Navigating the labyrinth of Japanese tax laws can be daunting for foreign residents. Sadly, this becomes especially true for those who wish to leave behind a legacy for their families. Whether to get ahead of Japan’s infamous inheritance tax rates, or simply to support their family while they are alive, some people may be tempted to gift valuable assets to their loved ones. Unfortunately, many don’t realize that Japan has developed unique ways to apply gift and inheritance tax such “living gifts”. How can you be sure that your legacy won’t be diminished by unexpected tax liabilities and that your family gets to keep what is rightfully theirs?
Understanding The Basics: How Gift Tax Works In Japan
In Japan, any asset transfer involving Japanese nationals, permanent residents, or their immediate family may attract taxes. How these assets are categorized dictates their tax liabilities. Gift tax can be levied in two main ways:
- -Calendar year taxation system: Gifts are taxed according to the calendar year, with a 1.1 million yen tax exemption. If the cumulative value of the gifts remains below the exemption limit, no tax applies, and filing a tax return is unnecessary.
- -Taxation system for settlement at time of inheritance: Merging gift and inheritance taxes, this system offers a special deduction up to 25 million yen for specific gifts made within a year. However, there are criteria:
- -The donor must be at least 60, and the recipient must be 20 or older.
- -Gifts shouldn’t exceed the 25 million yen threshold.
- -Excess gifts over 25 million JPY are taxed at 20%, serving as an advance against potential inheritance taxes.
- -Future inheritance tax values are determined based on the gift’s value at the transfer time.
- -Choosing this system necessitates filing inheritance taxes regardless of future inheritance situations.
How Gifts Become Liabilities: “Special Benefits” and Inheritance
According to Japanese law, gifts that will be taxed at the time of inheritance are known as “living gifts” or “special benefits”. As mentioned above, these are regarded as an advance transfer of one’s inheritance. When the time comes to divide inheritance after one’s death, the concept of “return of special benefits” comes into play. This essentially factors in these advance transfers (“living gifts”) into the inherited assets.
To put this into a clearer context, consider the following hypothetical scenario:
Keiko dies and leaves behind an estate valued at 50 million yen. Two beneficiaries, Kenji and Yuki, stand to inherit this estate. If divided evenly, both Kenji and Yuki would inherit 25 million yen each. However, if Kenji had previously been gifted 15 million yen while the deceased was alive, then the total assets to be considered for inheritance calculation become:
- 50 million yen + 15 million yen = 65 million yen
Splitting this amount, each beneficiary should ideally inherit 32.5 million yen. Since Kenji had already been gifted 15 million yen, he will only inherit an additional 17.5 million yen now. Conversely, if Yuki agrees that Kenji’s prior gift shouldn’t influence the inheritance distribution, the beneficiaries can collaboratively decide on an alternative split. This highlights the adaptability in inheritance distribution, contingent upon a mutual agreement between beneficiaries.
“Special Benefits” Exceptions
Not all financial support qualifies as a special benefit. Support such as food, educational fees, and medical expenses, which are more of an obligation than a gift, aren’t classified as special benefits. Furthermore, if a person expresses verbally or in writing that they don’t want the gift to be taken back as a special benefit after their death, that gift will be exempt from being classified as a special benefit. (Although these intentions can be voiced casually, it is best to write them into a will or another legal document to avoid any future disputes.)
In July 2019, another exemption came into effect. For couples who have been married for 20 years or more, if one spouse ‘gifts’ their home to the other, it is presumed that the intent is to exempt the gift from being taken back as a special benefit. This means that if no explicit declaration is made, the law treats the house like an obligation rather than a gift and no tax will apply. The special provision allows a basic exemption of 1.1 million yen as well as an amount of up to 20 million yen (exemption for spouse), when residential property or money for acquiring residential property is donated between a couple who have been married for 20 years or more. This change aims to protect the surviving spouse by ensuring they have a home. However, the exemption can be challenged if someone like another living relative argues that the home was intended as a “special benefit”.
Considerations for Foreign Residents of Japan
So how does all of this affect a foreign resident of Japan? Are you equally liable for gift and inheritance tax? The answer depends on your visa status. Thanks to certain tax reforms in 2021, holders of a “Table 1” visa (such as those sponsored by an employer) may be off the hook. Here’s a breakdown:
- Pre-2021: Those designated as “temporary foreigners” based on a visa test and a residency time test were granted exemption from gift and inheritance tax. Foreigners needed to hold a “Table 1” visa (like those sponsored by an employer) and should not have resided in Japan for more than 10 out of the past 15 years.
- Post-2021: The 2021 proposal was favorable for foreigners who have been in Japan for over 10 years within the last 15 years. The definition of “temporary foreigners” was revised and the residency time period waived. The “visa test” remains, however.
As of the 2021 revisions, then, “Table 1” visa holders – even those who have lived in Japan for over 10 years – are able to gift assets to non-Japanese recipients without having inheritance tax applied. If you hold a “Table 2” visa, however (such as a spousal visa or permanent resident visa), your gifts will still be subject to the tax. It should also be noted that the exemption only applies to donors and decedents, not recipients.
It’s also important to note that some tax treaties may affect how Japan’s gift and inheritance taxes are levied on foreigners, depending on their country of origin. Not only that, even temporary foreign residents who plan to leave Japan need to be aware of potential complications like the Japan Exit Tax should they receive assets from a Japanese national.
Protecting Your Assets And Your Legacy In Japan
When you work hard to create wealth to pass on to your loved ones, the last thing you want is for that wealth to be chipped away by unrelenting taxes. Unfortunately, for those living in Japan, there are all too many ways to lose the value of your hard-earned assets. Fortunately, there are experts who can help.
Experienced financial advisers with extensive knowledge of international tax laws can help you create strategies for saving your wealth and making sure it gets passed on as you desire. Don’t leave your loved ones at the mercy of Japanese gift and inheritance taxes. Talk with an expert to create a plan that can protect your wealth and their futures.