Japan: Inheritance Tax for Expats
The US and Japan both have comprehensive estate/inheritance and gift tax laws that determine their right to tax their citizens and foreign nationals on the transference of their world assets. The US-Japan Estate and Gift Tax Treaty was signed in 1955.
Japan imposes inheritance (sozoku zei ho) and gift tax (zoyo zei) on an heir, devisee, or donee who receives the assets (collectively, the beneficiary). Neither the estate itself nor the executor is a taxpayer. Japanese taxation has complex rules for how foreign nationals are taxed, including Japan. Inheritance tax can be a tricky subject.
In the US, tax is imposed on the decedent’s estate and the donor who gifts the assets. US estate and gift tax rules have different rules for US domiciliaries (people residing in the US) versus non-domiciliaries.
Key Provisions of the US-Japan Inheritance Treaty
Article III of the US-Japan Estate and Gift Tax Treaty, also known as the US-Japan Inheritance Treaty, states that a Japanese citizen, not domiciled in the US, who owns US property, will be taxed by the US. Those who are domiciliaries or citizens of Japan, and do not live in the US (or if you are a beneficiary of a transfer from someone in one of those two groups), the tax treaty applies as follows.
You will be taxed by the US upon transfers by gift or bequest of the following assets:
- Real (immovable) property located in the US
- Tangible (movable) property located in the US
- Debts (including bonds and promissory notes) from US persons, governments, corporations, or other legal entities
- Shares in a US corporation
- Ships and aircraft registered in the US
- Goodwill in a US corporation
- Patents and trademarks registered in the US
- Copyrights licensed or exercisable in the US
- Mining or quarrying rights located in the US
- Fishing rights exercisable in the US
The treaty does not address US gift or estate tax on property not included in this list. So, foreign nationals will be taxed by the US upon transfer by gift or bequest on property not included in the list similar to a non-citizen who isn’t domiciled in the US.
Article IV of the tax treaty provides a treaty exemption when one country’s taxes are solely based on an asset’s situs. For example, if a Japanese person whose domicile is outside of the US dies with a US asset (such as US real estate) and the beneficiary is domiciled in Japan, then the US taxes the transfer solely based on the situs of the asset (the real property in the US). In that case, the US needs to offer a pro rata estate tax exemption that mirrors the value of the US assets over the decedent’s worldwide assets. Thus, if the US assets represent ten percent of the non-resident alien decedent’s total assets, the exemption is ten percent of $4,505,800 (the unified credit in 2022). This exemption also applies in the gift tax context.
Article V of the tax treaty stipulates that a credit will be allowed against the tax imposed by either the US or Japan when the other county imposes a tax by “reason of the nationality of the donor/estate or beneficiary/donee.”
To claim the treaty exemption, the donor or the estate must disclose the worldwide assets and the treaty position. Deductions are also allowed on the same prorated basis. If there’s still double taxation after these relief provisions, the treaty provides a death tax credit as well. Treaty credits must be claimed within five years of the due date of the tax.
Domicile and citizenship are determined in accordance with the law in force in each respective country; however, the treaty does not offer guidance if a person is considered to be domiciled in both countries.
Summary of Japan: Gift Tax for Expats
- Before April 2017, wealthy Japanese individuals were able to avoid inheritance tax and gift tax by changing the residency of both the decedent/donor and the heir/devisee/donee more than five years before a lifetime gift or death.
- Ten-year rule: Effective April 2017, the Japanese government made tax avoidance more difficult by extending the five-year period to ten years. Japanese citizens living in the US (both the heir and donor) must not have been domiciled in Japan for ten years prior to the death of the donor or the date of inheritance to avoid the Japanese inheritance tax.
- Unlimited Liability: An heir or donee who is domiciled in Japan when acquiring property by inheritance, bequest of a decedent, or by gift has unlimited liability for inheritance tax or gift tax, regardless of his or her nationality. Unlimited liability taxpayers are subject to inheritance tax or gift tax on all of the properties acquired irrespective of whether the properties are located in or outside Japan. US citizens or heirs domiciled in Japan are subject to Japanese taxation. Before April 2017, there was no differentiation between permanent and short-term residents.
- Limited Liability: An individual who is not domiciled in Japan when acquiring property by inheritance, bequest of a decedent, or by gift, excluding an unlimited liability taxpayer with Japanese nationality domiciled outside Japan, is categorized as a limited liability taxpayer. The limited liability taxpayer is subject to inheritance tax or gift tax only on the properties situated in Japan.
- US citizens domiciled in Japan: Effective April 2017, relief from Japanese taxation was provided to foreign residents temporarily working and living in Japan. Under the changes, short-term residents who have been in Japan for no more than ten years and have a “table 1” visa (working visa) are no longer subject to any tax on overseas assets from a gift or inheritance. However, long-term residents who spent ten years or more during the last 18 years with permanent residency are now subject to the Japanese inheritance tax. In 2018, further tax reform stipulated that properties outside of Japan will be treated in principle as non-taxable properties for Japanese inheritance tax/gift tax purposes where a decedent/donor is a foreign national who has already left Japan.
- Progressive Tax Rates: The Japanese inheritance tax rates are progressive. Tax is calculated separately for each heir’s portion of the total worldwide assets. Tax rates range from 10%-55% of the value of the total assets. The basic exclusion amount is 30 million yen plus six million per each heir. The gift tax rate is 20% beyond the threshold of 25 million yen. The amount of gift tax paid in Japan is considered a prepayment of future inheritance liability.
US Estate and Gift Tax
- Unified Estate and Gift Tax. The US has been taxing the estates of decedents since 1916, and gifts have been taxed since 1924. In 1976, Congress passed the GST (generation-skipping transfer tax) and connected all of the taxes in a unified estate and gift tax.
- Japanese citizens and non-resident aliens living permanently in the US who pass the substantial presence tests and qualify as resident aliens will be taxed by the US on the transfer by gift or at death of any assets, regardless of where they are located. The tax imposed by the US on such transfers and the applicable exemptions and credits are those available for any US citizen domiciled in the US.
- Japanese citizens domiciled abroad are taxed only on the value of their US situs assets. The exemption allowed for non-resident aliens domiciled abroad is $60,000.
- The estate tax pertains solely to the share of the estate’s value that surpasses an exemption level. The Tax Cuts and Jobs Act (TCJA) expanded the estate tax exemption to $11.2 million for singles and $22.4 million for married couples, but only for the years 2018 through 2025. The exemption level is indexed for inflation. The tax rates range from 18-40%. In 2019, the exemption was $11.4 million for singles and $22.8 million for married couples. The US gift tax exemption was $15,000 per recipient in 2019.