Liability for certain types of taxes weighs heavily on foreigners overshadowing their comfortable life as expatriates. What’s more, this liability is sometimes not exactly something they are aware of.
Rarely enough, you may unexpectedly inherit properties from your relatives and become a lucky owner of a luxurious estate, let’s say. On cloud nine already? -Fiddlesticks! Once you become a lucky owner of the property or assets, you are subject to Inheritance Tax, the rates of which are pretty high here, in Japan.
This article will introduce you to the basics of the Japanese Inheritance Tax so that you can prepare just in case.
*Disclaimer: This article was accurate at the time of publishing and is intended to give you a quick overview of the tax. Whether certain regulations are applicable to your situation or not can only be decided by a professional tax accountant after careful examination of your documents. For this reason, we are not held responsible for any damages caused by this article.
Table of Contents
WHAT IS INHERITANCE TAX?
Inheritance Tax is levied on an heir who inherits properties, money, or assets. It occurs when the total taxable value exceeds the amount of basic exemption.
The following properties may also be subject to Inheritance Tax if they are located in Japan:
- Mining or quarry rights
- Personal property
Bank deposits
Japanese government bonds or foreign government bonds
Fishing concession rights
Insurance proceeds
Retirement allowances
Trade receivables
Investment interest
Ship or aircraft
Loans
Shares in a bond or company
Patents, copyrights, and trademark
THE CONCEPT OF Jusho (住所)
The donee’s or decedent’s (deceased person) jusho is critical in determining whether one is liable for Inheritance Tax in Japan.
There is no clear definition of jusho (domicile) under Japanese Tax Law. Yet, it is generally considered to be a person’s principal place of residence which can be determined by (but not limited to) the following factors:
Location of a person’s spouse
Location of a person’s residence
Location of a person’s workplace
Location of a person’s substantial assets/property
If you expect that only permanent residents and holders of spousal visas are subject to Japanese Inheritance Tax, then you’re wrongheaded.
Whether you have a jusho in Japan, how long you’ve had it and when you ceased to have one as well as your visa type (most visa types are eligible, even non-permanent ones) -these are the things that factor heavily into the liability for the tax.
WHO IS LIABLE FOR JAPANESE INHERITANCE TAX?
In attempts to make the Inheritance Tax System fair and balanced Japanese authorities have introduced some amendments for the past several years. The following table reflects the current scope of the Inheritance Tax in Japan.
*Temporary Resident: a person who has jusho and a resident status under Table 1 of the Immigration Control and Refugee Recognition Act at the time of inheritance, and whose total period of having jusho is 10 years or less within the last 15 years before the time of inheritance.
**Foreign national: a person who doesn’t have Japanese nationality, had jusho at a point in time within 10 years before the inheritance and whose total period of having jusho is 10 years or less within the last 15 years before the time of inheritance.
In general, the liability for the Inheritance Tax depends on the domicile of the decedent and heir, the nationality of the decedent and heir, and the location of the property.
In case the heir (regardless of nationality) is domiciled in Japan at the time of the decedent’s death, they are subject to the tax on all worldwide assets.
The only exception is made for temporary residents under Table 1 Visa (including instructor & specialist in humanities), they are relieved from the Inheritance Tax on overseas assets (though still liable for any inheritance located in Japan)
Please refer to the following URL to see the list of “Residence Statuses” under Table 1 Visa (the very first table on the page).
EXAMPLE OF A MOST TYPICAL INHERTANCE TAX CASE IN JAPAN
To give you a better hint of how to read the table above, we’ll describe the most typical case.
Let’s assume you’re 40 years old and your parents live in Australia. They have never been domiciled in Japan, only visited for sightseeing purposes and they don’t have any property located in Japan.
The first thing you should keep in mind is that both your and your parents’ status (jusho, type of visa, nationality) are crucial for determining the liability for the Inheritance Tax in Japan.
If you want to avoid paying taxes on worldwide assets (for example property located in Australia in case you inherit it when your parents pass away) you’d better have and maintain “Temporary Resident” status under Table 1 Visa.
This way, you won’t have to pay Inheritance Tax on the property located in your home country or any country abroad.
Since the amount of Inheritance Tax will possibly be huge, it is worth considering whether or not to acquire Table 2 Visa (the status of “spouse of a Japanese national” or permanent resident).
*Temporary Resident: a person who has jusho and a resident status under Table 1 of the Immigration Control and Refugee Recognition Act at the time of inheritance, and whose total period of having jusho is 10 years or less within the last 15 years before the time of inheritance.
Another thing you should be careful with is the amendment made to the law made in 2017.
It says that temporary residents who have lived in Japan for no more than 10 of the last 15 years under table 1 visa (including instructor &specialist in humanities) are relieved of Inheritance Tax on overseas assets (though still liable for any inheritance located in Japan).
However, even if you have lived in Japan for no more than 10 of the last 15 years and then decided to leave Japan for your home country (Australia in our case) for a while, you can become liable for the Inheritance Tax on worldwide assets again if you return to Japan and reestablish jusho within 2 years of departure.
Also, if you are a temporary resident under Table 1 visa, your parents’ status will affect your liability for the Inheritance Tax.
Here are some small tips which can help you:
The easiest and the safest course for Inheritance Tax avoidance is to make sure your parents have never been domiciled in Japan. In this case, no tax is posed on overseas property.
Your parents can be domiciled in Japan, but for no more than 10 years of the last 15.
These hints will help you only in case neither you nor your parents have Japanese nationality.
In case either you or your parents have Japanese nationality, the Inheritance Tax will be posed on overseas assets providing that either one had a jusho in Japan within 10 years of the date of passing away.
HOW MUCH IS INHERITANCE TAX IN JAPAN?
Contrary to other countries, the Japanese Inheritance Tax is levied not on the entire estate of the deceased, but the individual heirs.
It is levied at the progressive tax rate (up to 55%) on the fair market value of the property or asset inherited minus funeral expenses, any liabilities associated with the inherited assets, exemptions, or allowances.
The tax rate varies and depends on the amount of property or assets received.
The following table by the Japan Tax Agency determines the progressive tax rates:
HOW TO CALCULATE JAPANESE INHERITANCE TAX?
The calculation of the Inheritance Tax in Japan is done a bit differently than in other countries. Also, there is the Basic Exclusion for Inheritance Tax calculation. The exclusion as of 2018 amounts to ¥30 million + ¥6 million per heir:
¥30 million + (¥6 million X number of heirs)= Basic Exclusion
So, as you can see, the number of heirs factors greatly in the overall calculation.
Step-by-step calculation of Inheritance Tax:
Determine the net taxable assets (after deducting funeral expenses and liabilities associated with the inherited assets).
Subtract the Basic Exclusion from the net taxable assets to determine the taxable base given the statutory inheritance ratios.
Apply the marginal inheritance tax to each heir (see the table above).
Apply any tax credits or exemptions.
To put it simply, first they calculate the amount of tax for every statutory heir regardless of whether they receive their share or not. These amounts are further added up and divided between the actual recipients of the inheritance.
BASIC EXEMPTIONS & TAX CREDITS FOR INHERITANCE TAX IN JAPAN
There are several exemptions and tax credits related to Japanese Inheritance Tax.
Except for the Basic Exclusion, other possible exemptions available are:
Donation of property to specified non-profit or public organizations
¥5 million retirement allowance per statutory heir
¥ 5 million life insurance proceeds per statutory heir
Applicable tax credits include:
For heirs under the age of 20: ¥100.000 x (heirs age)
For handicapped heirs: ¥100.000 x (heirs age)
In case of special disabilities: ¥200.000 x heirs age
Foreign tax credits are also available (to avoid double taxation)
Another special provision called “spouse exemption” allows couples who have been married for at least 20 years to receive some tax credit as well. To be more precise, a married couple can receive a basic exception of ¥1.1 million and a spouse exemption of up to ¥20 million when passing on the residential property or money for acquiring the residential property to their spouse.
In reality, these exemptions and tax credits usually have a lot of special conditions and rules which can make the application process quite a red tape. It may be a good idea to run to a specialist to get professional advice and make sure you don’t miss out on something important.
WHEN DO I HAVE TO PAY INHERITANCE TAX?
The Inheritance Tax must be filed within 10 months of death. It is paid in one lump sum, deferred payment for up to 20 years may also be allowed, though. In case a single cash payment isn’t feasible, you can also pay with the inherited property.
Late payment, understatement, or non-payment entails severe penalties which may even increase further if investigation is required.
Inheritance Tax can be paid at the tax office or post office. In case of estate taxes, online payment with your credit card is available. You should also be able to pay through an attorney or local tax representative.
What’s the upshot?
Indeed, Inheritance Tax in Japan is a big deal since the rate is unusually high and the way of calculation is most likely different from your country. It can give you even more hassle (on top of already complicated tax laws) if appears unexpectedly.
Don’t make the process even more cumbersome – seek professional advice. This way, you’ll be able to save time and maintain the peace of your mind without any “take a deep breath and count to four” techniques.
2 Responses
Basic Exemption:
Please refer to (3) Inheritance tax and gift tax, a. Outline of inheritance tax and gift tax
https://www.nta.go.jp/english/report2003/text/02/01.htm#a-4_03
on the NTA web site where they state:
Statutory heirs must pay inheritance tax if the total amount of inheritance property exceeds the basic exemption (50 million yen + 10 million yen × number of statutory heirs).
Your web site states the Basic Exclusion is “30 million yen + 10 million yen x number of heirs”.
My question is which is correct “50 million yen” or “30 million yen”?
Dear reader,
Thank you for raising your concern over the correct calculation of Basic Exemption.
The Basic Exemption is calculated in the following way:
30 million yen + (6 million yen * number of heirs)
The information in the article by the NTA you cited seems to be a little outdated.
In fact, there is another article on their website where you can find the relevant information.
Please check the link below:
https://www.nta.go.jp/english/taxes/others/02/15001.htm
You will see that the way of calculating the amount of Basic Exemption changed on January 1, 2015.
Let us know if there are any other questions, we will be happy to assist.
Best,
Julia