Japan plans to scrap taxes for foreign investors

Japan plans to end capital gains taxes for foreigners investing in Japanese companies through funds, aiming to kick-start investment that has slowed amid the global economic downturn, a Financial Services Agency official said. Tokyo's benchmark Nikkei share average rose 2 percent in part on the news of the planned tax break, which is expected to lure more overseas investors to Japan, some analysts said.
The government plans to submit a bill to the current session of parliament, seeking to end from April corporate and income taxes on foreign investors who invest via funds, the FSA official said on Wednesday. The FSA is crafting legislation based on the ruling Liberal Democratic Party's policy outline on taxes for fiscal 2009, which is set to be submitted to parliament, the official said.
"If the legislation passes through parliament smoothly, it will be implemented from April 1," he said. Japan currently levies a corporate tax of about 40 percent on capital gains when foreign firms sell shares through funds, one of the highest rates in the world, depressing the flow of global capital into Japan.
Under the plan, eligible funds will need to have held stakes in Japanese firms for at least a year, while any foreign investor with a stake of 25 percent or more in these funds will not be eligible, the FSA official said. Foreign investors account for only 4 percent of fund investment in Japan, far below the 75 percent rate in the UK, 60 percent in the European Union and about 20 percent in the United States, the Nikkei business daily reported on Wednesday.
Market participants welcomed the news, with the Nikkei average - which fell 42 percent in 2008 in its biggest yearly loss ever - gaining 2 percent by the midday break. "This kind of move is positive for the market. Though this would take some time before being implemented, it was one of the factors pushing up prices today," said Kazuhiko Takahashi, general manager at Daiwa Securities SMBC Co Ltd. Still, others said the market impact could be limited.
"Tax breaks are clearly not negative, but we have to think whether this will actually draw more funds to the Japanese stock market," said Masaru Hamasaki, a senior strategist at Toyota Asset Management Co Ltd. "Considering that about 28 percent of Japanese shares are owned by foreigners, I don't think a bigger flow of foreign funds will come into the market on this move," he said.