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Japan Tax Changes Affect Foreign Residents
Written by Sam
January 16, 2018
Marilyn Monroe had the seven-year itch, but foreign residents in Japan might start getting itchy feet after nine years to avoid getting dragged into the inheritance tax net.
That was the message from the BCCJ’s toolbox event, “What you need to know about Japan’s Inheritance and Gift Tax,” which was presented by BCCJ Corporate Plus member, PricewaterhouseCoopers (PwC Tax Japan) on 29th November.
April 2017 revisions to Japan’s gift and inheritance taxes have been a hot topic in the nation’s foreign community, due to their impact on long-term residents.
Under the changes, short-term residents who have been in Japan for no more than 10 years within the past 15 years and have a “table 1 visa” (such as a working visa) are relieved of any Japan gift or inheritance tax obligations for any transfer of overseas assets via a gift or inheritance.
However, long-term residents who have spent longer than 10 of the past 15 years in Japan or have a “table 2 visa” (such as a spousal visa or permanent residency) are now subject to inheritance tax of up to 55% on their global assets.
Even after permanently leaving Japan, their assets remain subject to Japan’s inheritance tax for up to five years afterwards, meaning heirs could be forced to sell family homes or businesses without ever having set foot in Japan.
PwC’s Thomas Y. Lu explained that under Japan’s system, the burden of tax is on the recipients, with the taxation point at the time of death or gift.
“Japan assets are always subject to tax … and there is no joint ownership per se,” Mr Lu said.
Tax rates range from 10 to 55%, although there are basic exemptions for inheritance tax of 30 million Japanese yen, plus six million yen per statutory heir. For example, a spouse and two children would have a basic exemption of 48 million yen.
Gift tax also has an exemption amounting to 1.1 million yen per recipient, on an annual basis. For inheritance tax, there is a spousal credit, generally the higher of 160 million Japanese yen or the spouse’s statutory allocation shares, along with potential foreign tax credit relief for any double-taxed assets overseas.
“April’s tax reform has created a short-term foreigner category, where you’re exempt from Japan gift and inheritance tax,” said Mr Lu. “If you’ve got permanent residency or a spousal visa, you could switch to a Table 1 visa, but if you’re approaching that 10-year mark it might be a good time to do some potential planning.”
For long-term foreign residents departing Japan, a transitional measure is in place for those who departed prior to 1st April, 2017. However, after this date, those leaving face having their global assets subject to Japan inheritance tax until they no longer have jusho (residency) in Japan for 10 of the past 15 years, or effectively for up to five years after departure.
At the time of writing, the Japanese government has proposed to repeal the “five-year tail” but this proposal has not been passed into law.
“No mechanical test exists, nor is there any minimum time period to establish jusho,” Mr Lu said. He pointed to a range of factors subject to consideration, including the taxpayer’s and his or her family members’ living situation, occupation, asset location, absent home situation, and physical presence.
The somewhat alarmed audience grilled the PwC tax experts on the implications of the tax changes, including whether Japan could enforce such taxes on heirs living overseas and the definition of residency.
Also discussed was Japan’s exit tax, which came into effect in July 2015 for Japanese nationals.
Foreign residents holding a table 2 visa for more than five of the last 10 years will be subject to exit tax. However, there was a transitional measure in place which would effectively delay it until 1st July, 2020, for foreigners.
The exit tax requires the mark-to-market of certain financial assets such as shares and the imposition of capital gains tax on any resulting gains for certain Japan residents moving abroad with financial assets exceeding 100 million yen.
Other questions concerned the impact of wills, with foreign residents urged to get a will written in Japan if their family is located in Japan.
However, the PwC experts noted that Japan real estate and business assets could benefit from valuation discounts.
“Real estate has various special rules and discounts … the most common one is a 20 million yen exemption between spouses who have been married for 20 years, on gift of property or the fund to purchase a Japanese property,” said PwC’s Marcus Wong.
Gift-giving was also discussed, with PwC stating that gifting to qualified charities in Japan is deductible, but not for those overseas.
Meanwhile, grandparents living outside Japan who seek to support their grandchildren’s education in Japan could do so via special Japanese “education” accounts at Japanese financial institutions, of up to 15 million yen.
Tokyo Governor Yuriko Koike is reportedly lobbying to have the tax rules changed, to promote her vision of attracting foreign residents and businesses to make the capital a major international financial centre.
In the meantime though, some long-term foreign residents in Japan might be considering an earlier departure than perhaps otherwise anticipated.
The PwC team welcomes queries from BCCJ members about the changes to Japan’s inheritance and gift taxes.
Marcus Wong: [email protected]
Yuriko Sudo: [email protected]
Thomas Y. Lu: [email protected]