Scope of Japanese estate tax for non-Japanese. And types of visa you should not have

Japanese Inheritance Tax law was amended recently to protect foreigners living in Japan on working visa (as opposed to spouse  visa or Permanent Resident visa).

Before the amendment of the law in March 2017, foreigners living in Japan with working visa were subject to Japanese Inheritance Tax even on foreign assets if they die in Japan during their stay. For example, if they were sent from their headquarter to work in Japan as an expat for a few years and passed away here, they would be taxable to Japanese Inheritance even on their  estate in heir home country. The rule was very simple. If you are a resident of Japan, you will be taxed globally. If you are not, you only get taxed on estate located in Japan.

The changes are:

(1) Foreigners with working visa (e.g. humanity, engineer, investment, management. See the table #1) will be only taxed on their Japanese estate unless they have spent more than 10 years in the past 15 years. Their estate at home country will be untouched.

(2) Japanese person living abroad is still subject to global tax until 10 years passes in abroad for the both decedent and heir. Foreigners with visa in the table #2 below are treated the same as Japanese national.

I hope this posting will help but please let us know if you have any questions.

Table #1 (1) 外交、公用、教授、芸術、報道 Diplomacy, Official, Professor, Artist, Journalist
(2) 投資・経営、法律・会計、医療、研究、教育、技術、人文知識・国際業務、企業内転勤、興業、技能Investor/Business Manager, Legal/Accounting Services, Medical Services, Researcher, Education, Engineer, Specialist in Humanities/International Services, Inter-company Transferee, Entertainer, Skilled Labor
(3) 文化活動、短期滞在、Cultural Activities, Temporary Visitor
(4) 留学、就学、研修、家族滞在 College Student, Pre-college Student, Trainee, Dependent/Family

The below table shows the visa categories that are treated in the same way as those with Japanese national for the inheritance tax.

Table #2 (1) 永住者, Permanent Resident
(2) 日本人の配偶者等
Spouse or Child of Japanese National
(3) 永住者の配偶者等
Spouse or Child of Permanent Resident
(4) 定住者
Long-Term Resident

10 steps to reduce inheritance (estate) tax for business owners

There are many options you can take to reduce your inheritance tax. Here are basic steps to reduce the tax. Inheritance tax offers many tax deductions or discount under certain situations. But as a basic, the fundamental aspects should be addressed first.

Basics

1) Estimate your inheritance and see how the tax will be reduced if certain conditions are met. You need to know first what are there and how much they are for each items. Without knowing that, you will never know what options are available to reduce your tax. For example, if you take over parent’s (or parent in law) house and will live there with your resident address moved, you will get 80% discount on the valuation of its land.

2) Those tax benefits are only available if its split of the estate is agreed by the deadline of the tax filing (10 months). It is recommended to prepare an agreement in advance among heirs. For example, it is necessary to have an agreement of the split and actually live there by the deadline of the filing to take the above mentioned 80% discount on the land valuation.

Possible options to reduce tax

The below are real world feasible steps to reduce the tax. Some of them require to set up a co:

1) Buy life insurance by parents money. The money received from insurance is still to be counted as taxable base, you will get deduction of the taxable asset by 5 million yen times number of heirs. If the insurance money is 30 million yen, which should be close to the amount that was paid from the decedent money, you have already reduced taxable base by 20 million yen (presuming that the number of heirs is 4 for example).

2) Make gift to heirs every year. 1.1 million yen per year is tax free of gift tax by each person. This will reduce your taxable assets steadily. If you have 4 heirs and have 10 years before die, you will save 44 million yen in tax base (1.1M * 4 persons * 10 years).

3) Create a company and pay salaries to heirs. Real work has to be done to justify the salaries and keep its records of work. If you are a business owner, majority of your estate should likely come from the valuation of your own company. This is to reduce the valuation of the shares.

4) Create companies under names of heirs and pay fees to them. Again, real work has to be provided.

5) Borrow money to buy properties. Valuation of properties are usually much lower than its real market price. If you borrow money of 100 million yen to buy a condominium in Tokyo, the market price of the condominium may be still around 100 million yen but the valuation for the inheritance tax will likely be 70 million yen. You already manage to have reduced the tax base by 30 million yen.

6) Pay rents in advance or pay for other expenses to harm the balance sheet of the company. Then make gift to heirs in form of shares.

7) Make gift in form of properties to spouse for residence. It is tax free up to 20 million yen. It is a special tax benefit designed to stimulate the economy.

8) Same concept as the above. Your parent can make gift for your children’s education by 15 million yen. You need to open a special bank account for this education purpose and all the withdrawal from the account will have to be reported.

How to calculate Japanese Inheritance Tax

The difference between Japanese inheritance tax and American tax is that it taxes on estate while the Japanese tax is on heirs. That is why the total tax will vary depending on how many heirs are there. The more heirs you have, the lower the inheritance tax will be.

If you live in Japan, you are likely to be taxable at least the assets in Japan. If you are married with Japanese spouse and have the spouse visa, you are treated in the same way as Japanese nationals who are taxed on their global assets.

The way to calculate the inheritance is a little bit tricky.

You will have to figure out how much the total valuation of assets are to be inherited from decedent. Land valuation is based on “the unit price per street” which is made publicly available by National Tax Agency.

http://www.rosenka.nta.go.jp/

If you have a building on it and you are renting it out to somebody third party, its valuation will be lowered by about 21%. The tenant cannot be your family member.

The land valuation can be discount to 50%-80% if it is used for residential, your own business, your company’s business. IF is rented

Building is usually assessed with the same valuation for the property tax. You will find it out in the property tax bill.

The assessment for publicly traded stocks are the lowest of the price at the day the decedent passes away, the average price of the month, the average price of a month before and two month before.

The valuation for a private company is complicated because there are two ways to calculate. But the net asset method is always one option. You need to be aware that the “net asset” should be based on its current value, not its book value.

Here is how to calculate the tax:

Assets:

Cash 50,000,000
Residential House: 30,000,000
Rental Property #1 in Japan: 40,000,000
Rental Property #2 in US: 50,000,000

Decedent: Father

Heirs:
Wife
Son
Daugher

Scope of Inheritance Tax changed a lot since April 2017

Inheritance Tax Law changed a lot since April 2017. There are rules that make the scope of taxable assets both wider and narrower. Good news is that a person who came to Japan for work on an assignment from foreign countries becomes exempt from Japanese Inheritance Tax on overseas estate if she has lived in Japan no more than 10 years in the past 15 years. If this person obtains a visa that allows a permanent stay such as Permanent Residency and Spouse visa, she will be taxable on global assets.

改正案① : 課税の強化⤴

国内に住所を有しない者であって日本国籍を有する相続人等に係る相続税の納税義務について、国外財産が相続税の課税対象外とされる要件を、被相続人等及び相続人等が相続開始前10年(現行:5年)以内のいずれの時においても国内に住所を有したことがないこととする。

A person with Japanese nationality or foreigners with certain visa that allows to stay permanently who has not have domicile for more than 10 years in Japan will be exempt of inheritance tax on assets outside of Japan. (Assets in Japan are still taxable to Japanese Inheritance Tax.)

改正案②: 課税の緩和⤵

被相続人等及び相続人等が一定の在留資格をもって一時的滞在をしている場合等の相続又は遺贈に係る相続税については、国内財産のみを課税対象とすることとする。

Foreigners with
Non permanent residents who live in Japan with ‘table 1’ visa under Immigration Law are only taxable on domestic assets if she has resided n Japan no more than 10 years in the past 15 years. (Assets outside of Japan are exempt from Japanese Inheritance Tax and Gift Tax Law).

改正案③: 課税の強化⤴

国内に住所を有しない者であって日本国籍を有しない相続人等が国内に住所を有しない者であって相続開始前10年以内に国内に住所を有していた被相続人等(日本国籍を有しない者であって一時的滞在をしていたものを除く。)から相続又は遺贈により取得した国外財産を、相続税の課税対象に加える。