Inheritance Tax in Japan and its Effects on Foreigners

According to Benjamin Franklin, there are two things constant in life: death and taxes . No one can escape from paying taxes, either directly or indirectly.

Due to its technical nature, Japan’s inheritance tax has always been a topic of confusion among expats and foreigners. Therefore, it is imperative for any foreigner wishing to stay in Japan for any reason to understand the intricacies of Japanese inheritance tax laws.

Inheritance tax applies to property and money received from a deceased person. As an expat living in Japan, it is important to be familiar with Japanese inheritance tax laws to prepare for the inheritance tax rate you would pay if you receive an inheritance in Japan or from a family abroad. Inheritance tax liability in Japan depends on specific criteria: “jusho” (having residence in Japan) , length of residence, location of assets (whether in Japan or abroad), and visa status.

How is Inheritance Tax calculated in Japan?
Japan has the highest inheritance tax rate in the world, with the tax rate starting at 10% but can go up to 55% depending on the increase in inheritance. There is a basic exemption of ¥30 million plus ¥6 million for each statutory heir in Japan.

Therefore, individuals are exempt from paying inheritance tax if the net inherited assets are less than the figure mentioned above after deducting expenses such as funeral fees. However, inheritance tax will be imposed if the inherited assets exceed this figure. The value of the inherited assets is subtracted from the value of the basic exemption to obtain the total taxable assets.

In Japan, inheritance taxes are imposed on the beneficiaries of the inheritance and not the estate. The calculation of inheritance tax depends on the number of statutory heirs who will benefit from the inheritance. The basic statutory calculation is based on the Japanese civil code. According to the Japanese civil code, the spouse of the deceased is entitled to 50% of the total assets, while the rest of the assets are divided equally among the children. At the same time, in the case of inheritance tax, the spouse of the deceased pays 50% of the inheritance tax while the remaining 50% is divided equally between the children.

Inheritance tax must be paid to the National Tax Agency within ten months of the death of the deceased, not when the inheritance is received. Failure to pay at this stipulated time attracts heavy penalties ranging from fines to imprisonment.

Is there a foreign inheritance tax in Japan?
The answer is not always so simple for foreigners because several factors determine your qualifying status for inheritance tax in Japan. The easy answer is that if you qualify in Japan for inheritance tax on assets in Japan of which you are a beneficiary, you also qualify to be taxed on inherited assets you receive from abroad.

If your total inheritance is ¥30 million or less, then inheritance tax planning is probably not something you need to worry about, as you will be below the taxable threshold for Japan. If you expect to receive an inheritance worth more than ¥30 million, it may make sense to speak to one of our financial advisors for guidance on whether you need to dig deeper and speak to an accountant in Japan.

Who is obliged to pay Inheritance Tax in Japan?
Japan’s inheritance tax laws apply to both nationals and foreigners. Citizens who receive an inheritance greater than the basic exemption are required to pay inheritance tax regardless of whether the inheritance is located in Japan or abroad.

Japan’s inheritance tax laws become complicated for foreigners and expatriates, as different criteria determine whether an expatriate will be subject to Japan’s inheritance tax laws. As a foreigner, the length of stay in Japan does not matter if you have a table 2 visa (permanent resident, long-term resident, spouse/child of a national/permanent resident). If you fall into this category or have Japanese citizenship when you receive the inheritance, you must pay inheritance tax.

Expats with a table 1 visa are only exempt from paying inheritance tax if they are considered temporary citizens. To be classified as temporary citizens, they must have passed the length of residence test, which means they must have lived in Japan for less than ten years in the last fifteen years.

Changes to Japan’s Inheritance Laws
Japan’s inheritance tax laws have been reviewed and amended numerous times. However, significant changes were made to inheritance tax laws in 2013, 2017, and 2021. Before 2013, if an inheritance beneficiary resided outside Japan when receiving an inheritance, they would only pay inheritance tax on assets located in Japan. .

The 2013 amendment to the inheritance tax law meant that both short-term and permanent residents would be required to pay inheritance tax if the deceased or beneficiary had residence in Japan at the time of death.

This strict law was changed in 2017 to exempt expats who have lived in Japan for less than ten years from paying inheritance tax. A foreigner who has lived in Japan for less than ten years will only have to pay inheritance tax on inheritances received in Japan under this law. Inheritances received from abroad will not be subject to inheritance tax. However, if the foreigner renews his visa, so that the length of stay exceeds ten years, or if he obtains another long-term residence visa, he will have to pay taxes on inheritances received in Japan and abroad.

Another interesting twist on this change is that if the expatriate leaves after spending more than ten years in Japan, they will still have to pay inheritance tax on inheritances received abroad within five years after leaving Japan. On April 1, 2018, the rules were changed again. As a result, the five-year tail rule was relaxed and expatriates no longer needed to pay inheritance tax after leaving Japan.

However, in 2021, reforms were made to Japan’s inheritance tax laws regarding the residence period test (“ten-year-fifteen-year time rule”) with respect to the donor or deceased. Here, the donor or deceased was exempt so that even if they failed the time residency test, the inheritance tax would not be triggered. Additionally, it is important to note that modifications were also made to the five-year tail rule.

How to minimize the impact of Inheritance Tax in Japan?
There are ways in which an expat can reduce the amount of inheritance tax they will pay if they fall into the category of those who will pay this tax. However, since trusts cannot be used to reduce inheritance tax in Japan, a better method to reduce inheritance tax is to invest in real estate and use life insurance to minimize inheritance tax liability.

With real estate, the tax value of the property in Japan is usually lower than the actual market value, which will reduce the tax on the asset compared to the value paid as inheritance tax. Our real estate experts can advise you on property options in Japan.

Additionally, expats can use other exemptions to reduce their inheritance tax burden, including mortgage exemptions, foreign tax credits, donations to public organizations and retirement allowances.

Life insurance is a simple option that can be used to pay any inheritance tax bill in Japan in the event of your death. It is possible to roughly estimate your current inheritance tax bill and take out a policy to cover this. The cost of the life insurance policy will be cheaper than the inheritance tax bill. The Argentum team can advise you on the potential tax bill and insurance options available to expats.

Finally, there are additional options for high net worth individuals residing in Japan, where we can use US-based trusts for estate planning. This type of planning is specialized and makes sense for people who want to structure their assets to minimize future estate tax liability for their loved ones. However, the overall asset base needs to be more than about US$1.5 million for this to make sense.

Inheritance tax planning is a massive problem for any resident of Japan. The best time to plan and mitigate the effects of this tax is now, before any event occurs that triggers the tax.