The tax treatment of the assets of foreign nationals living in Japan when receiving an inheritance has come under fire as being harsh and unnecessarily draconian. The krux of the guidelines up until now has been that in certain scenarios, a foreign national could owe tax in Japan even years after having formally left Japan, whilst living in a completely different country. With marginal tax rates going up to 55%, this has been a serious cause for concern among high net worth individuals already living, or considering living in Japan. The rules were all the more perplexing when Japan seems to be making changes elsewhere to solicit foreign workers in an effort to stimulate the economy, and bring in skilled labor. By placing a highly unusual and punitive tax burden on the wealthy, Japan could be viewed as trying to pull a global scale bait-and-switch sleight of hand trick by telling foreign talent that they can qualify for permanent residency within one year if they meet criteria, only to then send them a tax bill up to 10 years after having left the country, telling them that they want a percentage of their dead relatives money. Common sense won out last year and changes have since been made (an improvement to, not an abolition of…).
Changes To Japanese Tax Law
Presently, until you have lived in Japan for 10 out of the past 15 years then you do not have any gift tax or inheritance tax liability as a result of an overseas gift or inheritance of overseas assets. This does however only apply to “Table 1 Visa” holders. This is the majority of visa holders who are here on a working visa. If you have a Japanese spouse, or are a “permanent resident”, then you are still included in the previous regime, whereby you will be subject to tax on international assets received; even for the 5 years following you having left Japan.
Japanese tax rates are marginal and among the highest in the world, starting at 10% and maxing out at 55%. Money can be ‘gifted’ to anyone during the year with a maximum allowance of 1.1 million JPY. Anything below this amount does not attract tax, and requires no notification to be made to the tax office. Many will start to systematically gift the maximum amount allowable to their beneficiaries annually, when they realise that their asset base is about to surpass the minimum “tax-free” threshold. Assets can be transferred to the spouse of the deceased free from tax if the total value is lower than 160 million JPY. Anything above that amount is taxed marginally. The basic exemption is 30 million JPY. This of course includes real estate assets, so homeowners should be among the first to consider the tax implications for their children and other beneficiaries before reaching their 10 year Japan-niversary. For those that have already crossed the 10 year mark, all is not lost, but estate planning should be completed as soon as possible to minimise expense.
You Leave Japan, But Japan Does Not Leave You
As mentioned, Japan levies inheritance tax on those previous Table-2 Visa recipients, even up to 5 years after they have left Japan. Although there is ‘relief’ available from double taxation (via bilateral taxation agreements between countries), it is our understanding that ‘normalisation’ is essentially the practice of grossing up tax bills to that of the higher Jurisdiction. For example, you may have paid the taxes payable on the inheritance in the UK, but those taxes are lower than those that were owed in Japan, so you “only” have to pay the difference in Japan. Are you taxed double? No, but you do pay twice…
As progress is often a slow process in Japan, this part of the legislation has yet to be repealed- despite fierce opposition from the expat community and rational policymakers. We would like to see the eventual removal of this clause altogether on the basis that it is entirely unreasonable. In the meantime, clients are advised to conduct tax planning and be aware of the implications surrounding the transfer of wealth among their family members. Failure to conduct planning could cost a family up to 55% of its financial legacy.
Tax Planning For Foreign Nationals In Japan
Japan does not acknowledge traditional common-law structures like Trusts, which instantaneously complicates the asset-protection proposition for foreign nationals. There are likely many Japan residents who are themselves beneficiaries of Trusts, or have their own Trusts set up from a time that they were residents of a foreign country that acknowledged asset trusts and their preferential tax implications. For these clients, remedial measures should be made to ensure compliance with Japanese rules whilst still maintaining a position which is tax efficient; both from the point of view of capital gains, and inheritance tax.
For those clients who have not yet conducted any planning measures, whose assets are owned personally, now is a good time to consider the options available for tax planning; ranging from corporate ownership of assets, to real estate investments and debt structuring.
[ Sources ]
– PWC; Global Mobility News- Japan Gift & Inheritance Tax Reforms
– KPGM: Japan: Amended scope of inheritance tax, gift tax
– Japan NTA : No.4138 相続人が外国に居住しているとき