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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.
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:
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.
Greenback can make this simple, so get started with us today. Looking for more information about US expat taxes in Japan? Read our full tax guide for Americans in Japan.