JAPAN Trends and Developments Contributed by: Yutaka Shimoo, Anderson Mōri & Tomotsune
The scope of taxable assets depends on multiple fac - tors, including: • the tax residency status of the transferor and recipient; • the nationality of the transferor and recipient; and • the location of the transferred assets. Notably, even where both the transferor and recipi - ent are foreign nationals living outside Japan, trans - fers of assets located in Japan may still be subject to Japanese inheritance tax or gift tax, depending on the structure of the transfer. In addition, where a transferor has been a Japanese tax resident for more than five years in the preceding ten years, certain transfers of securities or unsettled derivatives to a recipient living outside Japan may trig - ger “exit tax” treatment. This is an individual income tax imposed on a deemed capital gain, currently taxed at a flat rate of 15.315%. Recently, the Japanese tax authorities have strength - ened enforcement of inheritance tax and gift tax, par - ticularly in relation to HNW individuals. As a result, foreign individuals who intend to live in Japan for an extended period should pay careful attention to inher - itance and gift tax exposure and planning. 2026 Tax Reform: Changes to Permanent Establishment (PE) Exemption Requirements for Foreign Investors Where a limited partner invests in Japan through cer - tain types of investment limited partnerships (LPs), the limited partner may qualify for a PE exemption if the following requirements are satisfied: (i) the limited partner’s interest in the partnership property is less than 25%; (ii) the limited partner does not act as an executive of the LP; (iii) the limited partner does not have a special rela - tionship with the general partner; and (iv) the limited partner would not have any income attributable to a permanent establishment if the business were not conducted through a perma - nent establishment under the investment partner - ship agreement governing the LP.
Under the 2026 tax reform, amendments will be intro - duced to relax certain PE exemption requirements, including: • the threshold in item (i) will be relaxed from “less than 25%” to “less than 50%” for LPs that have established certain committees consisting of lim - ited partners; • regarding item (ii), approvals by the general part - ner relating to conflict-of-interest transactions will be more broadly excluded from the scope of “business execution” (and therefore more likely to jeopardise PE exemption); and • regarding item (iv), a limited partner may still ben - efit from the PE exemption for investments through an LP even if the taxpayer has income attributable to other permanent establishments.
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