Japan Deemed Inheritance Tax on Pensions/Annuities

[denny]

Has anyone come across this article or know something about it?

The issue is Japan's deemed inheritance tax. According to this article, upon the death of the benefactor, they have the right to tax a non-Japanese pension or annuity payout based on total to be received based on the expected life expectancy of the receiving individual. And not on what is received annually. I.e. if one receives Yen 2,000,000 a year and is expected to live 20 years, tax is assessed on Yen 40,000,000 the year the giver dies.

Any insights welcomed.

https://www.asahi.com/ajw/articles/14844606

[RetireJapan]

Has anyone come across this article or know something about it?

The issue is Japan's deemed inheritance tax. According to this article, upon the death of the benefactor, they have the right to tax a non-Japanese pension or annuity payout based on total to be received based on the expected life expectancy of the receiving individual. And not on what is received annually. I.e. if one receives Yen 2,000,000 a year and is expected to live 20 years, tax is assessed on Yen 40,000,000 the year the giver dies.

Any insights welcomed.

https://www.asahi.com/ajw/articles/14844606

I saw some of the news coverage of this. Seems insane and hopefully the courts will clarify the rules.

On the other hand, I don't have any inheritable pensions so not a huge concern.

[ClearAsMud]

It's not easy to wrap one's head around this, but two steps of reasoning are involved in the taxation of foreign survivors' pension benefits, whether public or not. The first is distinguishing between inherited assets (sōzoku zaisan) and deemed inherited assets (minashi sōzoku zaisan). The former are assets owned by the decedent that are transferred to the beneficiary or beneficiaries upon death: real estate, savings, and other property actually in the possession of the deceased at the time of death. The latter are assets that were not actually in the possession of the decedent at the time of death but the right to which the decedent (or law) had accorded to the beneficiary or beneficiaries. The most common forms taken by such deemed inherited assets -- as pointed out by the cited Asahi article -- are life insurance benefits and, if the decedent was still employed, corporate death benefits. Specified beneficiaries are designated as having the right to receive these benefits, so technically they are not the personal property of the deceased but instead specific types of income to the beneficiaries. But because the income is received as a result of death -- whether as a lump sum or as scheduled payments over a period of time -- the effect is the same as for other inherited property and the income is treated as an inherited asset, the value of which must be calculated as of the time of death. The designated beneficiaries are responsible for paying inheritance tax on these as-yet-unreceived benefits (with certain deductions available for, say, life insurance). For corporate pensions, for example, this results in inheritance tax possibly being paid on the calculated value of the pension, with survivors' benefits subsequently received by the designated beneficiaries exempt from income tax.

What this means is that ALL survivors' benefits that derive from pensions are "deemed inherited assets," which brings us to the second step in the process: Japanese pension law specifically excludes survivors' benefits under the National Pension and EPI/mutual-aid-association-type pensions from all forms of taxation. This exempts these two types of Japanese public pensions -- and these two types alone -- from standard deemed-inheritance-tax treatment. There is, in other words, no language in Japanese tax law or in international tax treaties that accords similar treatment to any other types of survivors' benefits, so the default position of the NTA is that those benefits are, by definition, deemed inherited assets, the taxable value of which is calculated based on how much those benefits were worth at the time of death. I can't go into the details of how that value is calculated, which is beyond my pay grade, but the method that applies to lifelong survivors' benefits takes into account the expected lifespan of the beneficiary.

The (paywalled) original Japanese version of the Asahi article cited above explains that this treatment of foreign survivors' benefits resulted from a 2010 revision of the inheritance tax code meant to update previous life-span calculations and prevent tax evasion by those trying to transfer assets to beneficiaries before death. This is when the amounts of survivors' benefits subject to potential taxation increased. No follow-up articles appear to have been published in Japanese, so it's not clear what happened in the reported case. But without a change in the statutory language, it's doubtful the NTA will change its position.

One moral of the story is that if you have a corporate pension, the survivor(s) should be made aware of this tax treatment (even if, in the case of spouses, the size of the spouse deduction means that no tax will be due). Book/video royalties and the like that produce income after death are also considered deemed inherited assets, Ben, so it may well be something that concerns you at least tangentially.

[captainspoke]

...

That's a great post--thanks!

I'd insert into that that trusts in the US, often a go-to method of estate planning, are also taxable in full on creation (death of the person concerned). The trust may not distribute much initially (or even anything at all), listing future birthdays/ages upon which someone then receives some money. But japan 'sees through' the trust, and it will all be taxed/assessed as if inherited immediately, rather than taxation happening at some future point.

[RetireJapan]

Book/video royalties and the like that produce income after death are also considered deemed inherited assets, Ben, so it may well be something that concerns you at least tangentially.

No worries there, my wife will have no problems paying tax on the lifetime value of earning 6,570 yen a month in perpetuity

[Deep Blue]

Fucks sake Japan. Yet another reason to try not to die here. I paid in to my UK corporate pension scheme for twenty years, and happily it has grown to a susbstantial figure. It includes payment to my spouse upon my death, so this is going to be yet another piece of fuckery for her to deal with.

I can understand taxing income from a pension but levying IHT on it just seems wrong, especially when the spouse may pay a substantial figure and then die the next day.

In fact the whole issue treating 'gifts" between married couples in Japan seems like it could do with an overhaul.

[IloveJapan]

So what would this imply in the case of the UK state pension? I haven’t made contributions, but I know that the law in the UK changed: For people retiring before 2016, it was possible for a spouse to inherit a state pension, but not after that date. Correct me if I’m wrong. I think from that time on, pension entitlement depends entirely on the individual’s own contributions, so that in most circumstances you can no longer inherit it. So if a person loses their inheritance rights, would they still be subject to tax?

[leojones2]

It's not easy to wrap one's head around this, but two steps of reasoning are involved in the taxation of foreign survivors' pension benefits, whether public or not. The first is distinguishing between inherited assets (sōzoku zaisan) and deemed inherited assets (minashi sōzoku zaisan). The former are assets owned by the decedent that are transferred to the beneficiary or beneficiaries upon death: real estate, savings, and other property actually in the possession of the deceased at the time of death. The latter are assets that were not actually in the possession of the decedent at the time of death but the right to which the decedent (or law) had accorded to the beneficiary or beneficiaries. The most common forms taken by such deemed inherited assets -- as pointed out by the cited Asahi article -- are life insurance benefits and, if the decedent was still employed, corporate death benefits. Specified beneficiaries are designated as having the right to receive these benefits, so technically they are not the personal property of the deceased but instead specific types of income to the beneficiaries. But because the income is received as a result of death -- whether as a lump sum or as scheduled payments over a period of time -- the effect is the same as for other inherited property and the income is treated as an inherited asset, the value of which must be calculated as of the time of death. The designated beneficiaries are responsible for paying inheritance tax on these as-yet-unreceived benefits (with certain deductions available for, say, life insurance). For corporate pensions, for example, this results in inheritance tax possibly being paid on the calculated value of the pension, with survivors' benefits subsequently received by the designated beneficiaries exempt from income tax.

What this means is that ALL survivors' benefits that derive from pensions are "deemed inherited assets," which brings us to the second step in the process: Japanese pension law specifically excludes survivors' benefits under the National Pension and EPI/mutual-aid-association-type pensions from all forms of taxation. This exempts these two types of Japanese public pensions -- and these two types alone -- from standard deemed-inheritance-tax treatment. There is, in other words, no language in Japanese tax law or in international tax treaties that accords similar treatment to any other types of survivors' benefits, so the default position of the NTA is that those benefits are, by definition, deemed inherited assets, the taxable value of which is calculated based on how much those benefits were worth at the time of death. I can't go into the details of how that value is calculated, which is beyond my pay grade, but the method that applies to lifelong survivors' benefits takes into account the expected lifespan of the beneficiary.

The (paywalled) original Japanese version of the Asahi article cited above explains that this treatment of foreign survivors' benefits resulted from a 2010 revision of the inheritance tax code meant to update previous life-span calculations and prevent tax evasion by those trying to transfer assets to beneficiaries before death. This is when the amounts of survivors' benefits subject to potential taxation increased. No follow-up articles appear to have been published in Japanese, so it's not clear what happened in the reported case. But without a change in the statutory language, it's doubtful the NTA will change its position.

One moral of the story is that if you have a corporate pension, the survivor(s) should be made aware of this tax treatment (even if, in the case of spouses, the size of the spouse deduction means that no tax will be due). Book/video royalties and the like that produce income after death are also considered deemed inherited assets, Ben, so it may well be something that concerns you at least tangentially.

The intricate taxation system concerning foreign survivors' pension benefits in Japan involves distinguishing between inherited assets and deemed inherited assets. While survivors' benefits under specific Japanese public pensions are exempt from taxation, other forms of survivors' benefits are treated as deemed inherited assets subject to inheritance tax. This complex system, rooted in the 2010 revision of the inheritance tax code, underscores the importance of understanding the nuances for beneficiaries and potential tax implications.

[Wales4rugbyWC23]

So what would this imply in the case of the UK state pension? I haven’t made contributions, but I know that the law in the UK changed: For people retiring before 2016, it was possible for a spouse to inherit a state pension, but not after that date. Correct me if I’m wrong. I think from that time on, pension entitlement depends entirely on the individual’s own contributions, so that in most circumstances you can no longer inherit it. So if a person loses their inheritance rights, would they still be subject to tax?

Expats cannot receive the UK state pension of their spouse when they die, whether it be frozen or not. Pre-2016 state pensioners residing in the UK were able to get half of their spouse's pension.

[cru42]

Book/video royalties and the like that produce income after death are also considered deemed inherited assets, Ben, so it may well be something that concerns you at least tangentially.

No worries there, my wife will have no problems paying tax on the lifetime value of earning 6,570 yen a month in perpetuity

Ben, beyond my pay grade too, but I wonder if NTA looks at the "likely" future value of your Intellectual Property (Books etc.) until the copyright expires? For writers earning more (scale yours up to, say, 65,000 yen /month or more) x 70 yrs after author's death.