The process of navigating inheritance tax can be difficult for foreign people in Japan or for people who have assets in their non-native countries. Each country has its own set of rules and regulations regarding what is subject to inheritance tax and how that tax should be calculated. If you’re a temporary resident in Japan without significant assets here, you might think that Japan’s inheritance tax laws don’t concern you. Think again.
Japan’s infamous inheritance tax has trapped not only permanent residents and owners of Japan-based assets – it has also come to haunt plenty of unaware temporary residents. Japan’s inheritance tax is notoriously high – and it can apply not only to Japan-based assets but to foreign assets of even temporary residents in Japan who meet certain requirements.
Inheritance tax is a tax on the transfer of assets from one individual – the donor or descendent (the dead person) – to another – the donee or heir (the living person). It’s also known as death duty, estate duty, or probate duty, although different countries may have different definitions and stipulations. Japan, for instance, has an inheritance tax but not an estate tax. Furthermore, while some countries allow the tax to be paid by the heir/donee or the descendent/donor, Japanese inheritance tax must be paid by the heir/donee.
How Does Japanese Inheritance Tax Work?
Japan enforces an inheritance tax on a number of assets that are located within its borders. These may include:
- -Mining or quarry rights
- -Personal property
- -Bank deposits
- -Patents, copyrights, and trademark
- -Japanese government bonds or foreign government bonds
- -Shares in a bond or company
- -Fishing concession rights
- -Insurance proceeds
- -Retirement allowances
- -Trade receivables
- -Investment interest
- -Ship or aircraft
Japan also imposes a tax on all overseas assets according to the inheritor’s residence (jusho). This, however, is not as straightforward as it may seem.
Who Has to Pay Tax on Overseas Inheritance in Japan?
Japan’s inheritance tax applies to overseas inheritances transferred to or from Japanese nationals who currently have residency in Japan or have residency in Japan within the last 10 years. It also applies to assets transferred to or from the following:
- -Long-term residents
- -Permanent residents
- -Spouses and children of permanent residents
- -Spouses and children of Japanese nationals.
As of 2017, transfer of overseas inheritances between “temporary foreigners” are exempt from Japanese inheritance tax. “Temporary foreigners” are foreign nationals who hold a Table 1 visa in Japan and who have had residency in Japan under a certain length of time preceding the event triggering inheritance.
Foreign nationals must meet the following requirements to meet the definition of temporary foreigners:
- Have residency (jusho) in Japan for no more than 10 years out of the 15 years preceding the event triggering inheritance
- Hold a visa issued under Table 1 (this excludes Table 2 visa holders such as permanent residents)
Note that these exceptions only apply if the foreign national does not return to Japan within two years of their departure. Should the foreign national return within those two years, overseas inheritances may still be subject to the Japanese inheritance tax.
There is an additional “5-year tail” rule that applies to overseas inheritances of certain foreign nationals. This rule was enacted on April 1st, 2017 and repealed April 1st, 2018. It stated that the transfer of worlwide assets to foreign nationals who had residency in Japan for 10 years or more would continue to be subject to Japaense inheritance tax for up to 5 years after the individuals permanently departed from Japan. This rule is still in effect, but only applies to inheritances occurring between the dates of enactment and repeal – April 1st, 2017 to April 1st 2018.
How Much is Inheritance Tax in Japan?
Inheritance tax in Japan is quite steep, exceeding 50% at the highest rate. Yes, you read that right. Japanese inheritance tax could claim more than half of the value of your inheritance assets. The following table reflects current inheritance tax rates in Japan:
|The present-day Japanese Inheritance Tax Rates are as follows:|
|Estate Value||tax rate||Deduction|
|10 million yen or less||10%||–|
|30 million yen or less||15%||500,000 yen|
|50 million yen or less||20%||2 million yen|
|100 million yen or less||30%||7 million yen|
|200 million yen or less||40%||17 million yen|
|300 million yen or less||45%||27 million yen|
|600 million yen or less||50%||42 million yen|
|600 million yen more than||55%||72 million yen|
Note: If the donee (person receiving the assets) responsible for paying this tax does not have the necessary cash funds, he or she may be forced to sell the asset(s) in question.
How Can I Protect My Family Against Japanese Inheritance Tax?
If your family members do not qualify for exemption from Japanese inheritance tax, there are still some ways to plan for and protect against it. One of the simpler and more cost-effective options is to set up a life insurance policy in which the death benefit can cover the estimated inheritance tax liability. This, however, requires intimate knowledge of available insurance plans according to your nationality and residence, as well as the taxation policies on such plans in the relevant countries.
For families with significant assets to protect, a more costly option may be to set up a holding company, trust, or foundation. These structures, however, come with annual operating expenses as well as fees for initial setup. Large estates will likely be worth the costs, but families with mid-sized or smaller estates may be better off looking at an alternative.
Whether looking at a life insurance policy or a legal structure such as a trust, there are several potential financial and legal ramifications to take into consideration. Make sure to discuss your options with an experienced financial advisor who can help you best assess your assets and tax position.