If you live in Japan as a long-term resident, you have likely already heard about Japan’s exorbitant inheritance tax. Perhaps you have already made peace with the wealth you may lose if you receive an inheritance. But what about your heirs? Did you know that there may be a way to protect those you leave behind from losing a large part of your estate’s wealth to the Japanese inheritance tax system?
Understanding the Japanese Inheritance Tax System
Japanese inheritance tax (called “sōzokuzei” 相続税) is a national tax paid by individuals who inherit money or property from someone who has passed away. Japan’s inheritance tax follows a progressive structure, with rates determined based on the amount of money or property received by each statutory heir. In Japan, these rates are among the highest in the world.
Calculating Japanese Inheritance Tax
The tax rates in Japan vary based on the amount of inheritance received. As the value of the inherited assets increases, the tax rates also increase accordingly. At its highest, Japanese inheritance tax can reach up to 55% of the value of the inherited assets – a significant tax burden for beneficiaries of larger inheritances. Here is a breakdown of the inheritance tax progression in Japan:
- Up to ¥10 million: 10%
- ¥10 million – ¥30 million: 15%
- ¥30 million – ¥50 million: 20%
- ¥50 million – ¥100 million: 30%
- ¥100 million – ¥200 million: 40%
- ¥200 million – ¥300 million: 45%
- ¥300 million – ¥600 million: 50%
- Over ¥600 million: 55%
To calculate the inheritance tax in Japan, an exemption amount is first deducted from the total taxable assets. The exemption amount consists of ¥30 million plus an additional ¥6 million per heir. The resulting aggregated tax base is then divided among all the statutory heirs (typically close relatives such as spouses, children, parents, siblings, or other blood relatives).
In Japan, inheritance tax debts must be filed and paid in a single lump sum within 10 months from the date of the decedent’s death. Failure to pay the tax within the designated timeframe can lead to severe penalties. The payment can be made at a tax office, post office, or through a lawyer or local tax representative.
Who Has To Pay Japanese Inheritance Tax?
All heirs, regardless of their nationality, are fully liable to pay inheritance tax on property located in Japan. If the decedent lived in Japan as a citizen or under a non-working visa, inheritance tax is also imposed on foreign property. Even if your children have a foreign nationality and do not live in Japan, they may end up fully liable for inheritance tax upon your death.
The tax liability for multiple heirs is divided among them based on their respective shares of the inheritance. Each heir’s tax responsibility is calculated separately, taking into account the portion of the total assets they receive.
Determining Tax Liability:
In Japan, inheritance tax is levied on each individual who has received an inheritance or gift in the taxable year (beneficiaries). Whether or not the inheritance tax is applicable depends on the following factors:
- -Domicile in Japan: If the person currently or previously maintained a domicile in Japan.
- -Location of assets: Whether the inherited or gifted assets are located in Japan.
- -Nationality of the recipient: If the recipient is a Japanese citizen.
- -Visa status of the decedent: Whether the decedent lived in Japan under a “working” or “non-working” visa.
If your heirs are not Japanese citizens and have been living in Japan for 10 years or less, only assets located in Japan will be subject to inheritance tax. However, if they are Japanese citizens who have lived in Japan within the last 10 years, or are non-citizens and have been in Japan for more than 10 years, overseas inherited assets could still be subject to Japanese tax. This depends on your visa in Japan.
Types Of Visas In Japan
There are many types of visas in Japan. For the purposes of inheritance tax liability, these visas can be broadly categorized as “working” and “non-working” visas.
Working visas, officially categorized as “Table 1” visas, allow foreigners to engage in work that requires specialized expertise. Some examples of working visas include:
- a) Engineer/Specialist in Humanities/International Services: This visa is for professionals with specialized knowledge or skills in fields such as engineering, IT, humanities, or international business.
- b) Skilled Labor: This visa is for individuals with specific skills in fields such as construction, manufacturing, or agriculture.
- c) Intra-Company Transferee: This visa is for employees of multinational companies who are being transferred to their company’s branch or affiliate in Japan.
- d) Highly Skilled Professional: This visa is granted to individuals who possess exceptional skills or expertise in their respective fields.
- e) Business Manager: This visa is for individuals starting or managing a business in Japan.
Note: Also under the “Table 1” visa category are those who stay in Japan as tourists and students, although these are technically non-working visas. However, the temporary nature of their stay in Japan typically renders the Japanese inheritance tax a non-issue for them.
Non-working visas for long-term residents generally fall under one of the categories listed under “Table 2” visas. These visas include long-term resident visas, permanent residents and family-related visas. These visas do not have restrictions on the activities individuals can engage in, allowing them to work in any field or industry. Many long-term foreign residents of Japan hold one of these visas.
These “Table 2” visas can be appealing to foreign residents because they allow freedom to change jobs or partake in multiple activities. Unfortunately, however, the “non-working” status of these Table 2 visas ensures that if you are the holder of such a visa, your heirs will likely be saddled with inheritance tax on even your foreign assets upon your death. This is why some people may want to consider changing their non-working “Table 2” visa to a working “Table 1” visa.
How To Protect Your Loved Ones From Japanese Inheritance Tax
Although you may not be able to avoid paying Japanese inheritance tax on your own inheritance, the laws described above may offer you a way to protect your heirs. Changing your visa status to that of a working visa could save your children from having to pay high taxes on your overseas assets.
Japanese inheritance law is complex and can be difficult to navigate. Protecting yourself and your loved ones requires a thorough understanding of not just the basic laws, but how they are affected by the visa status and relations of various family members. As such, creating an effective plan often requires the expertise of an estate planning professional.
The key point to understand, however, is that there are means by which you can reduce the burden on your loved ones after you die. An experienced adviser can help you create a comprehensive financial plan to not only secure your long-term wealth, but also ensure that generational wealth will be passed on to those you leave behind.