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Inheritance Tax: Expats Also Liable

New rules widen Japanese tax net

By Eiji Miura

January 1, 2015, heralds not only the start of a new year, but also changes to the inheritance tax rules in Japan. These regulations are designed to both increase the number of inheritances that fall into the Japan tax net and to increase the tax due on those inheritances.

Expatriates in Japan are often unaware of the wide scope of inheritance tax and the liability that their residence in Japan can create for themselves and their heirs.

For non-Japanese nationals
Residents of Japan are “unlimited taxpayers” liable to pay inheritance tax on all assets they inherit, regardless of the asset’s location and their nationality. In most cases, inheritance tax will also be due in the country where the estate is located.

It is a common misunderstanding that the tax paid overseas will be the final inheritance tax liability and that there are no further filing requirements in Japan. However, for an unlimited taxpayer, this is not true, and a tax return is due in Japan within 10 months of the date of passing. To reduce any double taxation, a foreign tax credit is available in Japan for the tax paid overseas.

Foreign nationals with no residence in Japan are deemed limited taxpayers, and are liable to inheritance tax in Japan in two cases.

If the deceased was a resident in Japan at the time of passing, then limited taxpayers will be liable for inheritance tax in Japan on all the assets they inherit. If the deceased was not a resident, then they will only be liable for the assets located in Japan.

In the past, it has been difficult for the domestic tax authority to identify overseas inheritances. To help with this, it has introduced several measures. These include the annual Overseas Assets Regulation filing obligation for permanent residents, and the revision of tax information exchange agreements with other countries. Also, the tax authority is increasing its focus on cross-border inheritance tax audits.

Together with the reports produced by Japanese banks on any remittance over ¥1 million, the tax authority is now well equipped to investigate the large transfers usually involved in settling estates.

Changes from January 1
Each estate benefits from a basic exemption and a deduction for each statutory heir. For inheritances taking place up to December 31, 2014, the basic exemption is ¥50 million, with a deduction of ¥10 million per heir. From January 1, 2015, these are reduced to ¥30 million and ¥6 million, respectively.


The good news
For an expatriate in Japan inheriting overseas assets, it is common for the other heirs to be limited taxpayers and for the whole estate to be located overseas. In such circumstances the expatriate’s portion of the inheritance is taxable in Japan, but the statutory heir exemptions are still available even though those heirs have no liability here.

Furthermore, a non-Japanese national can simply break residence, thus taking any overseas assets they might inherit out of the scope of Japan inheritance tax.

Inheritance tax in Japan can be a complicated subject, but careful planning can not only reduce liabilities, but also the burdensome compliance obligations at a time when they are least needed.



Eiji Miura is a
partner at Grant Thornton Japan specializing in succession planning and inheritance/gift taxation for high net-worth individuals.