International inheritance tax

[TPRG]

I am Australian. I have been living in Japan for over 5 years and therefore qualify as a permanent resident for tax purposes and am liable to pay taxes on global income.

I just read in a book on international inheritance tax that in the situation where one (or both) of my parents - who are in Australia - should die and leave me an inheritance while I am resident in Japan, I would be liable to pay Japanese inheritance tax. Australia does not have inheritance or gift tax laws.

Although this is totally understandable given that I am obliged to pay taxes on global income, it is something that never crossed my mind but has now prompted me to consider planning for the possibility of having to deal with such an event.

A US person resident in Japan for over 5 years in a similar situation (where they receive an inheritance from a deceased in the US) would firstly have to pay US inheritance tax and also Japanese inheritance tax, but would receive a foreign tax credit in Japan for the tax already paid in the US.

Food for thought .......

[R.Akashi]

Absolutely right TPRG,

Most people dont realise that any income brought into the country is gonna be taxable.
Pretty much a double whammy...
Gets even more complicated if your a foreigner who dies overseas..

I'm not too familiar with Aussie inheritance tax but isnt it just passed on to the spouse tax free? I thought If its left to the children, they are required to pay IHT.?

(I wrote an article a while back why Life Insurance is a great way to mitigate any IHT- it may still be on the site)

One good thing about Japan, its self regulating and so is down to the individual to declare all their assets. Mind you, the days of keeping a secret stash overseas will soon be over...The Government are looking to get a Japanese in as head of the OECD. These are the guys that have implemented the new EU tax directive. Watch out for an Asian version..

Regards

Robert Akashi

[TPRG]

Hi Robert,

I'll have to do a bit more digging to find out the details, but yes I believe - for example - were my dad to die in Australia, that my mum would get whatever she is entitled to in the will free of inheritance tax - in Australia!

My issue is that I would be liable for Japanese inheritance tax - not Aussie inheritance tax (which doesn't exist per se). I plan to be completely honest and above-board with the Japanese (and Australian) tax authorities, as I believe honesty is the best policy.

There is an offshoot to inheritance tax in Australia that has to do with the capital gains tax (CGT) on assets received by children - for example - by bequest. I think (don't quote me) that it depends on whether or not the inherited asset was initially acquired by the deceased before or after 20 September 1985 - an important date for CGT. I think the asset, when first acquired through inheritance, is not subject to CGT at that time. However, if the asset is subsequently sold within a certain time frame, then any gains will likely be subject to CGT.

Will report back later if I can clarify this more.

[TPRG]

I know this is a morbid topic (death AND taxes), but it is something where what you "don't" know can hurt you.

On another point that Robert mentioned, regarding foreigners dying overseas, I believe Japanese law states that the person's home country law takes precedence in terms of wills/estates/inheritance. In the case of Australia, I think the law says it depends on the person's domicile at the time of death. Which would thus put the ball back in Japan. However, if the foreigner (Australian in this case) has written a will in Australia and had it notarized there, then it will likely take precedence over the domicile test.

[TPRG]

Robert,

You also mentioned life insurance as a tool for mitigating inheritance taxes. I will have a look to see if your post is still on the board.

This has probably been discussed here before, but Japanese inheritance taxes are pretty hefty on a global comparison basis, and asset-rich families (those with lots of illiquid real estate, for example) that have not done their estate planning homework often leave their surviving family members with a massive inheritance tax headache, and a large chunk of the "family assets" ends up with the taxman. Often a lot of the assets have to be sold off to generate cash to pay the tax, or alternatively the assets can be used themselves to make payments in kind.

Trust structures are commonly used in estate planning in the US and Australia as vehicles for "owning" the assets, meaning the beneficiaries - for example - do not officially inherit the assets and are thus not subject to taxes on them. I understand in the Japanese case, however, that the tax office "sees through" trust structures and deems the beneficiaries to be the "owners" of the trust assets, so trusts are not as effective as estate planning tools in Japan.

I am not a lawyer, but am merely interested in learning as much as possible about the legal and financial implications of taxes, particularly from an international perspective, and my potential exposure to unexpected events (leading into another thread about insurance ...)

Please correct me if I my comments above are in any way mistaken.

[renkachan71]

Is this really true ?

I just read in a book on international inheritance tax that in the situation where one (or both) of my parents - who are in Australia - should die and leave me an inheritance while I am resident in Japan, I would be liable to pay Japanese inheritance tax. Australia does not have inheritance or gift tax laws.

Although this is totally understandable given that I am obliged to pay taxes on global income, it is something that never crossed my mind but has now prompted me to consider planning for the possibility of having to deal with such an event.

A US person resident in Japan for over 5 years in a similar situation (where they receive an inheritance from a deceased in the US) would firstly have to pay US inheritance tax and also Japanese inheritance tax, but would receive a foreign tax credit in Japan for the tax already paid in the US.

Food for thought .......

I had no idea about this. I've lived here for over 10 years so am a bit alarmed to find out I should have been planning for this possibility too. Does the Inheritance Tax rule still apply if the money never enters Japan ? My Mum is busy putting money into trusts because of steep Inheritance Taxes in the UK, but I didn't realize I should have been looking into the tax laws here as well. Thanks for bringing it to my attention.

[TPRG]

Yes - I think it does apply in your case, even if the money never enters Japan, as you have been in Japan more than 5 years and all your global income is therefore taxable. I think there is a UK-Japan tax treaty, in which case there may be exceptions.

Scary stuff isn't it! I don't know what the will situation with my parents is (I know they have one, but don't know if I am in it - he he), but I doubt they would even be considering the international inheritance tax implications of my being resident in Japan as there is no inheritance tax in Australia, and I suspect it wouldn't have crossed their minds.

My parents helped my siblings out with some money towards deposits on their homes (again no gift tax issues in Australia), but if they were to do the same for me while here (which they haven't yet, and we are considering moving back to Australia and not buying a house here in any case), I think it would create some tax issues.

I will try to continue posting more pertinent information as time permits. It's all very taxing (yes shoot me!)

[Guest]

Inheritance Tax?

I can`t believe you have to pay anybody anything .... the money your parents saved is what was left over from the taxes they paid. And you`ll be paying tax on anything you buy with it.

I feel lucky that I live i where I do because I pay no tax on inheritance. I do pay other taxes which I don`t mind because of the social programs. I pay no health insurance and when I get sick I don`t pay anything. It`s all based on income, your ability to pay.
Thanks for the tip.

[TPRG]

Hi barbishepherd,

I know it sounds crazy, but it is absolutely true. The book I bought is called "Kokusai Souzoku," which basically translates as "International Inheritance (or Succession)." Your message made me doubt myself, so I reread certain paragraphs and unfortunately came to the same conclusion as my first post.

I also feel that what my parents have built up and saved (and have already paid tax on) should theoretically (emotionally) not have anything to do with the Japanese tax authorities - or any other country's tax authority - this is particularly disconcerting for me as I grew up in Australia knowing that there were "no death duties" as they were commonly referred to. (Incidentally, Australia used to have "death duty" and gift tax laws, but these were done away with in the 1970s.)

However, before alarming the pants off everyone (including myself), I should also mention that there is a considerable basic exemption involved in calculating the taxable basis of the amount of the inheritance - which also depends on the number of statutory heirs under Japanese Inheritance Tax Law - so the inheritance tax doesn't kick in from the first dollar by any means.

The book has tables and case studies of various situations, including for example whether the donor (i.e. the deceased) was a resident of Japan or another country at the time of death, and whether the donee (heir, inheritor, successor) was a resident of Japan or another country. Other factors in the equation include the location of the assets to be inherited, etc. It also gives examples for Japanese citizens who live overseas etc.

Given time, I will try to post a few of the case studies and the table (in text form I guess) to give more concrete examples. They spell out the story very clearly.

[Guest]

I can`t believe you have to pay anybody anything .... the money your parents saved is what was left over from the taxes they paid. And you`ll be paying tax on anything you buy with it.

Yes, well that's the kind of bull____ you have to put up if you or your parents put forth any effort to provide for your family. Havenots (or rather do-nots) somehow view it as unfair that people should receive money, estates for free from their parents. Of course these same people have no qualms about receiving monetary assistance from the government...

If you inherit money overseas, just keep your mouth shut. If you have to move the money to Japan, be creative or be prepared to pay. Fight bull____ with bull____!

Your parents would roll over in the grave if they knew you didn't put up a fight to keep their hard-earned money in the family.

[donpaulo]

A friend recently had a parent die with EU assets, she was a US resident. She paid an EU tax for the assets, but in American its illegal to be taxed twice so she up and transferred the whole lot of it stateside and is using it.

I would ask ARE the Japanese are looking for income from assets or the assets themselves ?

If they are looking only for income then setup a re-investing scheme with your foreign money. No income will appear, just more assets.

If they are looking for assets to tax, there lies the mix. Honesty means paying tax.. dishonesty means saving money but breaking the law.

you decide.

[TPRG]

Case Study 1

QUESTION:
Paul is a US citizen (and not a Japanese national) who has been a resident of Japan for 6 years. Paul's father died (in the US) in January this year. Paul inherited cash and deposits and real estate (in the US) to the value of about 1-oku (100 million) yen. Paul does not have Japanese citizenship, and the inherited assets are not located in Japan. Does Paul have to pay Japanese inheritance tax on the above inheritance?

ANSWER:
Paul has a residence in Japan, and so qualifies as a resident with an unlimited tax liablilty. This means that Paul is liable to pay inheritance taxes on all inherited assets globally, which of course includes assets inherited in the US. However, as the US also imposes inheritance tax on those same assets, the calculation of the inheritance tax due in Japan will be adjusted to reflect a foreign tax credit for inheritance taxes already paid in the US (also prescribed under the US-Japan taxation treaty).

Just Googled the following URL which has a table and all. This is from the website "To live in Fukui - Daily life information for foreign residents in Japan." This website contains much better information in English than the Kanagawa prefectural website.

http://info.pref.fukui.jp/kokusai/ta...ikin/a_10.html

[TPRG]

I would ask ARE the Japanese are looking for income from assets or the assets themselves ?

Hi donpaulo,

I believe the tax is on the assets - a one-time tax on the stock of assets inherited.

Income from assets, once inherited (say interest on a cash deposit or capital gains on the sale of inherited real estate), would be taxable under normal income tax laws.

Note, however, that inherited assets can include the "right" to an income stream, say from an annuity or pension. The value of the annuity income stream would likely be discounted back to its present value to obtain the asset value subject to inheritance tax.

[TPRG]

Case Study 2

Case Study 2

QUESTION:
Tom is a national of Country X (not Japan) and has been a resident of Japan for five years. Tom�fs father died (in Country X) in March of this year and as a result Tom inherited assets located in Country X. Tom�fs father, before his death, lived in Country X with four other family members - Tom�fs mother, elder sister, younger brother, and grandmother (excluding Tom who was resident in Japan). Tom has no other siblings.

As a result of Tom�fs father�fs death, Tom�fs mother inherited (in Japanese yen terms) assets to the value of 2-oku (200 million) yen, and Tom, his elder sister and younger brother each inherited assets to the value of 1-oku (100 million) yen. Tom�fs grandmother inherited assets to the value of 20 million yen. Under Country X�fs inheritance tax laws, there are five heirs recognized in this instance - Tom�fs mother, Tom himself, his elder sister, younger brother, and grandmother.

How is the amount of inheritance tax that Tom is liable to pay in Japan calculated? (Note this is before any consideration of foreign tax credits for inheritance taxes already paid in another country, in this case Country X, and is purely to illustrate the calculation of Tom�fs inheritance tax liability in Japan.)

ANSWER:
The amount of inheritance tax that Tom us liable to pay in Japan in this instance is calculated as follows:

1) Tom has been a resident of Japan for five years and thus qualifies as a resident with an unlimited tax liability. Accordingly, Tom is liable to pay inheritance tax on all assets inherited regardless of where the assets are located (i.e. all worldwide asset that are inherited).

Meanwhile, Tom�fs mother, sister, and brother are not residents of Japan and are not Japanese nationals. They have also not inherited any assets that were located in Japan. They are therefore not liable to pay Japanese inheritance tax. (Note that Tom�fs grandmother is not included in this discussion with respect to Japanese inheritance tax as according to the priority of successors, the first priority group generally includes only the surviving spouse and children, and parents and grandparents are counted in the second priority group of lineal ancestors - anyway, Grandma, who is the mother/parent of Tom's father, doesn�ft count in this case.)

2) The calculation of inheritance tax in Japan is based on the total value of the taxable estate, after which a basic exemption is deducted to arrive at the net taxable amount. The net taxable amount apportioned to each heir is then calculated according to a predetermined formula, upon which each heir then pays their individual inheritance tax liability.

The amount of the basic exemption in turn depends on the number of statutory heirs as determined under Japan�fs Civil Code. Although Tom�fs mother, sister, and brother are not liable to pay Japanese inheritance tax, they are counted as statutory heirs for the purposes of calculating the basic exemption. (Grandma is not - see Point 1.)

The basic exemption for the entire estate comprises a fixed amount of 50 million yen PLUS 10 million yen TIMES the number of statutory heirs - in this case four (Tom�fs mother, Tom himself, his sister and brother).

3) Calculating the basic exemption:

50 million yen + 10 million yen �~ 4 people = 90 million yen

4) Calculating the total amount of inheritance taxable payable:

Only Tom�fs inheritance (1-oku or 100 million yen) is taxable under Japanese inheritance law.

Taxable estate = 100 million yen

Net taxable amount = taxable estate − basic exemption
= 100 million yen − 90 million yen
= 10 million yen

Each heir�fs portion of the net taxable amount (the predetermined formula for first priority group heirs apportions the spouse with 1/2 of the net taxable amount while the remaining 1/2 is equally divided among the children - in this case there are three children, so each child is apportioned 1/2 �~ 1/3 = 1/6 of the net taxable amount):

Tom�fs mother: 10 million yen �~ 1/2 = 5 million yen
Tom: 10 million yen �~ 1/2 �~ 1/3 = 1.66 million yen
Tom�fs sister: 10 million yen �~ 1/2 �~ 1/3 = 1.66 million yen
Tom�fs brother: 10 million yen �~ 1/2 �~ 1/3 = 1.66 million yen

The inheritance tax applicable to each heir�fs share is then calculated. Inheritance tax rates are progressive, but amounts of 10 million yen or less (the lowest bracket) are taxed at 10%.
(*) Ignore rounding for simplicity

Tom�fs mother: 5 million yen �~ 10% = 50-man (500,000) yen
3 children: 1.66 million �~ 3 �~ 10% = 49-man yen (* see above note)
TOTAL inheritance tax due: = 99-man (990,000) yen

5) Calculate each heir�fs individual proportion of inheritance tax payable. Tom is the only heir liable to pay Japanese inheritance tax in this example, so he effectively bears the burden of paying the entire 990,000 yen in taxes. The formula is as follows:

The total inheritance tax payable by each tax payer (heir)
=
Total inheritance tax due (990,000 yen)
�~
Inherited amount received by the heir (Tom received 100 million yen)
�€
Total of all inherited assets (the taxable amount is Tom�fs 100 million yen only)

i.e.
990,000 yen �~ (100 million yen/100 million yen) = 990,000 yen

Tom is liable to pay 990,000 yen in Japanese inheritance taxes on his inheritance of 100 million yen (which I calculate to effectively amount to just under 1% of his inheritance in this case - i.e. 990,000/100,000,000 = 0.99%)

Now wasn�ft that easy - enough to put you to sleep. Goodnight!

[TPRG]

Tax links in English

I reread my post of last night and realized that I made a mistake in my first reference to the limit of the lowest tax bracket, which I put at 8 million yen. The table of tax rates I referred to was for 2002. However, there was a major round of tax revisions in 2003, and the limit of the lowest tax bracket for inheritance tax was lifted to 10 million yen. This does not affect the calculation in the above case study, but I just thought I'd make a note that I revised the above post slightly.

Also, I know that many people have put lots of links to useful tax sites and so on, so I may be flogging a dead horse, but I think one of the best "free" and up-to-date resources on Japanese taxes - in English - has to be the link on the Ministry of Finance (MoF) website - "An Outline of Japanese Taxes 2004" as below:

http://www.mof.go.jp/english/tax/taxes2004e.htm

Chapter 4 covers Inheritance Tax and Gift Tax, and explains in detail a lot of the background information, laws, and calculation formulas relevant to the above case study.

I think the MoF reference is a really good source of information for ALL taxes in Japan, not just inheritance taxes.

P.S. I said "up-to-date" above but point out that other tax reforms were introduced and took effect in 2005, so please check out the MoF website for updated information.

http://www.mof.go.jp/english/index.htm