Tax Status in Japan

Clear as mud

A couple of weeks ago we ran a post on the new inheritance tax rules. In that post I was not clear about the tax rules in Japan (in my defense, they are pretty convoluted and it seems few people understand and communicate them well).Based on some excellent comments and feedback from readers, I hope this post is clearer and more accurate 🙂

Japanese citizens in Japan have to declare and pay tax on worldwide income and inheritances. Non-Japanese residents may have a different situation based on their length of stay in Japan and visa status.

The most important thing is that the rules on worldwide income and the rules on inheritance are different.

Income

Every resident of Japan has to declare and pay tax on income from work in Japan. Newly arrived foreign residents do not have to do so for income outside of Japan.

After five years in Japan your status changes to permanently resident for tax purposes. From this point on you do have to declare and pay tax on income outside of Japan (including from work, rent, interest, dividends, royalties, etc.).

If you have assets abroad worth over 50 million yen, you have to declare them to the tax office, even if no tax is due. Failure to do so is a criminal offence with financial and penal consequences.

Inheritance

Newly arrived non-Japanese residents with work or similar short-term visas do not have to pay inheritance tax in Japan on overseas inheritances. After ten years they then become liable for Japanese inheritance tax on any inheritance worldwide. This liability then extends to ten years after they leave Japan.

Non-Japanese residents with spouse visas or permanent residence are liable for Japanese taxes on worldwide inheritances from day 1. They remain liable for ten years after leaving Japan.

As we mentioned at the end of the previous post, this is a new law and it is not very clear how the liability for inheritance tax is going to be handled for non-Japanese residents who leave Japan permanently. Time will tell.

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

So what do you think? Did we get the rules right this time? Are things a little bit clearer?

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27 Responses

  1. Criminal offense if you don’t let them know of over 50 million yen abroad? I wonder what the penalties are.

    3. I think this declaration is as of December 31st of the calendar year concerned. Use the f/x rate from that day. (and I know, there can be intra-day moves)

  2. Wonder how they monitor it with borderline cases because with that amount of money in say pounds or dollars, a few small exchange rate movements could tip you over the limit without you noticing. Or it might tip you over and tip you back so you might have been over for a few months in the year only!

    1. Absolutely! The exchange rate is going to make a huge difference. I’m guessing the letter of the law is that if your assets are over 50m on the deadline, you should declare.
      Not sure how it would work in practice, but once you were consistently over it might be safer to declare the assets (you should already be declaring income).

  3. Great post. One additional interesting point. According to my accountant, for the purposes of determining whether you meet the 50 million threshold or not, you cannot factor debt into that equation. So if you own a house worth 50 million but owe 40 million on the mortgage, you still need to declare. Yuck.
    Also, although it was not mentioned in the post, the exit tax 100 million threshold does not currently apply to real estate so you can potentially avoid this tax by converting assets into real property.
    My question for anyone who knows. If I leave assets to a non-resident of Japan in my will, are they liable for any Japan estate tax on those assets? Is this the same whether the assets are located in Japan or overseas?

      1. That’s what I thought/feared. For those of us with family and assets overseas it feels like a complete overreach by the tax office. Even though I come from a no inheritance tax country, I am fine in principal with a tax resident being taxed on inheritance they receive (similar to income or gifts) but attaching the tax to the assets themselves seems unfair and needlessly complicated as it taxes people who have no proximal relationship to Japan..
        Anyway, rant over… if I really care I just need to make sure I leave japan with less than a million dollars and 10 years before I or my parents shuffle off this mortal coil.

  4. Indeed.
    Japanese inheritance tax should only seriously impact people with serious amounts of wealth, and there are ways around it (you can give over a million yen a year to a family member as a gift tax free, for example).
    If you are likely to be greatly affected it’s worth thinking about in advance I guess 😀

  5. I remember a few years back former Prime Minister Hatoyama (if memory serves me correctly) didn’t declare gifts from his mother. Claiming ignorance. And also that it had happened over seven years prior meaning that it was passed the statute of limitations and he wasn’t liable for any taxes or penalties. Is there a statute of limitations on tax fraud?

  6. Do you have any idea how UK ISA’s are treated in Japan, for permanent residents? As I understand, the UK/Japan double taxation convention prevents double taxation of UK income, but given these are tax exempt, does that then mean any income derived from an ISA is taxable in Japan?

    1. That is an excellent question.
      It also applies to how US IRAs or 401ks will be treated by Japan, and to how iDeCo and NISA will be treated by the US (or by other countries whose citizens move back while holding them).
      I’ll have a look into this.
      Anyone know the answer? Ideally it would be addressed by the tax treaties, but I’m not holding my breath there…

      1. Hello – I was wondering whether you ended up reaching an answer on this? This is a topic that interests me as well, as a UK resident thinking of moving to Japan.
        I personally have my ISA with Nutmeg (which you have posted about separately), so I don’t get ‘income’ but capital gains. My vague understanding of capital gains tax is that it only applies upon the disposal of an asset, so in my mind I would think that the gains on an ISA would be taxed upon withdrawing funds from the ISA as that’s when assets within the ISA become disposable cash.

      2. Hi Gandalf
        I believe that if you were permanently resident for tax purposes in Japan when you cashed out your ISA you would be expected to declare and pay capital gains tax in Japan.

  7. I wonder if anyone on here has been in the position of making a declaration of assets abroad worth over 50 million yen and who would be prepared to share some general info on what to do / what happened. Or is there anyone such as an accountant or financial advisor who would be able to comment or advise on it?

    1. Thankfully (??) not yet. I’d be really interested in hearing someone’s experience.
      Would make a great guest post 😀

      1. I recently sold a house in the US that I inherited from my father when he died about 7 years ago. When I took title of it the Japanese side said I didn’t have to worry about it unless I sold it and repatriated the money to Japan which I did this year. My accountant told me that If I could find out how much my father paid for the property when he bought it, and if that was more than I sold it for the tax liability would be zero. If I sold it for more than my father paid for it I would owe taxes on this amount which is still better than having to pay tax on the total amount. The problem is my father built the house on a parcel of land he owned for many years prior to building the house in 2000. Luckily the builder was still alive but retired so didn’t have a lot of his records going back that far but he was able to estimate pretty well how much my father paid him to build the house. My father also contracted for some finish work himself (as he was in the lumber business) so those records are gone, but I was able to get a good idea from the builder and real estate agent who sold it for what prices were in 2000. Next will be the tax office to see if they find this acceptable. will keep you posted.

    2. Depending on the exchange rates it is looking like I will have to do it next March thanks to an overseas rental property I have purchased. Although I normally file my taxes by myself, I will have a accountant do it this year to make sure it is all done properly and to ensure I get the full value of the depreciation allowance for the property against my global income. I am still getting my finances in order to hopefully simplify the disclosures but once it is all said and done I will share my experience with the forum.

  8. “Non-Japanese residents with spouse visas or permanent residence are liable for Japanese taxes on worldwide inheritances from day 1. They remain liable for ten years after leaving Japan.”
    For any and all? Land? Direct money?
    I have a spousal visa. Been here a decade. Are you telling me if my parents leave me 10k? 100k? 1 million? A priceless painting? A house? 3 million acres? Whatever ever. I owe Japan? Where does it begin and end?

    1. I believe so. It’s a new law so we’ll see how it plays out in practice.
      If you do receive a big inheritance or are likely to do so I recommend talking to a tax professional, as there are lots of rules and deductions that may apply.

  9. This is the first time I’ve heard that people on spouse visas or permanent residents are required to report taxes on world wide invoice. Do you have any documentation on that? I’ve always heard and read that it was only after five years.

    1. Hi Ben
      Tax on worldwide income after five years.
      Tax on worldwide inheritances after 0 years for spouse and PR.
      The latter is a new law :/

      2. Sadly no. Two separate issues:
        1) declare and pay tax on worldwide income after five years in Japan
        2) declare overseas assets when over 50m yen total, even if no tax is due