Ⅱ Framework
4 Taxation of Government Bonds
Chapter 1 Government Bonds (JGBs)
Taxation of JGBs varies depending on the bondholder - e.g. resident individual, domestic corporation, domestic financial institution, nonresident individual, foreign corporation - and on the types of bonds. In order to secure smooth and stable financing at a time when large-scale JGB issuance is expected to continue, it is essential to have a deep and diverse investor base. To that end, various tax exemption schemes, including providing tax exemption for interest, are offered to certain qualified investors under certain conditions. To promote JGB holdings, the tax exemption schemes are offered not only to domestic financial institutions and corporations, but also to nonresident individuals and foreign corporations.
(1) Resident Individuals and Domestic Corporations A. Coupon-bearing bond
4 Taxation of Government Bonds
Tax is imposed on the semiannual interest income from coupon-bearing bonds. The tax amounts to 20% (15% income tax and 5% local tax) of the interest income and is withheld at the time the interest is paid ( ☞① ). However, if you earn interest receivable from January 2013 to the year-end of 2037, Special Income Tax for Reconstruction will be levied, leading to tax withholding at 20.315% (15% income tax, 0.315% Special Income Tax for Reconstruction and 5% local taxation). As to coupon-bearing bonds held by corporations, their interest income and capital gain are counted as profit, and corporate tax and "hojinzei-wari" local tax (prefectural / municipal-level taxation which is calculated by multiplying corporate tax by a certain rate) are imposed ( ☞② ). If the JGBs are held by an individual, interest income is subject to a separate withholding tax, but capital gain is not taxed. Other tax breaks, known as "Maruyu" and "Tokubetsu-Maruyu" tax exemption saving schemes which provide tax exemption on interest income from JGB, are offered to disabled individuals and certain other types of individuals.
B. T-Bills T-Bills (Treasury Discount Bills) are discount bonds that are issued at a price less than the face value of the bond. At redemption, the difference between the redemption price and the issuing price is the redemption profit for the bondholders. Redemption profits from discount bonds like T-Bills are generally subject to income tax. However, since T-Bills may only be held by corporations, tax on the redemption profits will not be withheld at the time of issuance. Instead, corporate tax and local tax are imposed on the redemption profits.
C. STRIPS Only corporations may hold STRIPS (principal-only book-entry transfer JGBs and coupon-only book-entry transfer JGBs). Income from the transfer of STRIPS and the difference between the book value of the bond and its redemption payments or interest payments are subject to corporate tax and local tax.
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☞① Designated financial institutions, such as banks and financial instruments firms, and nonfinancial domestic corporations capitalized at 100 million yen or more may be exempt from the withholding tax imposed on the interest income. ☞② If tax is withheld, the portion that corresponds to the holding period of the principal can be deducted from the corporate tax. Public corporations may also be exempt from taxation.
Ⅱ Framework
(2) Nonresident Individuals and Foreign Corporations A. Coupon-bearing bonds
☞ As to the couponbearing bonds held by nonresident individuals or foreign corporations with a permanent establishment in Japan, the tax is withheld at a rate of 15% (15.315% from January 2013 to the end of 2037.
B. T-Bills
C. STRIPS Only corporations may hold STRIPS. Foreign corporations without a permanent establishment in Japan will be exempt from tax, provided that they hold the STRIPS in transfer accounts with JBESPs or QFIs.
D. Bond Gensaki Transactions and Securities Lending Transactions effected by foreign financial institutions Loan interest which foreign financial institutions ( ☞① ) receive from specified financial institutions in Japan ( ☞② ) on transactions executed with repurchase or resale agreements (i.e. Bond Gensaki Transactions) or Securities Lending Transactions between these two parties is exempt from tax, provided that certain requirements have been met.
☞① i.e. domestic financial institutions or financial instruments firms and the like which are account management institutions of JGBs; subcustodians. ☞② QFIs are foreign intermediaries (e.g. global custodians) which met certain requirement
☞①Foreign corporations operating banking business, financial instruments business or insurance business, foreign central banks and international organizations.
4 Taxation of Government Bonds
Only corporations may hold T-Bills. Therefore, redemption profits arising from T-Bills held by foreign corporations are not subject to withholding tax at the time of issuance. However, T-Bills had to be held in a transfer account opened with a JBESP ( ☞① ) or a QFI ( ☞② ). In addition, foreign corporations without a permanent establishment in Japan are further exempt from the corporation tax.
Chapter 1 Government Bonds (JGBs)
Interest income from book-entry transfer JGBs held by nonresident individuals or foreign corporations without a permanent establishment in Japan is exempt from the tax under certain conditions under the tax exemption scheme as described below ((3) Tax Exemption Scheme for Nonresident Individuals and Foreign Corporations). Aside from such tax exemption scheme, if there is a tax treaty in effect between Japan and the country of residence of the nonresident individuals or the country where the foreign corporation is located, and the tax rate on interest stipulated under the treaty is set lower than 15%( ☞ ), the withholding tax rate will be lowered to match the rate stipulated under the treaty, provided that the relevant procedures have been completed. In addition, for coupon-bearing bonds held by foreign corporations with a permanent establishment in Japan, the income tax is withheld, but the portion of such withheld tax corresponding to the period for which the principal is held by them will be deducted from their corporation tax.
☞② (i) Financial institutions and financial instruments firms subject to the provisions of the "Act on Collective Liquidation of Specified Transaction Conducted by Financial Institutions, etc." and (ii) the BOJ.
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Ⅱ Framework
Fig. 2- 23 Recent Tax-Related Initiatives
Chapter 1 Government Bonds (JGBs) 4 Taxation of Government Bonds 78
Fiscal Year
Tax Reform (Main Points)
FY 1999
・Application of tax exemption to interest on coupon-bearing JGBs held by nonresident individuals or foreign corporations which are directly deposited in transfer accounts at JBESPs. ・Exemption from tax for redemption profit arising from TBs/FBs (which are now collectively called "T-bills") held by foreign corporations which are directly deposited in transfer accounts at JBESPs.
FY 2000
・Application of tax exemption for the accrued interest on JGBs that need to be paid back to the national treasury when the JGBs have been reopened (i.e. additional issuance of the existing JGBs).
FY 2001
・Expansion of the tax exemption to cover interest on coupon-bearing JGBs held by nonresident individuals or foreign corporations in transfer accounts with QFIs.
FY 2002
・Expansion of the tax exemption to cover the interest on JGBs held by non-juridical foreign investment trusts, provided that the investment trusts are publicly offered and are not offered in Japan. ・Application of tax exemption, under certain conditions, to loan interest generated from Bond Gensaki Transactions involving JGBs, which is received by foreign financial institutions (till March 31,2004). ・Introduction of STRIPS related tax systems in light of the limitation that only corporations can hold principal-only book-entry transfer JGBs and coupon-only book-entry transfer JGBs. ・Adoption of the necessary tax related measures in conjunction with the transition to the new JGB book-entry transfer system.
FY 2003
・Application of withholding tax exemption to the interest on coupon-bearing JGBs held by nonfinancial domestic companies capitalized at 100 million yen or more. ・Application of withholding tax exemption to the interest on coupon-bearing JGBs held by Japan Government Bond Clearing Corporation.
FY 2004
・Expansion of tax exemption to cover redemption profit arising from TBs/FBs (which are now collectively called "T-bills") held in transfer accounts with QFIs by foreign corporations. ・Extension of the applicable period of tax exemption on loan interest generated from Bond Gensaki Transactions which is received by foreign financial institutions by 2 years (till March 31, 2006).
FY 2005
・Expansion of eligible holders of Inflation-Indexed bonds to include foreign juridical persons, provided that they are not subject to income tax on interest income. ・Relaxation/Simplification of the various procedural requirements to apply for beneficial tax treatment schemes related to JGBs held by nonresident individuals or foreign corporations, including: (i) simplification of the procedure required for notification from QFIs to JGB BookEntry System participants in Japan when the nonresident individuals or foreign corporations hold the JGBs in transfer accounts with QFIs and (ii) simplification of the procedures required for application of tax exemption concerning the interest on coupon-bearing JGBs to those who have tax exemption concerning TBs/FBs(which are now collectively called "T-bills") under certain conditions.
FY 2006
・Extension of the applicable period of tax exemption on loan interest generated from Bond Gensaki Transactions which is received by foreign financial institutions by 2 years (till March 31, 2008).
FY 2008
・Tax exemption on loan interest generated from Bond Gensaki Transactions which is received by foreign financial institutions becomes a permanent measure.
FY 2010
・The book prepared for each investor by JBESPs upon receiving notice from QFIs can be omitted under certain conditions. ・Expansion of the scope of the qualified foreign securities investment trusts.
FY 2011
・Procedures for applying tax-exemption measures on interest of book-entry transfer JGBs to Foreign Pension Trusts, partnerships and Trusts Taxable on Beneficiaries were refined. ・With respect to the Securities Lending Transactions using JGBs, tax exemption measures were applied on the interests received by foreign financial institutions, etc. as in the case of Bond Gensaki Transactions.
FY 2012
・Submission etc. of Application Form for Withholding Tax Exemption on interests of book-entry transfer JGBs pertaining to the trust property of Trusts Taxable on Beneficiaries was made possible to be performed by the trustees of the relevant trust.
FY 2013
・After January 2016, the taxation system for public and corporate bonds will be changed to separate taxation. Moreover, the extent of profit-loss offsetting for financial products will be expanded to public and corporate bonds (Integration of financial income taxes).
FY 2014
・Regarding the integration of financial income taxes to be implemented in January 2016, the scope of discount bills has been revised, etc.
Ⅱ Framework
(3) Tax Exemption Scheme for Nonresident Individuals and Foreign Corporations
A. Coupon-bearing bonds Interest income on JGBs held by nonresident individuals or foreign corporations without permanent establishments in Japan ( ☞ ) in transfer accounts at JBESP or a QFI is exempt from tax in proportion to their holding periods, provided that the requirements for verification of identity are met.
☞ Including trustees of Qualified Foreign Securities Investment Tr u s t s A n d F o r e i g n Pension Trusts.
a. Procedures with tax-exempt account If a tax-exempt account has been established, simplified procedures are available pursuant to the application of the tax exemption scheme for nonresidents. Fig. 2- 24 Overview of Tax Exemption Scheme for Nonresident Individuals and Foreign Corporations(Coupon- Bearing Bonds)( ☞①∼③ )
Identification QFIs
FIPs (other than QFIs) (Overseas) (Japan) Identification JBESPs (sub-custodian) Qualified Account Management Institution only (in the case where descriptions are made in the tax-exempt account of QFIs)
BOJ The Tax Office having jurisdiction over the location of the head office or principal office of JBESPs Application Form for Withholding Tax Exemption and Application Form for Amendment Notification on the matter pertaining to the interest payment
Substitute documents to alter the Statement of the Holding Period Payment record
☞② In case where the JGB described/recorded in the tax-exempt account, QFIs are not required to notify the information of the book for each investor. However, the QFI shall notify the matter pertaining to the interest payment of the JGB to the QAMI under which the QFI concerned has its operation.
4 Taxation of Government Bonds
Nonresident individuals and foreign corporation
☞① If the Notification for T-Bills or STRIPS has already been submitted and the JBESP has filed a document describing the required items, such as t he name of the foreign corporation who has submitted the Notification ( Document on Special Measure ),then submission of the Application Form f or Withholding Tax Exemption can be omitted.
Chapter 1 Government Bonds (JGBs)
In order to secure smooth and stable financing at a time when large-scale JGB issuance is expected to continue, it is essential to have a deep and diverse investor base. Toward this goal, beginning in September 1999 and thereafter, various tax exemption schemes, including providing tax exemption scheme for interest on JGBs, have been introduced to enable nonresident individuals and foreign corporations to invest more easily in JGBs. Such schemes are established with the consideration of fair and equitable taxation, and are offered to nonresident individuals and foreign corporations under certain conditions.
☞③ In order to receive tax-exemption on the interest of JGBs attributed to partnership property or trust property, it is necessary, in addition to the procedures stated in Fig.2-20, other procedures are required, namely, the operating partner of the partnership or trustee of the trust needs to submit Notification Form for Withholding Tax Exemption on Partnership or Trust.
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Ⅱ Framework
☞① Excluding financial institutions and financial instruments firms.
Fig. 2- 25 Tax- Exempt Account ■Tax-exempt account is a financial account which has two divisions; Non taxable-division
A division designated for description/records of JGBs which satisfy the following requirements １. JGBs continuously held by a non-resident or foreign corporation from the initial date of the calculation period for the interest thereon
Chapter 1 Government Bonds (JGBs)
２. JGBs acquired by a non-resident or foreign corporation during the calculation period for the interest thereon in the following cases ⅰ) JGBs held by one of the following types of investors during the period from the first day of the interest calculation to the acquisition date a. nonresident individuals b. foreign corporations c. public corporations d. trustee of public trusts or participant protection trusts e. financial institutions, financial instruments firms f. domestic corporations capitalized at 100 million yen or above ( ☞①) ⅱ) A reception of a notice about following matters from JBESPs/QFI through which previous holder of the JGBs concerned has made descriptions ( ☞② ). a. The JGBs concerned meet the requirement specified above i ) b. The name of the JBESPs/QFIs through which the previous holder has made descriptions c. A matter which proves satisfaction of the requirement specified above i ) d. Other relevant information Taxable-division A division excluding the non taxable-division ■Procedures for setting up a tax-exempt account Notice QFI
4 Taxation of Government Bonds
Qualified Account Confirmation Management Institutions (QAMI)
①Name (☞③) and address of the nonresident individuals or foreign corporations intending to set up a tax-exempt account (☞④) ②Name and address of the business office of the QFI (☞⑤) which sets up a tax-exempt account
Whether names and addresses of the nonresident individuals or foreign corporations, and address of the business office of the QFI (☞⑤) stated on the notice (☞⑥) are consistent with those on the relevant Application Form for Withholding Tax Exemption (☞⑦) . The head of the business office of the QAMI shall notify to the QFI concerned, and record the date, the contents of notices and other relevant information on the copy of the Application Form for Withholding Tax Exemption upon confirming the consistency of the information.
■What is a QAMI ? QAMI is JBESP approved by the commissioner of the National Tax Agency (NTA). QAMI shall prepare and preserve a copy of the following documents for five years after the receipt of them once QAMI receives them: Application Form for Withholding Tax Exemption; Application Form for Amendment; substitute document to alter Statement of Holding Period; Notification Form for Withholding Tax Exemption on Partnership or Trust; Notification Form for Amendment and/or a copy of partnership or trust agreement. Procedure for approval Submit via BOJ
JBESP
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・Application form for QAMI ・Document in which the BOJ certifies that the applicant is the JBESP
BOJ
NTA
☞② Only in the case where the JBESPs/QFIs of the previous holder and the nonresident or foreign corporations concerned are not the same. ☞③ In the case where the tax-exempt account is opened for a trustee of (a) Qualified Foreign Securities Investment Trust(s) or (a) Foreign Pension Trust(s), both the name of the trustee as well as the name(s) of the trust(s) concerned shall be notified. ☞④ In the event the nonresident individuals or foreign corporations intending to set up a taxexempt account receive the interest payment on JGBs attributed to partnership property or trust property, names and addresses of the business office of such partnership or trust and proportion of distribution of profits and losses of the nonresident individuals or foreign corporations intending to set up a taxexempt account. ☞⑤ Limited to the business office located in a counterparty country which has a tax treaty with Japan ☞⑥ QAMI shall keep the notice for five years after the receipt of the notice. ☞⑦ In the event nonresident individuals or foreign corporations intending to set up a tax exempt account receive the interest payment on JGBs attributed to partnership property or trust property, the head of the business office of the QAMI shall confirm whether names and addresses of the business office of the relevant partnership or trust and the portion of distribution of profits and losses of the nonresident individuals or foreign corporations stated on the notice are consistent with those on the relevant Notification Form for Withholding Tax Exemption on Partnership or Trust.
Ⅱ Framework
b. Procedures without tax-exempt account If no tax-exempt account is established, the procedures for the application of the tax exemption scheme for nonresidents are as follows.
Fig. 2- 26 Overview of Tax Exemption Scheme for Nonresident Individuals and Foreign Corporations (Coupon- Bearing Bonds) ( ☞①・②）
Identification QFIs
FIPs (other than QFIs) (Overseas) (Japan) Identification JBESPs (sub-custodian)
BOJ
Nihombashi Tax Office
The Tax Office having jurisdiction over the location of the head office or principal office of JBESPs Statement of the Holding Period
Notice of information described in the book for each investor
Payment record
4 Taxation of Government Bonds
Application Form for Withholding Tax Exemption and Application Form for Amendment
☞② In case where the JBESPs or QFIs prepare the document with required descriptions and submit it to Nihombashi tax office, Statement of the Holding Period will be deemed to have been submitted by nonresident individuals or foreign corporations. (See the dotted lines.)
Chapter 1 Government Bonds (JGBs)
Nonresident individuals and foreign corporation
☞① The contents of the book for each investor are required to be notified to the JBESP on a periodic basis. The JBESP so notified must prepare the book and record/describe information notified. Based on this information, the JBESP, in turn, is required to prepare and submit payment records.
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Ⅱ Framework
B. T-Bills If all the T-Bills which are identical (of one issue) are held in transfer accounts with JBESPs/QFIs when issued, then tax withholding on the redemption profit is exempted at the time of issuance. In addition, since T-Bills can be held only by corporations, corporate tax will be levied on the redemption profits of T-Bills. However, foreign corporations without permanent establishments in Japan ( ☞ ① ) are exempt from such corporate tax. Chapter 1 Government Bonds (JGBs)
Fig. 2- 27 Overview of Tax Exemption Scheme for Nonresident Individuals and Foreign Corporations(T- Bills)( ☞②・③ ) Foreign corporations Identification QFIs
FIPs (other than QFIs)
☞① Including foreign corporations which are trustees of qualified foreign securities investment trusts.
☞② Provided that the Application Form for Withholding Tax Exemption relating to coupon-bearing bonds has already been submitted, the submission of the Notification can be omitted.
(Overseas) (Japan) Identification JBESPs (sub-custodian)
The competent tax office in the tax jurisdiction
4 Taxation of Government Bonds
Notification and Application Form for Amendment
☞③ Payment records are required to be submitted in relation to the payment of consideration for the transfer or redemption amount. Note that payment records must be prepared and submitted for T-Bills as well as STRIPS.
Document certifying that identity of the principal has been verified
Payment record
C. STRIPS STRIPS can be held only by corporations. Foreign corporations without permanent establishments in Japan ( ☞ ) are exempt from such corporate tax on income from the holding or transfer of STRIPS, provided that the STRIPS are held in transfer accounts with JBESPs/QFIs. The procedures for applying such exemptions were integrated with the application procedures required for the tax exemption scheme for non- residents of T-Bill.
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☞ Including foreign corporations which are trustees of Qualified Foreign Securities Investment Trusts.
Ⅱ Framework
D. Bond Gensaki Transactions and Securities Lending Transactions effected by foreign financial institutions Loan interest which foreign financial institutions ( ☞① ) receive from specified financial institutions in Japan (☞② ) on Bond Gensaki Transactions or Securities Lending Transactions between them is exempt from tax, provided that certain requirements have been met.
Foreign financial institutions, etc. (Overseas) (Japan)
Identification Specified financial institutions, etc. in Japan
The competent tax office in the tax jurisdiction
Application Form for Withholding Tax Exemption and Application Form for Amendment
☞② (i) Financial institutions and financial instruments firms subject to the provisions of the Act on Collective Liquidation of Specified Transaction Conducted by Financial Institutions, etc. and (ii) the BOJ.
Chapter 1 Government Bonds (JGBs)
Fig. 2- 28 Overview of Tax Exemption Scheme for Nonresident Individuals and Foreign Corporations(Bond Gensaki Transactions)
☞①Foreign corporations operating banking business, financial instruments business or insurance business, foreign central banks and international organizations.
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