Japan: Change in treatment of derivative transactions income

Retroactive change in the treatment of income from the settlement of cross-border derivative transactions

Retroactive change in the treatment of income

Japan’s tax authority released guidance concerning the retroactive change in the treatment of income from the settlement of cross-border derivative transactions.

The outline of the 2022 tax reform proposals that was approved by the Cabinet in December 2021 explains that the law and regulations of income tax and corporation tax make it clear that income from the settlement of exchange-listed or over-the-counter derivatives are not treated as Japanese-source income from managing or holding of domestic assets. The same treatment is to be applied to foreign-source income from managing and holding of foreign assets under the foreign tax credits system.

In order to take a consistent tax position with the outline of the 2022 tax reform proposals, derivative income (excluding income attributable to a Japanese permanent establishment) will be treated as follows:

  • Derivative income of a non-Japanese resident or foreign company is not treated as Japanese - source income from managing or holding of domestic assets.
  • Derivative income of a Japanese resident or Japanese company is not treated as foreign-source income from managing for holding of foreign assets.

The tax authority also released the following information, because the change in the treatment of derivative income is applied retroactively:

  • A non-Japanese resident or foreign company that has made an overpayment of Japanese taxes due to the changes in the treatment of derivative income can claim refunds.
  • A Japanese resident or Japanese company that has made an underpayment of Japanese taxes due to the changes in the treatment of derivative income will need to file amended tax returns.

Read a January 2022 report [PDF 128 KB] prepared by the KPMG member firm in Japan

 

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