The Japanese parliament is set to receive the 2021 Japan tax reform proposals early this year. Proposals have been submitted by the Government’s Ruling Party in December 2020, and tax advisors will watch for the final wording and guidance on the passed legislation. Foreigners are set to receive, if the proposals are approved, tax relief for both gift and inheritance taxes.
Gift and Inheritance Tax Relief Proposals for Foreigners In Japan
Foreigners employed in Japan are receiving extra attention in this proposal as Japanese officials are proposing relief that will potentially reduce their tax burden.
Current Gift and Inheritance Tax Law
Current taxation laws limit gift and inheritance tax on temporary workers to Japan situs assets. In order to be designated as temporary workers in this case, foreign nationals will require two main criteria be met:
- Pass a visa test
- Pass a residency time test
Foreigners must hold a “Table 1” visa (such as being sponsored by your employer) and reside in Japan for a period of no longer than 10 years in a 15-year period. The timespan of 15 years is from the date of the gift or inheritance.
Under the current law, no tax is applied to either gift or inheritance so long as the visa and time requirements are met. This is a beneficial law for foreigners that have not resided in Japan for more than 10 years in the past 15 years.
Current laws allow for significantly high taxation of up to 55% on both gift and inheritance tax. Like income tax, the tax rates are higher the larger the gift or inheritance. It is also worth noting that gift tax ratchets up to the highest percentage much faster than with inheritance, with each marginal gift tax bracket being only about 1/10 as high as the brackets for inheritance.
The value of the assets gifted will be frozen at the time of the inheritance tax calculation so that the value is unable to increase during the calculation period. Recipients, not the giver or estate, are under an obligation to settle the tax obligations.
Proposed Gift and Inheritance Tax Law In Japan
The 2021 proposal will benefit foreigners that have been in Japan for over 10 years in the last 15-year period. The definition of “temporary foreigners” will be updated under the new proposal and the residency time period will also be removed. However, the donee or heir will not have the residency time period removed, only the donor and decedent.
Although the residency time test could be effectively removed for donors and decedents resident in Japan, the “visa test” will still apply. If the donor or decedent holds a Table 2 visa (eg. spousal visa or permanent residence), then they will receive no tax relief from the proposed changes, and worldwide assets will still be subject to inheritance tax.
Additionally, it is worth reiterating that the proposed changes impact only donors and decedents. If a foreigner resident in Japan, who holds a Table 1 visa, were to receive inheritance or gift from a family member outside of Japan, he or she (the donee or heir) in Japan would still need to pass the residency time test in order to avoid taxation of non-Japan situs inherited or gifted assets.
The proposal does not outline when the proposed changes, if they’re approved, would go into effect.
Estate and Gift Tax Treaties In Japan
Estate and gift tax treaties do exist that may come into play, depending on the foreigner’s home country. Treaties with certain countries will need to be honored, so the changes may or may not impact non-residents.
Japan Exit Tax For Foreign People
Foreigners should also consider Japan’s Exit Tax when planning gifts or inheritance. The tax may apply if a Japanese resident were to transfer certain assets to a non-resident, provided the taxpayer falls in the scope of the current Japan Exit tax scheme.
What the Changes Mean for Financial Planning In Japan
Foreign nationals that opt to reside or retire in Japan should consider estate planning in their both home country and in Japan. Certain inheritance tax planning strategies may be popular and beneficial in a home country, but may end up not being tax efficient in Japan. A financial planner with experience in cross border estate plans is the best option for smart tax planning.
There’s also the consideration of cross border planning in a post COVID-19 environment. Government changes may or may not be beneficial, depending on the economic state of your home country.
Financial planners know and understand that the state of current taxes is ever-evolving and can change at any time. Proper estate planning needs to be timely and efforts need to be undertaken while beneficial laws are in place.
Japan’s legislators are proposing new tax laws that would impact both the inheritance tax and gift tax. Residency time period will be eliminated for temporary foreigners that qualify, making Japan a more attractive destination for long-term foreigners.
Foreign national donees and heirs will not benefit under the proposed changes.
The bottom line: If you are living in Japan, and hold a Table 1 visa, and plan to gift or pass on your inheritance to non-Japan residents in your home country, regardless of how long you have lived in Japan, under the proposed changes they would not be liable for tax. If you are living in Japan, and hold a Table 1 visa, and inherit or receive a gift from someone overseas, in order to avoid tax on non-Japan assets you must have lived in Japan for less than 10 out of the previous 15 years.
The above outline is to be considered only relevant under the current proposed changes. Law changes may occur, and stipulations may be added or removed before legislation passes. It is expected that the passing of the changes will occur in or around March.
– ‘Japan Releases 2021 Tax Reform Outline’, Ernst And Young, Japan
– Japan, Country Tax Guide – PWC Japan