Tax Residence and Inheritance Tax

Oh, my.

The section dealing with inheritance tax reform (linked document also talks about the new NISA and changes to dependents, etc.)Back in April we mentioned the changes to inheritance tax laws in passing. Since then people have brought it up a few times on Facebook and in conversation, so I think it’s worth looking at today.

Bear in mind I am not a tax professional, so this article even more than usual should not be taken as authoritative, just a pretty incompetent look at the issue. If you will be substantially affected by the new laws I recommend seeking professional advice.

The Japan Times recently ran an article that was so poorly-written I still don’t really understand what it was trying to say. This seemed to freak a lot of people out (understandably).

David Wagner wrote this rant which also freaked a lot of people out.

​KPMG has published a much clearer English-language report, and PWC has their own report here.

The British Chamber of Commerce and the American Chamber of Commerce also have their own articles on the subject.

One thing seems to be constant: it’s really confusing. And Japan really doesn’t help things with its bizarre way of describing things.

For starters, why does Japan use the same English words to describe two completely separate issues? I’ve had to explain this a dozen times over the last month or so, and it’s beginning to annoy me 😉

Permanent Residence is a status of residence, similar to a visa. It allows you to stay in Japan indefinitely without any restrictions on work. You can apply after ten years in Japan or after being married to a Japanese national for three. It is also possible to get PR quicker if you are amazing.

Being permanently resident for tax purposes (or not) determines whether you should pay Japanese income tax on your income outside of Japan, or inheritance tax on assets received abroad. This is not as clear but seems to kick in after five years.

I believe all medium- to long-term residents here should try to get Permanent Residence, as there are lots of benefits and no drawbacks. Some people get confused due to the similar terminology and think that Permanent Residence is what makes you permanently resident for tax purposes, and that not getting PR would save you from the tax. In reality the two have no bearing on each other, although most people with PR will also be permanently resident for tax purposes.

Also, bear in mind that most of what is written about this subject in English is aimed at very well-paid professionals who are in Japan temporarily. The targets of the new rules are very wealthy Japanese individuals who used to be able to move abroad temporarily in order to avoid paying inheritance tax.

So what has changed this year?

‘Temporary’ residents (defined as living in Japan for fewer than ten years in the fifteen years before inheriting) don’t have to pay inheritance tax on assets outside of Japan. This is an improvement on the situation before, and is designed to make it easier for Japan to attract ‘high quality’ workers.

For people with permanent residence (of the visa kind), spouse of Japanese national, or spouse of permanent resident statuses living in Japan, nothing has changed. You are subject to the same rules as before.

The unwelcome new development is that people living in Japan long-term (ten years or more) or with more grounded visas will be liable for inheritance tax for up to ten years after leaving Japan.

This rather dramatic manga shows one possibility.

Now remember that inheritance tax in Japan has a tax-free basic allowance of 30 million yen plus 6 million yen per inheritor, and for spouses half of the inheritance is tax free regardless of the amount, and you can deduct funeral expenses and taxes paid to a foreign country.

Also, if the deceased had no tax liability to Japan and only one of the inheritors does, the tax due is calculated proportionally as opposed to being levied on the entire estate. A tax professional can help you calculate this.

There are also various other factors and rules, so if you are facing an inheritance tax bill and are likely to have to pay I highly recommend seeking professional advice.

Another important point is that it is necessary to report and pay all relevant taxes within ten months of knowing about the inheritance. Failure to do so will incur interest on the late taxes due to Japan.

So how big a deal are the new rules?

Well, if you are a normal person and are not expecting any multi-million dollar inheritances, probably not such a big deal. However, if you are planning to leave Japan and also have a chance of inheriting a lot of money within the next ten years, it might be worth looking at your options.

One related question I have is just how realistic are the new rules when applied to non-Japanese citizens who leave Japan and don’t plan to come back? I can imagine the government keeping track of high-net worth individuals, or Japanese citizens, but for Joe Bloggs who goes back to Canada and inherits something eight years after leaving Japan, just how would the Japanese tax office find out about the inheritance and collect the taxes due?

I suspect that, as with many things in Japan (speed limits, anyone?), the law as written and the law as enforced will be different. I guess time will tell as people start to run into the new laws.

Again, please remember that I am not a tax professional and this is not advice. Please do leave a comment if you have extra information or if I have made any mistakes in this post.

For more info on this topic, read our guide to inheritance tax in Japan.

What do you think? Are you concerned about the new tax laws? Do you think they will affect you?

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33 Responses

  1. They will affect me, and I am certainly going to get professional advice both here and in America. There is no way I am going to take a tax from both countries. The American laws are more advantageous, from what I have been reading. They tax 40 percent, whereas Japan taxes 50. They allow the first $1,000,000.00 tax free, whereas Japan has only a $300,000.00 (or so) as a tax free base. I uncovered something else interesting that I need to look into. Apparently, if you inherit land in America, the American tax laws are used. But cash is different. Japan takes claim to the cash. So, if you can get your family back home to set you up with land (or a family home) vs cash in their estate planning, then you can save a bit there. I’m not an expert, but have been doing some reading as of late.

    1. Hi Cynthia
      Definitely let me know if you find any good information! I understand tax treaties trump (heh) domestic law, so countries with a tax treaty like the US may have special circumstances.
      Treaties also prevent double taxation, in that you receive credit for the tax paid in one country when calculating any excess tax due in the other.

    2. Unbelievable, Japan is heading for a population crash within the next 50years, and yet the government controlled by Mr Super Abe is making a mistake as epic as pearl harbour. I am Australian, I was unaware that my children with my Japanese wife could be caught in this ludicrous net. We are right now in the process of renouncing our childrens Japanese citizenship (10 and 18 year olds). My son had a dream to live and work in Japan in the future, he will never follow that goal now. I love Japan and the Japanese, but the government is the most punitive and talent ridden authority, in what should be sophisticated given the capital and education advantages the country enjoys. I am telling all my friends in the financial industry to never set foot in Japan. I tell Mr Super Abe to listen the your Tokyo Governor. Damn fools.

      1. Hi Mark
        I don’t really agree with your reaction, but we all have to make our own decisions!
        Two important points:
        1. Japanese nationality alone does not make one liable for inheritance tax (unlike the US tax system). People have to be resident.
        2. If you are a PR or on a spouse visa, you are also liable as long as you remain in Japan.
        Good luck with whatever you decide.

      2. Retire Japans comments are true, but the US have much higher exemptions than in the Japanese case. US inheritance taxes actually raise very little revenue for the government. In Japans case as an example, a friends Japanese wife returned to Japan for a year and a half to take care of a parent in 2008. Said friend then last month discovered that an life insurance policy he had been paying for over 20 years (worth A$1,000,000) for his family was at risk because of his wife’s stay in Japan. That if he was the pass away in the next 2 years (of a 10 year period) that the Japanese government would be able to make a strong claim to sum of the funds payout. With Japanese exemptions set very low, that would become a significant amount. In addition this person has considerable real estate holdings, shares and owns a company in Australia and the US, that would also be at risk in the next few years. He has asked his wife to renounce her J citizenship. I now know not one colleague in the firm I am with wanting to work in Japan. That is a fact. The Tokyo governors criticism of the inheritance tax system speaks for itself https://www.japantimes.co.jp/news/2017/11/13/business/tokyo-pushes-back-bizarre-death-tax-deters-expats/#.WlkoBLyWapo If you dont have much in the way of cash, real estate, etc which is certainly not a bad thing you will not be effected by even the low exemptions set in the law. But trust me that foreign workers as word increasingly gets around will not be coming to Japan to work given the draconian nature of the law and the government in Japan. Retire in Japan (Why???). Just visit on a tourist visa or similar. The country and its people are magnificent. Not sure if this post will be published, but I have cut and paste it and will get it all down somewhere. Good luck for ‘RETIRE JAPANS’ website, though the motives for this forum remain unclear for me personally. My motive is to protect anyone who can innocently fall into the net by being in similar circumstances to myself and a few friends. The tax will ultimately raise very little revenue because we knowledge of the toxic nature of law changes in this area is spreading. Why the Japanese government perseveres in trying to slide things through and hold onto no win situations has always astounded me. Whaling as a perfect example.

      3. Hi Mark
        We only censor comments that are spam or offensive. Divergent opinions are very welcome!
        RetireJapan is here to help people who are living in Japan learn more about personal finance so they can improve their financial situation and live a richer life.
        If you are not willing to pay Japanese taxes then not living and working here is probably a good strategy.
        Personally I think inheritance taxes are very good for society. Might have to do a blog post on the reasoning soon. I predict it will be fairly unpopular 😉
        Best of luck with your decisions.

  2. It won’t really affect me, but I agree with you that there is a lot of confusion and probably some unfounded fears – most non-Japanese people leaving Japan permanently are, I think, unlikely to be chased down.
    I did wonder what this means:
    ‘Also, if the deceased had no tax liability to Japan and only one of the inheritors does, the tax due is calculated proportionally as opposed to being levied on the entire estate. A tax professional can help you calculate this.’
    Isn’t the tax always calculated proportionately? I mean, yes, if you are the sole inheritor then it is calculated against the estate, but if you are one inheritor, you are only taxed on what you inherit. So if you live in Japan (or indeed don’t) and inherit, say $100,000 of a million dollar estate, the tax would only be calculated on that $100,000 anyway.
    Now, if countries have double taxation treaties, you’re only going to be taxed once, so for all but large legacy inheritors whose assessment might vary a lot depending on which country the inheritance is assessed, I think much of this is just a kerfuffle over not much. If the treaty is in place, you’re not going to get taxed twice, surely?
    That might all be nonsense, but I can’t figure out what the actual intention of these new rules are!

    1. Actually ignore all that. I misread the original bit and thought it was talking about taxes paid by inheritors rather than taxes coming out of the estate before payouts!

      1. Sorry if that wasn’t clear! I have met people that thought that Japan would try to tax the entire estate, even if only one of the inheritors was liable, so wanted to make that clear.
        A lot of the angst is from people from countries that don’t have inheritance tax (Australia) or have much higher limits (USA).
        My take on it is that if you are living in Japan you can’t really complain about having to follow their tax rules.
        I think asking people to pay after they have left Japan with no intention of returning is a bit beyond the pale, but it seems to be an unintended consequence of the new law (the purpose of which was explicitly to prevent anyone else getting away with the ‘move overseas, weasel out of paying billions of yen in inheritance tax’ move that some families got away with recently).

      2. The families in question then moved back to Japan and thumbed their noses at the tax office, who took them to court and lost.
        Hence the rather hasty new legislation 🙂

  3. No, it was clear – just me being sloppy and hasty. It does seem harsh on people who are no longer in Japan and in countries with much more favourable inheritance tax laws. With so many countries having differing rates etc it will surely be very complex and frustrating. Nice to be hIt with that in amongst the grief.

    1. Although I have heard that only 5-6% of people pay any inheritance tax in Japan, so it can’t be that onerous or strictly enforced 😉

      1. Don’t think it’s an enforcement thing. Just that moats people’s estates fall within the exempt limits. Only 8% of estates in the UK have liability, too, according to this: http://www.bbc.com/news/business-36014533
        Most people don’t seem to have to pay inheritance tax, which can only be good!

      2. I actually hold the (seemingly unpopular) viewpoint that considerable inheritance taxes are a good thing, and the only way to avoid social stratification 🙂
        I don’t think it is in society’s interests for landowners in the UK, or the Walmart heirs in the US, or Hatoyama’s family here to use their dynastic wealth to control the government. It would be better to reset each generation (up to a certain limit), and use the proceeds to fund education and social security to put everyone on an equal footing. More talented children would then succeed, and society as a whole would benefit.
        I think The Giving Pledge is wonderful, but most people are not going to sign up to it and sadly we seem to be going in the other direction at the moment.

  4. Yes, agree with your reasoning. I just meant most people aren’t rich and the tax exempt limits are high enough that Mr and Mrs Joe Average aren’t going to get hit by much. Thus those that can’t afford to lose more money to a tax just because someone died, won’t. For now, anyway.

  5. Good evening all,
    Thank you for bringing this subject up again. I mentioned it in my interview a few weeks back. I am 99.999% sure that about 10 or 15 years ago I read somewhere that foreigners residing in Japan WOULD be liable to pay inheritance tax on the entire estate as they ‘represented the family in Japan’ or words to that effect. This means that despite my 2 sisters inheriting 1/3 each, I would have to pay tax on 100%.
    If you do not believe me, please think for a moment how outlandish some of Japan’s other rules are/were, this one here about collecting tax years after leaving Japan being the latest outlandish ideas.
    MJC

    1. Hi MJC
      Happily I believe things are a bit brighter than that.
      The tax accountant I spoke to yesterday took great pains to explain that inheritance tax in Japan is complex and there are lots of ways to reduce or eliminate taxes paid (so definitely consult someone if you inherit a large sum).
      Ordinarily how your situation above would work is that the tax-free allowance for your estate would be 30m + 6m per heir (so at least 18m for your and your sisters, maybe more if there are more heirs).
      After deducting the 48m from the value of the estate (you can also deduct funeral expenses and any taxes paid in other countries) you would calculate the amount of tax due and then pay 1/3 of that amount (or less if the proportion of the estate you get is less than that). There are also preferential rates for property, etc.
      So hopefully not too onerous for most people.

      2. Hello again RetireJapan
        Thanks for the detailed update. The amount would not be huge and there would be taxes to be paid in Ireland first, probably more than the Japanese ones. In the end I might owe nothing to Japan, but I cannot imagine dealing with all the hassle to satisfy the Japanese tax office.
        MJC

  6. Thank you for tackling this complicated topic. I found this Price Waterhouse (the accountants) newsletter to be clearer than the JT article.
    https://www.pwc.com/gx/en/services/people-organisation/publications/assets/pwc-japan-gift-and-inheritance-tax-reforms-become-law.pdf
    Can you confirm that this statement is correct:
    All foreign nationals resident in Japan on a Spouse Visa are liable to worldwide inheritance tax i.e. irrespective of how long they have lived in Japan.
    Thanks.

    1. Hi Phillip
      Well spotted and very interesting. It seems as though people on spouse visas (and PR?) may be considered to have their jusho in Japan regardless of how long they have been here.
      It also seems as though this was not a change, but rather a fact that basically no one is aware of…
      So perhaps:
      1. spouse visa/PR = permanently resident for tax purposes from day 1
      2. other visa = permanently resident for tax purposes from year 11
      Again, this seems like first world problems (ie something that should be of concern to fairly wealthy people, but not anyone else). Kind of typical that no one is aware of the issue, not even Japanese tax professionals I have talked to 😉

      1. Or is this actually different from the permanently resident for tax purposes (worldwide income) thing?
        Clear as mud.

      2. Thanks RJ.
        I feel pretty stupid for not being able to get my head around the complete issue but I’m pretty sure the following is certain:
        Foreign residents in Japan
        1. On spousal Visa- Liable for Japanese tax on worldwide inheritance i.e. from day 1 in Japan
        2. Permanent Residence (immigration status)- Liable for Japanese tax on worldwide inheritance
        3. Other visa status- Liable for Japanese tax on worldwide inheritance AFTER 10 years of residence in Japan.
        Being permanently resident for tax purposes (worldwide income) is completely unrelated to your Inheritance tax status. The above 3 statuses are treated equally in relation to worldwide income.
        As you say, Inheritance tax wont affect the vast majority of foreign residents in Japan but for those who for example have relatively wealthy, aging parents in certain home countries this is definitely an issue they should be aware of. If possible, for their first 10 years in Japan they would be better to be on a work visa than following the Spousal Visa/ Eijuken route.
        Cheers.

      3. Well, I think you’re doing better than I am. That has really helped clear things up, I think.
        Unfortunately it also means I am going to have to write another blog post about this!
        They really couldn’t make it more opaque if they were trying, could they 😉

  7. Very much impressive blog keep the good work up. I found this very informative. It helps me a lot. Love to wait for your next post.

  8. Does anyone have experience with delinquent Japan inheritance tax payments? Delinquent tax seems to be 1% plus the special standard rate, currently about 1.8%, during the first two months (a total of 2.8%). Thereafter, it increases to 7.3% plus the special standard rate, or 9.1%. That sounds onerous, if it takes a couple of years to settle an overseas estate.

  10. I need some basic clarification. Is the exemption based on the value of the TOTAL estate, and not merely your share of it? So if your parents leave you and your 3 siblings $1 million, and you get $250,000, you use the exemption on the $1 million to reduce the taxable amount to around $700,000?
    In that case you’d have to pay around 2 mil yen in inheritance, according to the formula. Tell me if this is wrong!

    1. Take a look at this post: http://www.retirejapan.info/blog/japanese-inheritance-taxes
      I’m not an expert, but I believe the following may be true (let’s call it 100m yen just to make the numbers easy):
      With three siblings inheriting, the deduction on the estate would be 30m + 3x 6m, so 48m would be tax free. You can also deduct funeral expenses, etc. from the amount. Call it 51m taxable. The tax due on 51m would be 30%, with a 7m yen deduction. 30% of 44m is 13.2m, and you would be liable to pay 1/4 of that, ie 3.3m on your inheritance of 25m. Your tax rate would be around 13.2%.
      Please talk to a tax specialist or the tax office though, as you may well be able to reduce the bill further. Good luck!

      1. Thanks for that. I also looked at the formula before posting.
        So this seems serious for many foreigners here. In my country and many others, the tax would be zero.
        A lot of foreigners seem to believe that any amount received over 30mil yen is tax-free.
        As for getting advice from a professional, my Japanese accountant merely told me not to transfer any of the money to Japan and I should be safe!