The Japanese government has submitted tax reform bills to Japan's parliament, the Diet. If enacted as planned, these bills will become law on or after April 1 2003. The tax reform bills include, in particular, proposals for a significant streamlining of and tax reduction in individual income taxation on capital gains and dividends with respect to listed shares, with a view to revitalizing Japanese stock markets.
Streamlining individuals' capital gains tax
Pursuant to the tax reform laws enacted in 2002, a specified account system was established so that capital gains on an individual investor's sale of listed shares would be, upon his/her election, subject to income tax only by way of withholding tax. However, this specified account system has been significantly criticized in the market and by individual investors primarily for technical reasons. The proposed amendments included in the tax reform bills pending at the Diet will significantly streamline this specified account system, so that individual investors can more conveniently and more broadly use this system if they so choose. In addition, it is proposed that most of the special tax treatments for capital gains earned by individuals, which were introduced in the recent tax reforms, be replaced by a new temporary special tax treatment under which capital gains derived by individuals from the sale of listed shares during the period from April 1 2003 through December 31 2007 are to be reduced from 20% to 10% (including both national level tax and local level tax).
Under the existing law, dividend income earned by an individual taxpayer must, in principle, be aggregated with other income and the total is subject to net basis taxation at progressive rates with certain de minimis exceptions. In addition, under the existing law, dividends are always subject to withholding tax at the rate of 20% regardless of whether the recipient of the dividends is an individual or a corporation.
Under the proposed amendments included in the tax reform bills pending at the Diet, so far as dividends received on listed shares are concerned individual portfolio investors (with not more than a 5% shareholding) will be taxed only by way of withholding tax, and the rate of this withholding tax will be temporarily reduced to 10% (including both national level tax and local level tax) for dividends received during the period from April 1 2003 through March 31 2008. The foregoing temporary reduction in the withholding tax rate will also be applied to dividends on listed shares to be received by corporate shareholders.
It should also be noted that foreign portfolio investors (either non-resident individuals or foreign corporations) will also benefit from the above-stated reduction in the withholding tax rate. The proposed tax reform will reduce the withholding tax rate that is to be applicable to such foreign portfolio investors with respect to dividends on Japanese listed shares from 20% to 10% for the period from April 1 2003 through December 31 2003, 7% for the period from January 1 2004 through March 31 2008, and 15% thereafter.