By: Jeff Wynkoop
The following is an explanation of the taxes a purchaser must pay when acquiring real estate in Japan.
Every effort has been made to ensure the accuracy and completeness of this information, but please consult with a certified professional if you are planning a transaction.
It should be noted that the discussion below only applies to the direct acquisition of real estate in Japan, as opposed to the acquisition of a trust beneficiary certificate.
In addition, there are a variety of specific exceptions and/or reductions to the tax rates below, but an exhaustive discussion of all such exceptions/reductions (vehicle-specific and otherwise) is beyond the scope of this explanation.
Consumption Tax
As a general rule, Consumption Tax (shouhizei) is payable on the sale of a building in Japan, but does not apply to the sale of land.
In Japan, ownership of a building and ownership of the land where the building is located are separate legal rights.
This means that when land and buildings are transferred together, consumption tax is payable on the purchase price of the buildings only.
The seller is legally responsible for paying consumption tax to the national tax authorities (currently 8%), although usually the buyer agrees to pay the consumption tax amount to the seller along with the purchase price.
Residency
Sellers of Japanese real estate are liable for consumption tax in Japan, regardless of whether the seller actually resides in Japan, and regardless of whether the seller is deemed to have a ‘permanent establishment’ in Japan under Japanese income tax rules.
However, foreign and/or Japanese sellers not qualifying as a ‘taxable enterprise’ for Japanese consumption tax purposes [shouhizei kazeijigyou, generally any person or entity with more than 10 million JPY qualifying revenue in the fiscal year two years prior to the date of transfer] are exempted from having to pay consumption tax.
Fixed Asset Tax and City Planning Tax
Fixed Asset Tax (koteishisanzei) and City Planning Tax (toshi keikakuzei) are taxes levied every year on the owner of a property as of January 1st.
The fixed asset tax rate is 1.4% of the value of the property as indicated in the ‘fixed asset tax book’ (koteishisan kazeidaichou) for such asset, and the city planning tax rate is 0.3% of such value.
Both of these taxes are payable to the local city authorities quarterly in April, July, December and the following February. Please note, however, that city planning tax only applies to properties located in designated city planning areas (toshi keikaku kuiki) under Japanese zoning laws.
Mid-Year Transactions
When a property is sold during the calendar year (for example, a July 1st sale date), sellers usually require buyers to pay the proportion of the fixed asset tax/city planning tax that corresponds to the time the new buyer will own the property in the year.
Thus, a buyer of a property on July 1st will usually have to pay to the seller an amount equal to 1/2 of the fixed asset tax/city planning tax for that year along with the purchase price and the relevant consumption tax amount.
The Big Three: Real Estate Acquisition Tax, Registration Tax, and Stamp Tax
In addition to consumption tax and the fixed asset tax/city planning tax, buyers of Japanese real estate should prepare for the following taxes.
1. Real Estate Acquisition Tax (fudousan shutokuzei)
Real Estate Acquisition Tax is payable by the purchaser every time land and/or buildings are transferred in Japan, regardless of whether the transfer is registered in the official Real Estate Registry (toukibo), and regardless of the amount of the purchase price, construction price, etc. As with the above fixed asset tax and city planning tax, the value of the property as indicated in the ‘fixed asset tax book’ (koteishisan kazeidaichou) for such asset is used to calculate the amount of acquisition tax.
The basic tax rate here is 4% of the value indicated in the relevant fixed asset tax book.
Limited-Time Reductions
Until March 31st, 2018, land and residential buildings are taxed at a special reduced rate of 3%.
In addition, transfers in land benefit from a special 50% reduction in the tax until March 31st, 2018. It should be noted that transfers in trust beneficiary interests are not subject to this tax, although major renovations or additions to an existing property usually are.
2. Registration Tax (touroku menkyozei)
Registration of ownership and other legal interests in land and buildings (such as mortgages), and registration of transfers etc. of ownership and other interests are subject to a Registration Tax.
‘Registration’ here refers to the recording of a legal interest in the official Real Estate Registry (toukibo) maintained at the local Legal Affairs Bureau for such property, which is deemed to give constructive notice to all subsequent owners (and the general public) that the property is subject to the rights indicated in such registry.
How the tax is calculated
This tax is calculated based on the value of the property as indicated in the ‘fixed asset tax book’ (koteishisan kazeidaichou) for such asset (the same basis for calculation of the above real estate acquisition tax).
The registration tax rate varies with the type of legal interest being registered:
Initial registration of ownership
The rate for initial registration of ownership (after construction etc.) (shoyuuken hozon touki) is 0.4%, but thereafter the rate for a transfer of ownership (shoyuuken iten touki) is 2%.
Mortgages
For mortgages, the basis for calculating registration tax is the loan amount (i.e., the amount to be secured), and the tax rate is 0.4%.
Limited-Time Reductions
There are several exceptions to the above rates however (especially with respect to the initial registration of ownership or transfer of existing ownership in residences, which is 0.15% and 0.3% respectively until March 31st, 2017).
In addition, until March 31st, 2017 the tax rate for the registration of a transfer of ownership in land is 1.5%.
3. Stamp Tax (inshizei)
Stamp Tax is payable on a variety of real estate documents such as purchase and sale agreements for land and/or buildings, agreements to create a superficies (a ‘superficies’ is similar to an easement in common law countries), agreements to lease land, and construction contracts, etc. with general contractors.
Each executed version of an agreement must have a stamp affixed, with the cost of the stamp depending on the value/face amount of the agreement.
For example, the stamp tax basis for a purchase and sale agreement for land is the purchase price. The stamp tax on such an agreement with purchase price between 500 million and 1 billion JPY (approximately 4-8 million USD) is 200,000JPY (although until March 31st, 2018, the tax on purchase and sale agreements over 10 million JPY is reduced through special tax measure to 160,000JPY).
Although technically the person who drafts the agreement is responsible for buying the actual physical stamps to attach (much like postage), in practice which party bears this cost is subject to negotiation.
Please note that on the books there is another real estate tax called the Special Land Holding Tax (tokubetsu tochi hoyuuzei), but it has not been in effect since 2003.
Japanese Income Tax and Withholding Tax
Non-residents and foreign corporations are generally not subject to Japanese income tax, provided they do not have a ‘permanent establishment’ in Japan as defined under Japanese income tax rules.
Nevertheless, even for such non-residents there are certain categories of ‘Japan source income’ which are taxed, e.g., gains from the sale of Japanese real estate.
For regular Japanese companies, any gain realized from the sale of real estate is taxed at the applicable marginal income tax rate for that company. For foreign corporations with a permanent establishment in Japan, the applicable tax rate differs depending on the type of permanent establishment in Japan (there are three types under Japanese tax law) among other factors.
For non-residents without a permanent establishment in Japan, the applicable tax rate on real estate gains can vary depending on whether the non-resident is a foreign corporation or a foreign individual, and is taxed for individuals at 15% or 30% depending on how long the seller holds the asset (five years or less).
In addition, any disposition of Japanese real estate by a non-resident is in principle subject to withholding tax (generally 10.21%), although the actual withholding amount may vary depending on the location of the seller (among other factors), due to the differing contents of the various tax treaties Japan has with countries around the world.
For non-resident individual buyers, it is important to understand that
(1) there will be Japanese capital gains tax as well as withholding tax from the disposition of Japanese real estate regardless of the status of your residence, and
(2) rental income will be subject to withholding tax (generally 20.42%) prior to being remitted abroad.
The specific tax rates depend on your country of origin, the characterization of such income for Japanese tax purposes, the rules and content of the applicable bilateral tax treaty, etc.
Editor’s note: Every effort has been made to ensure the accuracy and completeness of this information, which is based on relevant tax laws as of July 2015. Please consult with a certified professional if you are planning a transaction.
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