The Journal The Authority on Global Business in Japan

The 2018 Tax Reform Proposals were released in Decem­ber 2017, and the rules relating to Japan Inheritance Tax (IHT) and Gift Tax were amended to reduce the burden for non-Japanese nationals who are long-term residents.

Japan has long treated non-Japanese nationals the same as Japanese nationals when it comes to inheritance and gift taxes, even though the circumstances behind and sources of their accumulated wealth can be vastly different.

Increasingly, mobile high-net-worth Japanese nationals sought to take advantage of this and remove their offshore assets from the scope of these taxes by moving them abroad. In the past, five years spent outside the country could mean that offshore assets gifted to your children would not be taxed by Japan.

UNINTENDED IMPACT
Recognizing that the rules did not fit the purpose, and as part of an ongoing drive to increase the tax authority’s ability to levy tax on overseas assets, the rules were amended in 2017 to lengthen the period an individual must be out of the coun­try from five years to 10. But this was targeted at Japanese nationals, and it proved an obstacle for Japanese companies trying to attract senior executives from overseas. So, a carve-out was introduced for “short-term domiciled” non-Japanese nationals (those that had domicile in Japan for fewer than 10 of the 15 years prior to the gift or inheritance date).

Non-Japanese nationals who did not meet the narrow criteria for being temporarily domiciled were once again treated in the same way as Japanese nationals and subject to the widened scope. This meant that, technically, for 10 years after these “long-term” foreign nationals left Japan, their heirs or people they gifted assets to would still have a liability to IHT or Gift Tax in Japan on overseas property received.

CHANGES
The 2018 Tax Reform, to be enforced from April 1, ­seeks to redress this imbalance and encourage senior executives and entrepreneurs to stay in Japan for longer periods by introducing a further exemption.

As with most pieces of legislation, the details are complex. But, it seeks to address the situation in which a non-Japanese national, after expatriating from Japan, gives a gift or be­queaths an inheritance to a foreign national with no domicile in Japan. If the expatriate had been domiciled in Japan for more than 10 of the 15 years prior to making the gift, then the overseas assets they gift or bequeath are out of the scope of Japan IHT and Gift Tax. Assets located in Japan are still subject to tax here.

This particular case is shown in blue in the accompanying chart.

An exception has been pro­posed to prevent non-Japanese nationals from benefitting by leaving Japan for a short period and making a gift while abroad. It has been proposed that if a non-Japanese national who is subject to the exemption returns to Japan within two years of their expatria­tion, gifts made during those two years to non-Japanese nationals with no domicile in Japan would still be subject to the rules currently in force (i.e., worldwide assets would be subject to taxation in Japan).

Although the new rules mean that the scope of Japan IHT and Gift Tax is slightly narrower for non-Japanese nationals after they leave Japan, care still must be taken to ensure that these rules apply to an individual’s particular circumstances. Therefore, advice should be sought when contemplating any asset transfers.

* Temporarily domiciled Visa status from Appendix Table 1 (other than Permanent resident and
Spouse of Japanese national), AND domiciled in Japan for fewer than 10 of previous 15 years
** Short-term domiciled foreign national Non-Japanese national, AND domiciled in Japan for fewer than 10 of previous 15 years
** Long-term domiciled foreign national Non-Japanese national, AND domiciled in Japan for more than 10 of previous 15 years

 


For more information, please contact your Grant Thornton representative at +81 (0)3 5770 8829 or email us at tax-info@jp.gt.com

Eiji Miura is a partner at Grant Thornton Japan