Back in April we mentioned the changes to inheritance tax laws in passing. Since then people have brought it up a few times on Facebook and in conversation, so I think it's worth looking at today.
Bear in mind I am not a tax professional, so this article even more than usual should not be taken as authoritative, just a pretty incompetent look at the issue. If you will be substantially affected by the new laws I recommend seeking professional advice.
The Japan Times recently ran an article that was so poorly-written I still don't really understand what it was trying to say. This seemed to freak a lot of people out (understandably).
David Wagner wrote this rant which also freaked a lot of people out.
KPMG has published a much clearer English-language report, and PWC has their own report here.
The British Chamber of Commerce and the American Chamber of Commerce also have their own articles on the subject.
One thing seems to be constant: it's really confusing. And Japan really doesn't help things with its bizarre way of describing things.
For starters, why does Japan use the same English words to describe two completely separate issues? I've had to explain this a dozen times over the last month or so, and it's beginning to annoy me ;)
Permanent Residence is a status of residence, similar to a visa. It allows you to stay in Japan indefinitely without any restrictions on work. You can apply after ten years in Japan or after being married to a Japanese national for three. It is also possible to get PR quicker if you are amazing.
Being permanently resident for tax purposes (or not) determines whether you should pay Japanese income tax on your income outside of Japan, or inheritance tax on assets received abroad. This is not as clear but seems to kick in after five years.
I believe all medium- to long-term residents here should try to get Permanent Residence, as there are lots of benefits and no drawbacks. Some people get confused due to the similar terminology and think that Permanent Residence is what makes you permanently resident for tax purposes, and that not getting PR would save you from the tax. In reality the two have no bearing on each other, although most people with PR will also be permanently resident for tax purposes.
Also, bear in mind that most of what is written about this subject in English is aimed at very well-paid professionals who are in Japan temporarily. The targets of the new rules are very wealthy Japanese individuals who used to be able to move abroad temporarily in order to avoid paying inheritance tax.
So what has changed this year?
'Temporary' residents (defined as living in Japan for fewer than ten years in the fifteen years before inheriting) don't have to pay inheritance tax on assets outside of Japan. This is an improvement on the situation before, and is designed to make it easier for Japan to attract 'high quality' workers.
For people with permanent residence (of the visa kind), spouse of Japanese national, or spouse of permanent resident statuses living in Japan, nothing has changed. You are subject to the same rules as before.
The unwelcome new development is that people living in Japan long-term (ten years or more) or with more grounded visas will be liable for inheritance tax for up to ten years after leaving Japan.
This rather dramatic manga shows one possibility.
Now remember that inheritance tax in Japan has a tax-free basic allowance of 30 million yen plus 6 million yen per inheritor, and for spouses half of the inheritance is tax free regardless of the amount, and you can deduct funeral expenses and taxes paid to a foreign country.
Also, if the deceased had no tax liability to Japan and only one of the inheritors does, the tax due is calculated proportionally as opposed to being levied on the entire estate. A tax professional can help you calculate this.
There are also various other factors and rules, so if you are facing an inheritance tax bill and are likely to have to pay I highly recommend seeking professional advice.
Another important point is that it is necessary to report and pay all relevant taxes within ten months of knowing about the inheritance. Failure to do so will incur interest on the late taxes due to Japan.
So how big a deal are the new rules?
Well, if you are a normal person and are not expecting any multi-million dollar inheritances, probably not such a big deal. However, if you are planning to leave Japan and also have a chance of inheriting a lot of money within the next ten years, it might be worth looking at your options.
One related question I have is just how realistic are the new rules when applied to non-Japanese citizens who leave Japan and don't plan to come back? I can imagine the government keeping track of high-net worth individuals, or Japanese citizens, but for Joe Bloggs who goes back to Canada and inherits something eight years after leaving Japan, just how would the Japanese tax office find out about the inheritance and collect the taxes due?
I suspect that, as with many things in Japan (speed limits, anyone?), the law as written and the law as enforced will be different. I guess time will tell as people start to run into the new laws.
Again, please remember that I am not a tax professional and this is not advice. Please do leave a comment if you have extra information or if I have made any mistakes in this post.
What do you think? Are you concerned about the new tax laws? Do you think they will affect you?