The Journal The Authority on Global Business in Japan

Trusts have long been used outside Japan as a tax-efficient vehicle to protect family assets and preserve family wealth. In addition, where assets are to be passed to minors, trusts can be used to ensure that the assets are looked after until the beneficiary comes of age.

Japan’s inheritance and gift tax law takes a different approach to trusts. Common transactions involving trusts include a settlor entrusting assets to a trust, naming bene­ficiaries, changing named beneficiaries, and winding up the trust. With each transaction, Japanese tax law seeks to determine whether one party has received beneficial ownership rights to assets from another party. If so, a liability will arise in Japan if either of the parties—or the assets—are within the scope of Japan’s inheritance and gift tax.

UNEXPECTED RISK
Consider an overseas resident who, as part of their estate planning, puts a portion of their estate comprising of overseas assets into a trust that is irrevocable during their lifetime and names two of their children as the beneficiaries. In many countries, this would not give rise to any tax liabilities. But if one of the children resides in Japan, putting the assets into the trust risks passing beneficial ownership to them. This would be defined as a gift under Japanese tax law and, depending on the child’s residency status, may be taxable.

The top gift tax rate is 55 percent, and it kicks in at a much lower threshold than the top rate of the inheritance tax. So, a rather unremarkable overseas transaction could possibly give rise to a rather remarkable tax liability in Japan. The same would apply if the trust were set up as part of a will—only the liability would arise under the inheritance tax instead of the gift tax.

SHIFTING TARGET
More complicated trusts can involve no named beneficiaries at the time they are set up and a beneficiary can be added at a later stage. At the time of setup, the law would seek to identify whether the beneficial rights to those assets had been transferred to the trustees and, if so, to treat them as the taxpayer. If not, there is the possibility that the trust itself may be treated as a corporation and taxed accordingly. Further, if a beneficiary is named later, the trust may be treated as a gift or assets transferred from the taxpayer identified initially to this new person.

The key point is that, for residents of Japan, trusts are not effective vehicles for tax purposes. The potential taxation must be considered for each transaction, even if the particular transaction may not be seen as important or give rise to tax consequences overseas. This can be difficult for those residing in Japan if they are not the settlor or are not the driving force behind the estate planning.

INFORMATION EXCHANGE
With the new weapons that the National Tax Agency has in its arsenal, it is becoming easier to identify overseas assets belonging to resident taxpayers. The statement of assets and liabilities—as well as the overseas assets report—are some of the more visible ones, but we have seen a rise in the exchange of tax information between Japan and tax authorities in other countries to identify unreported assets belonging to expats.

The inheritance and gift tax laws in Japan are extremely complex and, in recent years, seem to be updated with alarming frequency. This has given rise to uncertain tax positions and unexpected liabilities. As always, it is important to seek profes­sional advice if you are a party in any sort of trans­action involving an overseas trust, whether it be as a beneficiary or as the one establishing a trust for your heirs.

Adrian Castelino-Prabhu is a principal at Grant Thornton specializing in international inheritance/gift taxation for high-net-worth individuals as well as tax advice for corporations looking to enter the Japan market.

For more information, please contact your Grant Thornton representative at +81 (0)3 5770 8822 or email us at tax-info@jp.gt.com.

www.grantthornton.jp/en

Adrian Castelino-Prabhu is a principal at Grant Thornton specializing in international inheritance/gift taxation for high-net-worth individuals as well as tax advice for corporations looking to enter the Japan market.