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Since Tokyo was announced as the host city of Olympics in 2020, an increased number of foreign investors have been purchasing real estate in Japan.
There are no restrictions on who can purchase property in Japan, i.e. resident individuals, non-resident individuals and companies may invest in property located in Japan.
However, residency status and whether an individual holds the property in his name or in the name of a local or offshore entity will result in different tax treatments. Generally, foreign investment in real property situated in Japan is subject to the following taxes.
Taxes on Acquisition
• Real Estate Acquisition Tax
The tax rate is 3% (for land and residential buildings) or 4% (for non-residential buildings), applied on the assessed value of the real estate.
• Registration Tax
The tax rate varies according to type of registration, for instance preservation of ownership, transfer of ownership, or granting or transfer of lease interest. The tax rate ranges from 0.4% to 2%, applied on the assessed value of the real estate.
• Consumption Tax
Consumption tax is imposed only on building, at the rate of 8% on assessed value of the building.
• Stamp Tax
Agreements for the transfer of ownership title of real estate are taxed on ad valorem basis, ranging from JPY 200 to JPY 600,000, based on the amount stipulated in the agreement.
Taxes on Holding
• Fixed Asset Tax Fixed asset tax is imposed on land, buildings and other depreciable assets used for business purposes. It is imposed on 1 January every year and is 1.7%, applied to the assessed value of the fixed asset.
There are certain tax deductions available for the owners who have the building reformed for anti earthquake reinforcement. The owner is exempted from paying fixed assets tax for a period of up to 3 years depending on the conditions that the construction meets; the owner is also able to enjoy 1/3 fixed asset tax deduction for the reform that upgrades the functions of the property if certain requirements met.
• City Planning Tax
City planning tax is levied on land and buildings located in certain urban areas as a surcharge to fixed asset tax. The annual tax rate is 0.3% or less, applied to the assessed value of the fixed asset.
Taxes on Rental Income
Rental income is aggregated with other taxable income and taxed at the applicable tax rate, for both individuals and companies. If a foreign investor invest in Japanese property directly and then lease it, the rental income is subject to marginal tax rate based on annual income. The highest tax rate is 55%.
When a foreign investor choses to set up a company in Japan to purchase real estate for rental purpose, the effective tax rate on the taxable income is approximately 38%.
Taxes on Capital Gain from the Sale of Real Estate
Tax imposed on capital gain from the sale of real estate varies depending on whether the owner is an individual or company, resident or non-resident, and the holding period of the real estate.
For individuals, capital gain is taxed separately from other taxable income. In respect of non-resident individuals, capital gain from selling short-term investment i.e. property held for less than 5 years is taxed at 30%; while capital gain from sale of property held for more than 5 years is taxed at 15%.
For companies, capital gain is aggregated with other taxable income and taxed at the applicable tax rate. The effective tax rate for a foreign company is approximately 38%.
