Gift and inheritance tax reforms leave more of Japan’s foreign residents liable

Reader M wrote to Lifelines about Japan’s inheritance tax law, which he calls “one of the most punitive in the world”:

I’ve read with interest a number of articles in The Japan Times recently about the Japanese government’s efforts to make it easier for foreigners to obtain permanent residence in Japan. However, there’s another issue that the government has introduced recently that is actually a very big disincentive for foreigners who are considering moving to or taking permanent residence here, and that is the proposed changes to the inheritance tax law. I have a number of friends who are in the process of leaving as a result of this, and others who are refusing assignments here.

Yuko Urushimatsu is a bilingual taxation specialist who has helped answer inquiries on similar matters in past columns. She helped us get to grips with this tricky topic. According to Urushimatsu, the 2017 reform of the Japanese gift and inheritance tax system has various implications for foreign nationals living here.

The first thing is to consider the reforms in relation to visa status and length of residency in Japan, based on the following two categories. (More information on these categories can be found right at the end of the Immigration Control and Refugee Recognition Act here: bit.ly/jimmiglaw.)

1) Short-term residents/table 1 visa holders

“Those who have been in Japan for no more than 10 years within the past 15 years — so- called short-term residents — and who have a ‘table 1 visa’ (such as a working visa) are now regarded as nonresidents” for gift and inheritance tax purposes, Urushimatsu explains. “As a result, they are relieved of tax obligations for any overseas assets they receive from parents abroad. This ties in with the government’s efforts to attract more highly skilled foreign nationals.

“Irrespective of their current or future location, such individuals need not worry about taxation on any assets they receive outside Japan, as long as they hold a table 1 visa and have stayed in Japan short-term.” However, Urushimatsu adds, once your stay exceeds 10 years within the past 15, your tax obligations will change in line with 2) below.

2. Long-term residents/table 2 visa holders

Gift and inheritance taxation has become stricter for long-term residents. Basically, this covers those who hold a “table 2 visa” (such as spouse visa or permanent residence) and those who have lived in Japan for over 10 years within the past 15 (defined as “long-term”).

“Their tax obligation on worldwide assets is not limited just to their period of stay in Japan but also includes the next 10 years after they leave Japan,” Urushimatsu points out. “Thus, it might prove beneficial for table 2 visa holders who have lived in Japan short-term to consider switching to a table 1 visa if possible.”

The next step is to distinguish the roles of the two parties involved in the gift and inheritance tax equation, namely the recipient (the donee or heir) and the donor or decedent (deceased person). Unlike some other countries, Urushimatsu notes that only recipients have tax obligations in Japan. So how do things add up for Japan-based foreign nationals?

Foreign residents of Japan are likely to be most concerned with the implications of potential tax burdens placed on their heirs.

“In principle, transfer of domestic assets is always categorized as a taxable transaction. In addition, if your heirs are gifted or inherit your worldwide assets while you are living in Japan, they have tax obligation for those assets regardless of their country of residence,” says Urushimatsu.

The important thing to note is the change pertaining to cases where neither the recipient nor the donor/decedent is based in Japan.

“Previously, you had no tax obligation regarding your overseas assets in such a case. However, the new rule stipulates that if the donor/decedent had long-term residence in Japan within 10 years of the gift or inheritance being passed on, then not only domestic but also overseas assets might be subject to Japanese taxation. This is irrespective of both parties’ current residential status,” explains Urushimatsu. “For example, if you lived in Japan for more than 10 years and then pass away within five years from the date of your departure, your heirs have tax obligation for both domestic and overseas assets.”

Based on this change, it is conceivable that an heir who does not have Japanese nationality and has never even visited the country could wind up with tax obligations here. (However, they may claim the foreign tax credit on their residential tax return in cases of double taxation.) The accompanying chart summarizes this information, based on the Japanese original on the Finance Ministry’s website (at bit.ly/moftaxreform)

Urushimatsu shares some interesting background information behind the changes.

“The 2017 reform was implemented to plug a loophole that had been exploited by some wealthy Japanese nationals. In this tax evasion scheme, they left Japan and lived abroad for five years in an attempt to transfer their overseas assets with no tax burden on their heirs (who were born abroad or had given up Japanese nationality).”

Unfortunately, the new measures will now also have a potential financial impact on law-abiding foreign nationals, as well as their relatives.

In closing, Urushimatsu notes that the information is given here as a general guide only, and she recommends consulting with the local tax office or a taxation professional (zeirishi) for advice on specific situations.