When it comes to estate planning, most people share a singular goal: leaving your assets to the people you love. However, when you live in a foreign country, achieving this goal can become more complicated. Tax laws involving foreign residents in Japan can be particularly tricky. With the country’s exorbitant inheritance tax rates, some people may opt to gift money, assets, and investments to their children in Japan instead of leaving them in their wills or expensive trusts. But what are Japan’s tax rules around gifting financial assets?
What is the Difference Between Income, Inheritance, and Gifts, According to Japanese Tax Laws?
Any transfer of assets to or from Japanese nationals, permanent residents, or the children and spouses thereof may be subject to taxes. The classification of these assets according to Japanese law will determine whether a portion of these assets can be tax-exempt. Thus, the circumstances under which you transfer and gift assets to your children in Japan will dictate the tax laws to which they are subject. There are three main classifications to consider: income, inheritance, and gifts.
The definitions for these classifications are as follows:
- -Income: Assets donated by a corporation. These assets are subject to income tax.
- -Inheritance: Assets transferred from private ownership of one person (the “descendent” or “donor”) to another (the “heir” or “donee”) as a result of the donor’s death. These assets are subject to inheritance tax.
- -Gift(s): Assets willingly donated by one individual to another. These assets are subject to gift tax.
Are there exemptions for gift tax in Japan? Yes – Japan offers an annual exemption on gifts of up to 1.1 million JPY in value.
What Are the Rates and Methods of Taxing Gifts in Japan?
There are two methods by which gift tax may be levied in Japan. The most common is the calendar year taxation system. Depending on certain requirements, however, you may also choose the taxation system for settlement at the time of inheritance. The two systems operate as follows:
- 1. Calendar year taxation system: This system imposes a gift tax on money, assets, and investments that you transfer to your children only after the 1.1 million yen exemption has been subtracted from the total value of assets transferred between January 1st and December 31st of that year. If the total value of the gifted assets equals less than 1.1 million yen, the gift tax will not be imposed, nor will you be required to file a tax return.
- 2. Taxation system for settlement at time of inheritance: This system is an integration of inheritance tax and gift tax. Under this system, gifts meeting certain requirements may receive a special deduction of up to 25 million yen from the total value of the assets transferred between January 1st and December 31st of that year. This system is only available for qualified transfers from lineal ascendants 60 years of age and older to lineal descendants 20 years of age or older. Under this system the following stipulations apply:
- a. Transferred assets can include multiple gifts, all of which will remain tax-free as long as the total value does not exceed the 25 million yen exemption limit.
- b. Gifts that exceed 25 million JPY will be taxed at a rate of 20% on the amount exceeding exemption. If this occurs, the tax will be treated as a prepayment of tax against a future inheritance tax liability.
- c. Any future inheritance tax calculation will be based upon the value of the gifted assets at the time of transfer.
-
- d. Those who opt for this system will be required to file inheritance tax regardless of changes to their situation at the time of inheritance.
Note: Only taxpayers that file their gift tax return within the statutory due date can choose the second system and the special deduction that accompanies it.
How Much Tax Will My Children Have to Pay if I Gift Them Over 1.1 Million JPY in Assets?
For gifts that exceed 1.1 million JPY and exclude the above exceptional cases, the gift tax rates in Japan are as follows:
| Taxable gifts less exemptions and other exclusions (JPY) | Tax table on gifts except for the column to the right | Tax table on gifts from lineal ascendants to their descendants who are at least 20 years old | |||
| Over | Not over | Tax rate (%) | Deduction (JPY) | Tax rate (%) | Deduction (JPY) |
| 0 | 2,000,000 | 10 | 0 | 10 | 0 |
| 2,000,000 | 3,000,000 | 15 | 100,000 | 15 | 100,000 |
| 3,000,000 | 4,000,000 | 20 | 250,000 | ||
| 4,000,000 | 6,000,000 | 30 | 650,000 | 20 | 300,000 |
| 6,000,000 | 10,000,000 | 40 | 1,250,000 | 30 | 900,000 |
| 10,000,000 | 15,000,000 | 45 | 1,750,000 | 40 | 1,900,000 |
| 15,000,000 | 30,000,000 | 50 | 2,500,000 | 45 | 2,650,000 |
| 30,000,000 | 45,000,000 | 55 | 4,000,000 | 50 | 4,150,000 |
| 45,000,000 | And above | 55 | 6,400,000 | ||
For most people, protecting their financial assets is not just about their own security, but also providing for the future of their children. If you’re not sure how best to manage your assets, and wish to make sure that your gift to your children in Japan will not create a tax cost for them, talk to your financial advisor. An experienced advisor will help you make the best decisions for your family’s future.
