign tax credit in your new country for the Japanese exit tax paid, depending on the tax treaty between Japan and that country. This avoids double taxation but doesn’t eliminate the initial Japanese tax. This also applies if you sell assets during a tax deferral period while living abroad.
6. Sell and rebuy to eliminate the risk of being taxed twice
   • One big issue with the exit tax is that you are expected to pay tax on unrealised capital gains to Japan without realising those gains. This means you might end up having to pay tax again in the future when you eventually sell your investments. It may be worth selling to reduce that liability, then buying the same investments again to reset your purchase price.

Real-Life Scenarios

Here are some fictional examples based on the rules:

• Scenario 1: The Long-Term Expat Caught Out
  • Mr. Smith lived in Japan for 15 years. The first 10 were on an “Engineer” work visa (Table 1). Five years ago, he obtained Permanent Residence (Table 2). He has a global portfolio of stocks and investment trusts worth ¥150 million with significant unrealized gains.
  • Outcome: Mr. Smith is likely subject to the exit tax. His 5 years as a Permanent Resident count. His assets exceed ¥100 million. He’ll either have to pay the 15.315% on his gains or arrange for a tax deferral with a tax administrator and collateral.
• Scenario 2: The Work Visa Professional Moves On
  • Ms. Jones has been in Japan for 8 years on an “Intra-company Transferee” visa (Table 1). She has investments worth ¥120 million.
  • Outcome: Ms. Jones is likely not subject to the exit tax. Even though her assets are over the threshold, her time in Japan was entirely on a Table 1 visa, so she doesn’t meet the 5-out-of-10-years residency requirement for exit tax purposes.
• Scenario 3: The Strategic Planner
  • Mr. Tanaka (a Japanese national, so residency is always counted) plans to retire to Malaysia. He has ¥110 million in Japanese stocks. A year before his planned departure, he sells ¥15 million worth of stocks that had minimal capital gains, paying the regular 20.315% capital gains tax on that small gain. This brings his covered asset value down to ¥95 million.
  • Outcome: Mr. Tanaka avoids the exit tax because his covered assets are now below the ¥100 million threshold at departure.
• Scenario 4: The Returnee
  • Ms. Lee was a Permanent Resident subject to the exit tax when she left for Singapore. She appointed a tax administrator, provided collateral, and deferred her ¥5 million exit tax. She returned to Japan after 4 years and still held most of the assets.
  • Outcome: Ms. Lee can apply to cancel the exit tax on the assets she still holds upon her return to Japan as a resident.

Important Note: These are simplified scenarios. Individual circumstances, especially visa history and the exact nature of assets, are critical.

The Bottom Line: Plan Ahead

Japan’s exit tax is a serious consideration for long-term residents with significant financial assets.

• Know your visa history: Understand how much of your time in Japan counts towards the 5-year threshold.
• Know your assets: Regularly assess the market value of your covered financial assets.
• Seek Professional Advice EARLY: If you think you might be affected, consult with a tax accountant (税理士 zeirishi) familiar with international taxation and the exit tax rules well before your planned departure. They can help you understand your obligations, explore mitigation strategies, and navigate the procedures.

Leaving Japan involves a lot of planning. Don’t let the exit tax be an unwelcome surprise. With foresight and proper guidance, you can manage this aspect of your departure effectively.

Am I worried about the exit tax?

Personally I am not too worried about this tax. Most of my assets are in Japan, so in the case of me leaving I would likely have to sell them before I go so they wouldn’t count towards the exit tax. My assets abroad are not worth anywhere near 100m yen, and even if they do eventually get to that level I suspect I could just sell enough of them to get under the threshhold.

How about you? Are you worried about the exit tax? Has it prevented you from moving to a spouse visa or permanent residency?

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Disclaimer: This blog post is for informational purposes only and does not constitute financial or tax advice. Please consult with a qualified professional for advice tailored to your individual situation.

References and Further Reading:

• National Tax Agency (NTA) Website: The NTA provides official information, though often primarily in Japanese. Key search terms: 「国外転出時課税制度」
  • General Information: https://www.nta.go.jp/taxes/shiraberu/shinkoku/kokugai/index.htm
  • Pamphlet (PDF, Japanese): Search for 「国外転出時課税制度のあらまし」on the NTA site.
  • Q&A (PDF, Japanese): Search for 「国外転出時課税制度（FAQ）」 on the NTA site.
• RetireWiki: a collaborative site with information about personal finance in Japan.
  https://retirewiki.jp/wiki/Exit_tax
• Tax Accountant Firms: Many international tax accountancy firms in Japan publish English-language summaries and updates on the exit tax. (A quick Google search for “Japan exit tax” will bring up several).
• Ministry of Finance: For tax treaty information. https://www.mof.go.jp/english/policy/tax_policy/tax_conventions/index.html

This post was written with the help of AI (Google’s Gemini) but I did check it (there were a couple of mistakes, heh) and rewrite parts of it before publication. This is our first AI assisted post on the blog, and is a bit of an experiment. It seems it will be useful going forward in order to create this kind of informational post. What do you think?

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