2021 Japan Tax Reforms

Mar 29

Changes to the scope of inheritance and gift tax for some foreign nationals

Japan’s 2021 tax reforms include minor changes to the scope of inheritance and gift tax for non-Japanese nationals in an effort to increase the attractiveness of Japan as a financial hub.

In 2018, in response to sentiment from the domestic industry, a new category called “temporarily domiciled foreigner” was introduced to reduce the scope of inheritance and gift tax, in order to increase the attractiveness of Japan as a destination for senior executives.

Under this category, non-Japanese nationals—who had worked in Japan under a visa status in the Immigration Control and Refugee Recognition Act Appended Table 1 (which includes investor/business manager, intracompany transferee, and specialist in humanities/international services) and who had maintained a jusho (similar in concept to a residence) in Japan for fewer than 10 of the prior 15 years—were only subject to inheritance and gift tax on their assets located in Japan for certain gifts and inheritances. Previously, their worldwide assets had been within the scope of Japanese inheritance and gift tax.

The 2021 tax reforms further relax the scope to remove the residence period requirement, so longer-term residents will benefit. The new category will be called “foreign nationals with applicable visa status.” It is likely that the change will go into effect on April 1.

The proposal is that only the visa status requirement will remain. This would mean that taxpayers who reside in Japan for more than 10 of the previous 15 years benefit from the reduced scope.

How does it affect you?

The simplified chart below shows the new treatment. The obligation to pay Japanese inheritance and gift tax falls on the heir or the recipient of the gift, and the scope of the tax depends on: the domicile, visa status, and nationality of the heir/donee; the domicile and visa status of the decedent/donor. Before the proposed changes, long-term foreign residents had to factor in that their heirs would be subject to Japanese inheritance and gift tax on assets located worldwide, making lifetime gifts a potentially inefficient tax option. Now, those long-term residents with a qualifying visa can leave or gift overseas assets to:

Other long-term residents with an applicable visa
Non-resident non-Japan nationals
Japanese nationals who have lived outside Japan for more than 10 years

The first category can apply to family members living together in Japan, and the others to children who work abroad and adult offspring residing overseas.

Planning Opportunities

If a long-term resident holds a qualifying visa, the new changes offer estate-planning opportunities. The reduced scope of inheritance tax means that overseas assets can be left to overseas non-Japanese national heirs—as well as heirs who are Japanese nationals but have not lived in Japan for more than 10 years—without inheritance tax being due in Japan.

Additionally, the reduction in scope of gift tax means that planning for lifetime gifts and trust transactions can be made for overseas assets without the prospect of incurring punitive gift taxes in Japan.

In the past, the options for long-term foreign residents have been limited, as they were taxed in the same way as resident Japanese nationals. The new changes to the scope of the taxes—while ostensibly aimed at increasing the attractiveness of Japan to foreign executives—will also widen the scope for tax planning for certain long-term residents. As ever, if you think you would benefit, make sure to seek professional advice.

Presented in partnership with Grant Thornton Japan