一般社団法人 東京国際金融機構(FinCity.Tokyo)

FY2021 Monthly Market Report vol.4 –November 2021

The FY2021 Tax Reform andRequest Items for the FY2022 Tax Reform
With a view to establishing Tokyo as a global financial center and attracting
businesses, human resources, and funds from overseas, the Outline for theFY2021 Tax Reform includes tax measures for corporate taxation, assettaxation, and personal income taxation. In addition, the Tax Reform Request
for FY2022 has been compiled to create an investment-friendly environment
and promote further digitalization. This report outlines both the FY2021 TaxReform and the Tax Reform Request for FY2022.
(Table of Contents)
1. FY2021 Tax Reform
1-a. Tax measures for the development of aGlobal Financial Center
2. Tax Reform Request for FY2022：Creation of
an investment-friendly environment andpromotion of further digitalization
2-a. Unification of taxation on financial income
2-b. Revision of inheritance tax on listed shares, etc.
2-c. Enhancement of convenience of NISA accounts,
further digitalization of tax procedures

1. FY2021 Tax Reform
1-a. Tax measures for thedevelopment of a Global FinancialCenterWith a view to attracting businesses, humanresources, and funds from overseas toestablish Tokyo as a global financial center,
the Outline for the FY2021 Tax Reform
includes the following tax measures forcorporate taxation, asset taxation, andpersonal income taxation as part of efforts
to resolve various issues.
Corporate taxation（Corporate tax: Imposed oninvestment management companies）
Previously, with respect to the corporate tax
imposed on invest management companies,
performance-linked remuneration forexecutives of unlisted companies was notdeductible.
The FY2021 Tax Reform has allowed
performance-based remuneration for
executives of unlisted non-family companies,etc., whose main business is investment
management, treated as a deductible

expense, provided that they disclose thecalculation method and the performance, etc.,
on the Financial Services Agency's website,
etc., in light of the circumstances where suchcompensation is generally subject to thescrutiny of stakeholders such as investors.
Asset taxation（Inheritance tax: Imposed on heirs
such as fund managers）
Conventionally, foreign property of foreign
nationals who have resided in Japan for
more than 10 years was subject toinheritance tax. If the period of residence
was less than 10 years, property in Japan
only was subject to taxation.
With the FY2021 Tax Reform, in theinterest of facilitating the employment, etc.
of highly-skilled foreign personnel in Japan,
foreign property of foreign nationals
residing in Japan for work, etc. is no longer
subject to inheritance tax, etc. provided
that the property is inherited by foreign
nationals residing outside Japan or staying
in Japan for a short period of time, etc.
regardless of their period of residence.
Personal income taxation（Income tax: Imposed on individual
fund managers)
Under the previous tax system, it wasunclear whether profits distributed from afund in excess of equity interest inaccordance with the fund manager's
investment performance constituted
financial income.
The FY2021 Tax Reform has clarified that
distributions of partnership profits

Copyright: The Organization of Global Financial City Tokyo (FinCity.Tokyo)

November 25th, 2021

一般社団法人 東京国際金融機構(FinCity.Tokyo)

FY2021 Monthly Market Report vol.4 –November 2021

The FY2021 Tax Reform andRequest Items for the FY2022 Tax Reform(carried interest) received by fundmanagers from funds in which they holdequity interest (partnerships whosebusiness is the transfer of shares, etc.) in
excess of equity interest are subject toseparate taxation (a flat rate of 20%) as
profit from the transfer of shares, etc.,
instead of being subject to comprehensive
taxation (progressive tax rate up to 55% )as considerations for services, provided
that the distribution ratio is economicallyreasonable. The FSA will establish
necessary measures to ensure theconvenience and accuracy of tax returns
filed by fund managers in suchcircumstances.
Exemption from filing for investments inJapanese funds through overseas funds

In addition, when investing in a Japanesefund through a foreign fund, etc., foreign
investors are exempted from filing atax return in Japan even if the ownershipinterest in the foreign fund, etc. is 25% ormore but the ownership interest perinvestor is less than 25%.

Outline of the FY2021 Tax Reform Items and the impact on asset managers（Tax rate） （Before the reform） （Tax rate）⚫

Corporation
Tax30%⚫

OutlineInheritance
0～55%
Tax

⚫

Income Tax 0～55%⚫

⚫

Impact onassetmanagers⚫

⚫

Performance-based
compensation forexecutives ofunlisted companies
could not beexpensed.

Overseas assets
owned by foreign
nationals who haveresided in Japan for
more than 10 years
were subject toInheritance Tax.

Unclear what istaxable on profits
distributed inexcess of equityinterest

⚫

0%

⚫

0%

⚫

20%

（Content of the reform）
Performance-based remunerationfor executives of unlisted companies,
etc., primarily engaged in theInvestment Management
Business, can be recorded as anecessary expense if certain
requirements are met.
In the event of the death of a foreign
national who resided in Japan for
employment, etc., regardless of theperiod of residence in Japan,
overseas assets acquired by his/herfamily members, etc., residing
abroad through inheritance areexempted from Inheritance Tax.

Clarified that "profit distributed inexcess of equity interest" is subject
to separate taxation (a flat rate of20%) as profit from the sale of theequity share price in certain cases.

(Others) When investing in a Japanese fund through a foreign fund, etc., foreign investors areexempted from filing a tax return in Japan even if the ownership interest in the foreign fund,etc. is 25% or more but the ownership interest per investor is less than 25%.
(Corporation Tax) A 30% tax on executive compensation of asset management companies will
be exempted, enabling asset managers to provide their executives with full compensation.
(Inheritance Tax) Foreign nationals who have resided in Japan for more than 10 years will be
exempted from taxation on their overseas assets.
(Income Tax) The amount of taxation on "profits distributed in excess of equity interest" will be
reduced to a flat rate of 20%.

Copyright: The Organization of Global Financial City Tokyo (FinCity.Tokyo)

November 25th, 2021

一般社団法人 東京国際金融機構(FinCity.Tokyo)

FY2021 Monthly Market Report vol.4 –November 2021

The FY2021 Tax Reform andRequest Items for the FY2022 Tax Reform
2. Tax Reform Request for
FY2022：Creation of aninvestment-friendly
environment and promotionof further digitalization
In Japan, each ministry in the government
will submit the “Tax Reform Request” fornext Fiscal Year, usually during August toSeptember. This will be screened andaggregated into “Tax Reform Proposals”,
which will be determined by the cabinet.
This will finally go through the discussion
at the national diet (parliament), andfinally go into legislation if the bill has
passed the diet.
Here, we summarized the Tax Reform
Request, announced by the JFSA
(Japanese Financial Services Agency), theregulatory body in Japan. As mentioned
above, these requests are yet to be fixedat current status (and uncertain whether itwill be realized), but we would like tointroduce the government’s efforts onreformation, and how it may affect theasset management industry.

2-a. Unification of taxation on
financial income
Expansion of the scope of aggregation of
profits and losses related to financial
instruments⚫ Expansion of the scope of aggregationof profits and losses for financial
instruments to include derivatives
transactions, deposits and savings, etc.
➢ Currently, aggregation of profits andlosses is not available for derivatives
transactions, deposits, and savings,
etc.
➢ This may provide more benefits tothe investors, leading to theexpansion of the business
opportunities for asset managers.

2-b. Revision of inheritance tax onlisted shares, etc.
⚫ Review the inheritance tax assessment
method for listed shares, etc.
➢ Currently, listed shares, etc. thathave become inherited property are(in principle) valued at their market
value at the time of inheritance,
though the moment of inheritancetax payment is later than that,conveying the risk of pricefluctuations (=decline in stock prices).
➢ This may prevent the citizens fromselling stocks in anticipation of adecline in prices after inheritance.

2-c. Enhancement of convenience ofNISA accounts, further
digitalization of tax procedures
Use of My Number Card when opening aNISA account⚫ Necessary improvements be made sothat investors can immediately confirm
whether or not they have a NISA
account by using their My Number Card
➢ NISA (Nippon individual savingsaccount) is the system granting taxexempt benefits for investors. Eachinvestor can open only one account.
➢ Currently, if applicants are not surewhether they already have a NISA
account, there is no system to
immediately confirm eligibility.
➢ By using “My Number Card”, agovernment-issued card (which could
be used for identity verification as
well as to receive a wide range ofgovernmental services), thisconfirmation could be done
immediately, leading to the easinessof the individual investors to startinvestments by utilizing NISA.

Copyright: The Organization of Global Financial City Tokyo (FinCity.Tokyo)

November 25th, 2021

一般社団法人 東京国際金融機構(FinCity.Tokyo)

FY2021 Monthly Market Report vol.4 –November 2021

The FY2021 Tax Reform andRequest Items for the FY2022 Tax Reform
Promotion of further digitalization of tax
procedures, etc.

⚫ Necessary measures be taken to enable
procedures between financial
institutions and tax authorities to betransmitted in a data format that can be
immediately utilized by tax authorities.
➢ Currently, only PDF or hardcopy
documents are used for transactions
between financial institutions and tax
authorities, limiting data utilization
by tax authorities. Furthermore,financial institutions still need toconvert electronic data received from
customers into document format
such as PDF, also preventing
improvements in efficiency throughdigitalization.
➢ This may improve the efficiency on
both government (tax authority) sideand financial institutions side for
operations related to taxations.

*Please note that we are covering only
major items of the Tax Reform Request,
and also summarized the outline. If you
want to learn more exhaustive menu, ordetails of each contents, please visit thegovernment website, or feel free to ask thesecretariat. ( fincitytokyo@jp.ey.com )Sources and full text:
Financial Services Agency, Tax Policies for Japan as an International Financial Center Published on Aor. 2021
https://www.fsa.go.jp/en/financialcenter/financialcenter_tax.html
Ministry of Finance, FY 2021 Tax Reform (Key Points) (December, 2020), Published in Dec. 2020
https://www.mof.go.jp/english/policy/tax_policy/tax_reform/fy2021/03keyhighlight.pdf
Financial Services Agency, Request Items for the FY2022 Tax Reform, Published in Aug. 2021 (Japanese)
https://www.fsa.go.jp/news/r3/sonota/20210831/01.pdf
Financial Services Agency, Guidebook for Registration of Investment Management Business and Other Financial Instruments
Businesses, Published in Jan. 2020
https://www.fsa.go.jp/en/policy/marketentry/guidebook.html

Copyright: The Organization of Global Financial City Tokyo (FinCity.Tokyo)

November 25th, 2021