Q&A – Tax Matters and Japanese Properties

Japan Investment Properties

Japan Real Estate

29 Sept, 2016 –

This Week in his Q&A column on “Asian Property Review” magazine, NTI’s Asia-Pacific Executive Manager, Mr. Ziv Nakajima-Magen explains taxes affecting  foreign investors purchasing Japan properties.

Q: Can you explain to me what are the taxes I need to pay as a foreigner when I invest in a property in Japan e.g. rental income, quit rent, assessment or municipal taxes, and real property gains tax when I sell?

ZNM: The following is a brief and general outline of taxes applicable to foreign property investors in Japan:

◆ Income Tax
Income tax thresholds in Japan are the same for individual residents and non-residents alike. Non-residents, or residents who have lived in Japan under five years, are not required to report their income in other countries to Japanese tax authorities.

The Japanese financial year ends on 31 December, and tax statements and payments are to be concluded by 31 March the following year.

It’s important to note the following –

a) Most developed countries have a tax treaty in place with Japan, to prevent double taxation – you should confirm the existence of such a treaty between Japan and your country of residence prior to deciding whether a Japanese investment property portfolio would be profitable for you. Depending on your personal financial circumstances and whether any claims/deductions are applicable in your case, however, you may have to pay the difference in taxation levels. For example, if you are taxed at 5% in Japan, and 6.3% in your country of residence, your local tax department may require you to pay the remaining 1.3% even if there is a tax treaty in place. Consult with your local accountant to find out which taxation scenario applies for your particular circumstances.

b) Once you reach the minimum reporting threshold (below), Japanese accounting services would be required, in order to file tax return statements, claim expense deductions & depreciation, etc. Bear in mind, however, that in Japan, property purchase costs can generally be claimed in full, and also carried forward for several years, so a smallish 1-5 small, second-hand units portfolio would normally not be required to pay any income tax or use an accountant’s services for the first four or five years.

c) Whenever you reach a higher income tax threshold, the new level is only applicable to income exceeding that of the previous level – meaning, for example, that once your income exceeds 380,000 JPY, you will only be paying 5% on every JPY beyond that sum, and not on the entire amount (see thresholds below).

* Under 380,000 JPY per-annum – 0% (non-taxable income)
* 380,001 – 1.95 Million JPY – 5%
* 1,950,001 – 3.3 Million JPY – 10% + 97,500 JPY
* 3,300,001 – 6.95 Million JPY – 20% + 232,500 JPY
* 6,950,001 – 9 Million JPY – 23% + 962,500 JPY
* 9,000,001 – 18 Million JPY – 33% + 1,434,000 JPY
* Over 18,000,000 JPY – 40% + 4,404,000 JPY

◆ Property (Fixed Assets)
Tax Property tax in Japan is approximately 1.4% of the official taxable estimated value of the property per annum, with slight variations possible due to the age of the property, its designated purpose, location and size.

The highest yielding properties are normally under 200 sqm in size, and as such, enjoy a large discount in property tax– which brings the tax further down, to 0.75-1.25% of the purchase price per-annum, on average.

◆ Purchase Tax
Property purchase tax in Japan averages up to approximately 2.6% of the official taxable estimated value of the property per-annum, with slight variations possible due to the age of the property, its designated purpose, location and size.

◆ Capital Gains Tax
Gains realized from selling short-term real properties (i.e., properties held for less than five years) are taxed at 40% of the net gains. The taxable net gain is computed by deducting the acquisition costs and related expenses, improvement costs, and transfer costs from the gross sales price. Net gains from the sale of properties held for more than five years will be taxed at 20%.

◆ Consumption Tax
Consumption tax, or goods and services tax (GST), as it is known in other countries (sometimes also referred to as value added tax (VAT) – while not directly related to property investments, is included in all quotes and invoices received from Japanese shops, companies, or service providers (such as our own company, a real estate agency, or a property management firm or property lawyer). The tax has gone up from 5% to the current 8% on 1 April, 2014, and is anticipated to rise to 10% by the end of 2017. Any quote or invoice issued by a business (as opposed to a private individual) for goods or services rendered in Japan includes this tax, even if it is not mentioned specifically.

◆ Other Taxes
Other Japanese taxes, which are mostly corporate or prefectural/municipal in nature, do not apply to individuals who are not Japanese residents. For foreign or locally incorporated entities purchasing, holding, managing or selling real estate properties, other taxes may apply – please consult the relevant accountants or authorities in your country of residence as well as in Japan.

(N.B. Nippon Tradings International (NTI) is not a professional accountant and will not be held liable for any losses sustained by above information. It is highly advisable to hire the services of a Japanese accountant for accurate and up-to-date advice. Feel free to contact me for the contact details of our recommended accounting firms.)

(Source – “First Published in ‘Asian Property Review,” Pic – Sapporo at Night / “Alpha 2008“)

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