We are Murata General Tax and Accounting Office, located in Miyakojima Ward, Osaka City, specializing in inheritance tax and international taxation.

In this article, we answer one of the most frequently asked questions regarding the taxation of foreign exchange gains in a Q&A format.

 
1. Case Study

I am a Japanese national. Approximately 20 years ago, I was transferred by my employer to its U.S. subsidiary and worked there until my retirement, receiving my salary from the U.S. company throughout that period.

After retiring, I returned to Japan. I plan to support my living expenses by converting U.S. dollars held in my U.S. bank account into Japanese yen and remitting the funds to Japan.

However, I have heard that the Japanese tax authorities may impose income tax on foreign exchange gains arising from such remittances.

Am I required to calculate foreign exchange gains every time I remit money from the United States to Japan?

 
2. Conclusion

No. You are not required to calculate any foreign exchange gain.

 
3. Reason

The taxation of foreign exchange gains is governed by Article 57-3 of the Japanese Income Tax Act, which provides rules for foreign currency transactions.

The Article states:

"Where a resident enters into a foreign currency transaction (meaning the sale or purchase of assets, provision of services, lending or borrowing of money, or any other transaction settled in a foreign currency)..."
Although converting U.S. dollars into Japanese yen constitutes a foreign currency transaction, the Article applies only to foreign currency transactions entered into by a resident of Japan.

In order for a foreign exchange gain or loss to arise under Article 57-3, there must first be an underlying foreign currency transaction that falls within the scope of the Article.

In this case, the U.S. dollar deposits originated from salary earned while the taxpayer was a non-resident of Japan. Since the salary was earned during a period when the taxpayer was not a resident, the acquisition of the U.S. dollars does not constitute a foreign currency transaction entered into by a resident for purposes of Article 57-3.

Accordingly, there is no qualifying foreign currency transaction against which the subsequent conversion of U.S. dollars into Japanese yen can be compared.

As a result, no foreign exchange gain can be calculated, and therefore no taxable foreign exchange gain arises when the funds are remitted to Japan after returning.

 
Final Remarks
As international mobility and cross-border financial transactions continue to increase, we receive an increasing number of inquiries regarding the taxation of foreign exchange gains.

If you have any questions regarding this topic or other international tax matters, please feel free to contact us through our inquiry form.