Tax scheme of Japanese ISA to be launched starting from January 1, 2014

The tax scheme of Japanese ISA, or Individual Savings Account which was originated in the U.K, will allow people aged 20 or older to start tax-free investments of up to 1 million yen annually starting from January 1, 2014. In details, the dividend income and capital gain derived from the individual's total investment of up to 5 million yen in which 1 million being invested every year during the 10 year period beginning January 1, 2014 till December 31, 2023 is tax-free. The tax-free total investment amount of 5 million is deemed as having utilized by the investor if the investor sells his/her investment before his/her total investment amount (1million yen/year) reaches the threshold (5 million yen). The scheme allows one account per person and no switching accounts to another financial institution for at least four years. To open ISA account, the investor needs to have his/her account authorized as tax-free account by submitting their certificate of residence bearing their Japan's address as of January 1, 2013 to their tax office via his/her financial institution.

Currently, the dividend income is subject to separate withholding taxation. A tax rate of 20.315% (10.147% for listed stocks until 12/31/2013) will be levied on the dividend income; for instant, 20,315 yen will be withheld from the dividend income of 100,000 yen by the financial institution before 79,685 yen is distributed to the investor's account. Once the scheme launches beginning January 1, 2014, the dividend income will be exempted from tax.

The annual investment amount of 1 million may seem low for those riches, but such annual ceiling is likely enough for the average corporate employee.