Japan is known for its rich culture and technological advancements. However, it is not without its unique challenges – especially for the High Net Worth Individuals (HNWI) and their families living, working, and staying in Japan. Affluent individuals are often confronted with confusing tax scenarios and harsh rules, making wealth management and tax planning a top concern. Here are four common issues that HNWI face in Japan.
1. Japan’s Complex Gift and Inheritance Tax Landscape
HNWIs aiming to provide for their families posthumously face particular challenges due to Japan’s strict inheritance tax rates. Further complexities arise when assets are gifted during the lifetime, often known as “living gifts”, which can sometimes lead to unexpected tax implications.
With tax rates of up to 55%, there’s a genuine concern for HNWIs in Japan who want to protect the value of their assets when transferring ownership to their heirs. What’s more, according to Japanese law, foreign assets are also subject to inheritance tax.
This makes it difficult for HNWI to protect their assets by housing them overseas using otherwise common structures (like holding companies and trusts) in the same way that they might have in Anglo-american common law jurisdictions.
2. The HNWI Trap: Reporting Requirements in Japan for Overseas Assets
Introduced in 2014, the Japanese tax law mandates permanent residents with overseas assets exceeding 50 million JPY to disclose these assets annually, aiming for transparency over foreign holdings. This threshold includes all assets assessed at their market price, including publicly traded assets and real estate.
The intent behind such rigorous reporting requirements is to monitor the movement of significant assets and prevent tax evasion through overseas channels. Notably, this requirement’s definition of “permanent resident” is expansive, encompassing anyone who has lived in Japan for over five years within the past decade, thus broadening the base of individuals obligated to report.
The consequences of non-compliance with the overseas asset reporting requirements are severe, adding to the burdens faced by HNWI. The Japanese tax authorities wield the power to inspect bank accounts without owner permission and force banks to report international transfers over 1 million yen.
In 2020, a revision required maintaining transaction records for these foreign accounts. The term “permanent resident” encompasses those who’ve resided in Japan for over 5 of the last 10 years, whereas “non-permanent residents”, residing for 5 years or less, are exempt. Assets are assessed via market price or, for real estate, the tax base if market price is unavailable. Non-compliance can result in up to 500,000 JPY in fines or even prison.
3. When The Door Hits You On The Way Out – Japanese Exit Tax
Commencing in March 2015, the Exit Tax Provision aims to tax unrealised gains on financial assets of individuals planning to leave Japan permanently. The goal is to prevent HNWI from relocating their wealth overseas to sidestep Japanese taxes whilst technically being tax “residents” of Japan.
While the law is not applicable to all (and it’s best to check with your adviser how to stay outside of the fishing net…), those who fall under its purview can find themselves facing a considerable financial burden. This is further compounded by the ambiguity surrounding which assets are subjected to the tax, though it explicitly includes securities, bonds, certain contracts, and unsettled transactions.
In practice, the Japanese exit tax mechanism can create significant challenges for those HNWIs who wish to relocate- even if they had no intention of staying in Japan for a significant portion of their lives and have little to no local roots. Not only do they face a potentially hefty tax bill upon departure, but the requirements surrounding the payment are stringent.
If an individual intends to leave Japan, they must either appoint a Tax Administrator to manage their financial obligations, or they must settle their exit tax dues four months in advance of their intended departure date. Failure to comply with these stipulations can result in an individual being categorised as a tax delinquent, prosecuted, and their tax bill exacerbated by penalties and interest.
4. The Pitfalls of Trusts for HNWI in Japan
While trusts are a popular wealth management tool globally, they pose challenges in Japan. Due to differences in legal systems, Japan views trusts differently than many other countries. Transferring assets into a trust can result in hefty gift taxes, and taxable events within the trust can lead to income, dividend, and capital gains tax for the beneficiary.
For HNWI living in Japan, the intricacies of managing or being connected to a trust from a common-law country can inadvertently lead to severe tax and legal consequences. HNWIs in Japan entangled in such trust structures might find themselves in non-compliant positions, exposing their assets to excessive taxation.
How To Protect Your Wealth In Japan Using Trusted Advisers
For HNWI living in Japan, especially foreign residents with substantial assets abroad, the terrain of asset management and inheritance is fraught with complex regulatory hurdles. These include intricate rules on reporting and taxation of overseas assets, as well as the intricacies of managing trusts from common-law countries.
To navigate this intricate landscape and action effective tax and financial planning strategies, many individuals turn to financial advisers experienced in working with international clients with cross-border needs. An experienced wealth management professional can offer insights into tax-efficient strategies for managing and protecting your wealth and assets – whether housed domestically or overseas. Speak to your Tyton adviser today to learn more about planning opportunities for complex people.