Welcome relief for foreign nationals who qualify as temporary foreigners.
There have been significant gift and inheritance tax reforms in Japan in recent years as the Japanese government attempts to attract more highly skilled foreign nationals to invest and work in Japan. With the recent law changes in 2017 and 2018, the developments were better for the foreign nationals but worse for the Japanese nationals.
Prior to the 2017 and 2018 tax reforms, foreign nationals relocating to Japan with the intention of making Japan their main principal place of living were subject to Japan gift and inheritance tax on their overseas assets the very next day after their arrival in Japan. To clarify, this means any transfer of overseas assets involving the foreign national residing in Japan could potentially be subject to Japan gift and inheritance tax, even if the donee/heir or the donor/decedent is a foreign national who isn’t residing in Japan. The laws for Japanese nationals are a lot stricter: Japanese nationals permanently departing Japan with the intention to relocate overseas will continue to be subject to Japan gift and inheritance tax on their overseas assets for up to five years after permanent departure.
Relief for Foreign Nationals
Effective April 1, 2017, the transfer of overseas assets between a foreign national residing in Japan 10 years or less out of the past 15 years with a visa issued under Table 1 of the visa status table of the Immigration Control and Refugee Recognition Act (defined as temporary foreigners) and other temporary foreigners, or other foreign nationals residing outside Japan, is exempt from Japan gift and inheritance tax. Note that the transfer of overseas assets to a Japanese national who’s residing in Japan or had resided in Japan within the past 10 years isn’t exempt. In addition, this exemption also doesn’t apply to transfers involving a foreign national residing in Japan for more than 10 years out of the past 15 years, or holding a visa issued under Table 2, such as a spouse of a Japanese national visa or a permanent resident visa.
Two-Year Clawback
A 5-year tail rule was introduced on April 1, 2017 for foreign nationals who’d departed Japan but had resided in Japan for 10 years out of the past 15 years. Under this rule, the transfer of foreign nationals’ worldwide assets continues to be subject to Japan gift and inheritance tax as well as potentially subject to transfer tax in another country for up to five years after permanent departure from Japan. To clarify, even if the foreign national no longer holds a Japanese visa, the assets are located overseas or the transferee/recipient has never resided in Japan before, the transfer of assets involving the foreign national would be subject to Japan gift and inheritance tax. There was a transition measure in the law that exempted foreign nationals who permanently departed Japan prior to April 1, 2017 from this 5-year tail rule.
The 5-year tail rule was repealed effective April 1, 2018, provided that the foreign nationals don’t return and re-establish residency within two years of permanent departure from Japan. Otherwise, any overseas asset gifts occurring within the two years between Japan departure and return could potentially be subject to Japan gift tax.
Extension to 10-Year Tail
Japanese nationals will continue to be subject to Japan gift and inheritance tax on their overseas assets even if residing outside of Japan if they or the donor/decedent had resided in Japan within five years of the gift and inheritance. Effective April 1, 2017, this time period is increased from five years to 10 years.
Relief for Foreign Nationals
These new laws provide welcome relief for foreign nationals who qualify as temporary foreigners from gift and inheritance tax exposure on overseas assets. Nevertheless, continued exposure for other foreign nationals residing in Japan and increased exposure for Japanese nationals mean that estate-planning professionals need to consider ways to address the Japan gift and inheritance tax burden. The new laws are complex and can be confusing, so interested individuals should seek professional advice.