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Friday, August 8, 2014

Japanese Inheritance Tax vs. US Estate Tax (2014 Update)

BRIEF OVERVIEW OF
JAPANESE INHERITANCE AND GIFT TAXES
vs.
AMERICAN ESTATE AND GIFT TAXES
(2014 Update)

I. Estate Taxes
A. America
1. If the Decedent is a Citizen or Permanent Resident
a. Tax on Worldwide property (credit for taxes paid to foreign countries)
b. Exemption of $5,340,000 in 2014 (indexed for inflation). For married couples, the exemption amount is $10,680,000 as a result of portability.
c. Federal Estate Tax of 40% on amount over $5,340,000
d. Unlimited Marital Deduction for Surviving Spouse if Surviving Spouse is a citizen
2. If the Decedent is a Non-Citizen/Non-Permanent Resident
a. Tax only on Real Property and business interests in the United States (Cash in foreign banks and foreign stocks are not taxed)
b. Exemption of $60,000 for US based Assets
c. Tax of between 18%-40% on amount over $60,000
d. Unlimited Marital deduction if Surviving Spouse a citizen
e. Tax on bequest to surviving spouse can be delayed by creating a Qualified Domestic Trust
3. If the Decedent is not a United States Citizen or permanent resident alien, assets outside of the US can pass to a US person with no US estate tax.
B. Japan (Actually an Inheritance tax, not an estate tax)
1. Japanese Citizens and Permanent Residents
a. Tax on Worldwide property (credit for taxes paid to foreign countries) - [NOTE - this is new for 2013, previously Japan did not tax worldwide assets] 
b.  Exemption of ¥30,000,000 + (¥6,000,000 for each statutory heir); Possible additional exemption for insurance money, retirement savings, and money left to handicapped individuals [NOTE - this is a reduction from the previous exemption of ¥50,000,000 and ¥10,000,000 per statutory heir.]
c. Additional exemption for life insurance received of ¥5,000,000 multiplied by the number of statutory heirs
c. Until December 31, the highest tax rate is 50%.  Effective January 1, 2015, tax between 10%-55% for statutory heirs (spouse, children and parents) after you go over the exemption amount;
  • Up to ¥10 million 10%
  • Above ¥10 million up to ¥30 million 15%
  • Above ¥30 million up to ¥50 million 20%
  • Above ¥50 million up to ¥100 million 30%
  • Above ¥100 million up to ¥200 million 40%
  • Above ¥200 million up to ¥300 million 45%
  • Above ¥300 million up to ¥600 million 50%
  • Over ¥600 million 55% 
d. An additional 20% surcharge for everyone other else other than charities (this does include a surcharge on gifts to grandchildren);
e. For property outside of Japan, a beneficiary that acquires property will be subject to Japanese inheritance tax. (THIS IS A MAJOR CHANGE, prior to April 1, 2013, Japan did not tax gifts or inheritance of property outside of Japan received by non-Japanese nationals.)
f. A surviving spouse is entitled to a tax deduction. This is a complex formula based upon who is living at the time of the Decedent's death and where the money goes. Generally, a surviving spouse can deduct about 1/2 to 2/3 of the tax.
2. Non-Citizens/Non-Permanent Residents
a. If beneficiary is not Japanese and not living in Japan and property is not in Japan, appears Country where property located will tax such property.
b. I'm currently double checking to see if the Beneficiary is a Japanese Domiciliary whether Japan CAN tax inheritance regardless of where Decedent lived and regardless of where assets are located (subject to tax treaties)
c. If there is a tax, it appears a surviving spouse is entitled to the same marital tax deduction as for Japanese citizens.
3. Real estate acquisition tax is exempt if passing by bequest.  There is a registration and license tax at the rate of 0.4% of the assessed value of the land and building. (currently reduced?)

II. Gift Taxes
A. America
1. Citizens and Permanent Residents
a. Tax on all gift transfers of Worldwide property
b. Annual exemption of $14,000 per person/per donee (unlimited gifts for donees if different donors)
c. An annual gift to a non-citizen, permanent resident spouse, of $145,000 is available.
d. Lifetime exemption of $5,340,000
e. Gifts may be split with spouse
f. Tax rate of 40% if lifetime gifts exceed $5,340,000
2. Non-Citizens/Non-Permanent Residents
a. Tax on all gift transfers of US Property (including real estate and Stocks in US companies)
b. Annual exemption of $14,000 per person/per donee (unlimited gifts for donees if different donors)
c. Annual gift tax exemption if gift to a spouse of $145,000 (Note that a person can gift more to a spouse than they can bequest to a spouse)
c. No Lifetime exemption
d. Gifts may not be split with spouse
e. Tax rate of 18%-40% if gifts exceed $14,000
B. Japan (Rates between 10%-55%)
1. Citizens and Permanent Residents of Japan
a. Tax on gifts of property Worldwide (credit for taxes paid to foreign countries) - [NOTE - this is new for 2013, previously Japan did not tax gifts worldwide assets to certain people] 
a. Annual exemption of ¥1,100,000 for each beneficiary (beneficiary taxed after this)
b. One time spouse exemption of ¥20,000,000
c. Effective January 1, 2015, tax between 10%-55% for statutory heirs (spouse, children and parents) after you go over the exemption amount;
  • Up to ¥2 million 10%
  • Above ¥2 million up to ¥4 million 15%
  • Above ¥4 million up to ¥6 million 20%
  • Above ¥6 million up to ¥10 million 30%
  • Above ¥10 million up to ¥15 million 40%
  • Above ¥15 million up to ¥30 million 45%
  • Above ¥30 million up to ¥45 million 50%
  • Over ¥45 million 55% 
  • The threshold is lower for gifts to other individuals.
d. For property outside of Japan, a donee that acquires property will be subject to Japanese gift tax.  (THIS IS A MAJOR CHANGE, prior to April 1, 2013, Japan did not tax gifts or inheritance of property outside of Japan received by non-Japanese national.)
2. Non-Citizens/Non-Permanent Residents
a. Annual exemption of ¥1,100,000 for each beneficiary(unclear – enforcement is almost impossible)
b. Japan will tax donees who live in Japan.
3. Special real estate acquisition tax of 4% (currently reduced?) in addition to a registration and license tax at the rate of 2% of the assessed value of the land and building.

III. Generation Skipping Taxes (Taxes on gifts or bequests to grandchildren or lower generations)
A. America
1. Exemption of $5,340,000 (indexed for inflation)
2. Tax of 40% on rest
B. Japan
1. None

Remember, there is an estate and inheritance treaty between the United States and Japan to minimize double taxation of assets on death if you own assets in both countries or are a resident of one living in the other country

For more information on Japanese taxes, the Japanese government has a website in English with some helpful facts, but it is now very outdated. 

I am not licensed to practice in Japan, this is just my understanding of Japanese gift and inheritance tax law that I can gather from sources which are written in English.

NOTE- Major rewrite on 9/12/14 to address changes in rates and fact that assets outside of Japan are now subject to Japanese inheritance and gift tax.

5 comments:

Norman Solberg said...

Nice job, Kevin.

Anonymous said...

Hi Kevin

If a deceased is domiciled and permanently resident in South Africa but they have shareholdings in Japan, will they pay any inheritance tax in Japan?

Many thanks for your assistance.

Kevin A. Pollock, J.D., LL.M. said...

It appears that under the revised Japanese inheritance tax, Japan will have the authority to tax the shareholdings. I would double check with a Japanese accountant or attorney as I am not licensed to practice there.

Don said...

Hi, Kevin, you blog is very informative.

My, wife just became an American citizen and renounced her Japanese citizenship.
She has a son living in Japan and wants to know how much she can leave he son upon her demise before her estate is taxed in the US and her son is taxed in Japan for the inheritance.

We are living in Florida and need to redo our NYC wills to comply with Florida law.

Thank you, Don

Kevin A. Pollock, J.D., LL.M. said...

Dear Don,

For a private consultation, it would be best to call our office.

Thank you.

Kevin