With the increase in property values, the Inheritance Tax is an area which could give rise to unexpected liabilities for the unwary. Many people are interested in mitigating potential inheritance tax liabilities when preparing inheritance tax returns. Due to a maximum inheritance tax rate of 50%, it is often said that ownership of inherited properties would be completely dispersed by the third generation.
It is quite difficult as the tax authority changes the inheritance tax law whenever taxpayers try to find loopholes in the system. Also, as the Japanese economy has become more integrated and globalized, many people have properties not only in Japan but also outside of Japan. Based upon these increasing trends , Japanese tax authorities reformed the inheritance tax law in the 2000 tax reform, and they made taxpayers subject to the inheritance tax worldwide. Before 2000, a case involving the avoidance of the inheritance tax by taking advantage of a loophole regarding living abroad was made famous by the Takefuji family.
Source data: The Japan tax site
The facts of the case were straight forward. The taxpayer had left Japan to live in Hong Kong for around 3 and a half years and subsequent to his departure was given a substantial portion of the Takefuji company shares. Under the tax law then in force, provided that the recipient was not a Japanese tax resident at the time of the transfer, such a gift would not include the Japanese gift tax.
At the time of the transaction the taxpayer had been spending approximately two-thirds of his time living in Hong Kong while spending around a quarter of each year in Japan and the rest of the time elsewhere overseas. Despite the relatively small proportion of his time spent in Japan the tax authorities assessed that a gift tax should be levied on the taxpayer.
The Tokyo High Court decided to impose JPY 1,585 million in taxes, including the original gift tax as well as overdue taxes. On 18th February 2011 the Japanese Supreme Court decided a case in favor of the heir, and ordered that JPY 2,000 million be refunded including interest paid on overdue taxes. The technical tax issue was the definition of “address which the heir lived” for the inheritance tax purpose, and the Supreme Court judged that the heir did not have an address in Japan.
Note :
The gift tax is necessary in order to tackle the problem of people who avoid the inheritance tax through transfer of income. As with the inheritance tax, the gift tax is payable by the person who receives the gift.
At the moment, the taxpayer of the inheritance tax and the gift tax are defined as follows.
1. Unlimited resident taxpayer
A person who acquires any property by inheritance, bequest or gift and has a domicile in Japan at the time the property is acquired. An unlimited resident taxpayer is subject to the inheritance tax or the gift tax on all
property received regardless of where the property is located.
2. Unlimited non-resident taxpayer
A person with Japanese nationality whose domicile is outside Japan and acquires any property by inheritance, bequest or gift located in Japan, and both the heir and the ancestor had never been domiciled in Japan within 5
years prior to the inheritance or the person without Japanese nationality whose domicile is outside Japan. An unlimited non-resident taxpayer is subject to the inheritance tax or the gift tax on all property received regardless of
where the property is located.
3. Limited taxpayer
A person who acquires any property by inheritance, bequest or gift, but does not have a domicile in Japan at the property which is acquired. A limited taxpayer is subject to the inheritance tax or the gift tax only on property
received which is located in Japan or acquired any property by inheritance, bequest or gift located in Japan.
The following is the reference table of the above.
| Heir | ||||||||
| Japan | Outside of Japan | |||||||
| Japanese Nationality | Non-Japanese Nationality | |||||||
| Within 5 years in Japan | Within 5 years outside of Japan | |||||||
| Ancestor | Japan | Unlimited resident tax payer | Unlimited non-residenttax payer | Unlimited tax payer | ||||
| Outside of Japan | Within 5 years in Japan | |||||||
| Within 5 years outside of Japan | Unlimited tax payer | |||||||
In the Takefuji case, if they implemented the current structure , the heir of Takefuji family is categorized as an unlimited non-resident taxpayer, so the gift tax would be imposed on a worldwide basis. As mentioned above, due to recent globalization the resident status for tax purposes is getting stricter, not only for the inheritance tax and the gift tax but also other taxes.
However, I think that recent rapid globalization might make the reformed inheritance tax and the gift tax obsolete in the near future. For example, many non-Japanese have a business in Japan and base his/her life here, and also, some have children in Japan with Japanese or non-Japanese. I assume that it depends on the country though, in some cases these children can get non-Japanese nationalities even while living in Japan (as a new generation). Because of the background of the new generation, tax officials might not adhere to the rule about living in foreign countries more than 5 years which is a condition of the inheritance tax. If so, the inheritance tax on property outside of Japan might be avoidable if the new generation live in non-inheritance tax and gift tax areas such as Australia, Canada, Hong Kong, Malaysia, etc. Of course, it is quite difficult to predict the tax system in Japan or other countries and then implement tax planning based on these future predictions though, it might an option to be considered.
Koji Takahashi
Certified Public Accountant, Tokyo & Yokohama
