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Japan Considers Changing Tax Laws to Impact Expats

The austerity measures put in place around the world after the financial meltdown have led governments to investigate sources of lost revenue. One popular solution is to locate loopholes that cost the government tax money, then to firmly close them up. Japan is no different, except that their proposed changes could have a significant impact on wealthy expats.

Historically, capital gains in Japan has been set at 20%. However this levy typically only applies to sources of income located within Japan, such as property or share portfolios. Japanese expats have largely escaped these capital gains levies thanks to earning their income overseas. These days thousands of wealthy Japanese expats live around the world, earning hefty profits on businesses and investments that are outside of Japan’s field of influence.

Now though it seems that Japan is making moves to alter their legislation and ‘internationalize’ their tax regulations. If the proposals are voted into action then any form of capital gains tax earned by Japanese citizens – whether those earnings were generated within Japan or not – will be subject to the same capital gains taxes.

While in many ways this levels the playing fields, ensuring that wealthy expats do not take advantage of such loopholes as a legal way to avoid paying capital gains tax, there are some concerns that the rules may simply chase away wealthy Japanese expats altogether.

Capital gains and inheritance taxes in Japan are some of the highest in Asia, hence the reason for expats trying to avoid them. Enforcing a levy like this could serve to encourage wealth expats to leave Japanese shores for good. In this way Japan would miss out on any tax revenues at all if expats decide to renounce their citizenship.

It is not just Japanese expats living round the world who could be affected by this new legislation. Foreign nationals living in Japan could also find themselves subjected to taxation on their worldwide earnings. Such a move would therefore almost certainly lead to an exodus of foreign nationals from Japan so as to avoid paying excessive taxes on their income.

It is worth noting that these new suggestions would apply only to the ‘super rich’ – those with a fortune of 100m Yen or more, so it is unlikely to be a problem for most expats. Only time will tell as to whether the legislation -which is tabled for next year – gains public approval. If so, Japan as an expat destination could become a very different place.

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