JAPAN Law and Practice Contributed by: Yutaka Shimoo, Anderson Mōri & Tomotsune
25/5 rules • If the transferor, including its “closely related par - ties” as defined under Japanese tax law, held 25% or more of the issued equity of the target company established in Japan at any time during the year of transfer or the two preceding years; and • If the transferor (including its closely related parties) transfers 5% or more of the issued equity within the same year. Real property-related company requirements • If the target company qualifies as a real property- related company (a company whose real estate holdings in Japan or shares in another real proper - ty-related company constitute at least 50% of its total gross assets at any point during the 365-day period preceding the transfer); and • If the transferor (including its closely related par - ties) held more than 2% of the issued equity of the target company (or more than 5% if the target is a listed company) as of the day immediately preced - ing the year of transfer. However, these requirements, especially the “25/5 rules” may be exempt under applicable tax treaties. In addition, a foreign investor investing in Japanese assets through some types of limited investment part - nerships (LPs) may benefit from PE and capital gain exemption if the statutory requirements are met. 3.5 Employment Income Individual residents are generally subject to income tax at the progressive tax rate, the maximum rate of which is 55.945% (including 10% local tax). If (i) employment earnings of a permanent resident or a non-permanent resident who has submitted a certain application do not exceed JPY20 million per year; and (ii) other income required for the reporting does not exceed JPY200,000, such an employee will only be subject to withholding tax and need not report. Instead, the employer will be responsible for the cal - culation and payment of the employees’ taxes. This system, especially the year-end recalculation proce - dure of the system, is called the “year-end adjustment system” ( nenmatsu chousei ) of tax payment. On the other hand, a non-resident is generally only subject to withholding taxes of 20.42% on their salary
In the absence of a PE, passive income paid from Japan is generally subject to withholding tax at 20.42% or 15.315%. Such withholding tax may be exempted or reduced by applicable tax treaties.
3.4 Capital Gains Individual Residents
Any capital gain is generally subject to income tax at the progressive tax rate, the maximum rate of which is 55.945% (including 10% local tax). With some excep - tions, only half of capital gain is taxed if a taxpayer has held the asset for more than five years. However, capital gains derived from some types of securities, such as shares, are subject to separate reporting at 20.315% of the flat tax rate. In addition, regarding capital gains derived from some types of listed securities in a special securities account, an individual taxpayer can select taxation (i) only by with - holding at a flat tax rate of 20.315%; or (ii) by separate reporting (plus withholding). Furthermore, capital gains derived from real estate (held for more than five years) are subject to separate reporting at 20.315%, or 39.63% of the flat tax rate. Corporate Residents Any passive income is subject to corporate income tax at approximately 30–35% of the flat tax rate (includ - ing local tax). In addition, dividends and interests are generally subject to withholding tax and the withheld amount is credited in the calculation of the tax amount in tax reporting. Individual and Corporate Non-Residents If a non-resident has a PE in Japan and capital gains are attributable to the PE, the non-resident is required to report this income. Such reported income is gener - ally taxed in the same way as it would be for residents. In the absence of a PE, capital gains derived from some types of assets, such as Japanese real estate or equities meeting some requirements, are taxed as domestic-sourced income. With regard to capital gains derived from equities (ie, shares or interests), non-residents are briefly subject to taxation in the following cases:
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