“If we move to Japan, will Japanese inheritance tax apply to the assets we built overseas?”

We often receive this question from internationally married couples who are thinking about moving or returning to Japan.

The answer is: Yes, it will apply. And the tax rate is very high compared to other countries.

The highest rate of Japanese inheritance tax is 55%. Some countries, such as Singapore, Australia, Canada, and Hong Kong, do not have inheritance tax at all. The United States has an estate tax, but there is a large lifetime exemption (the “unified credit,” approximately USD 15 million per person), so in reality, most families do not pay it. For families coming from such countries, the tax environment changes completely after moving to Japan.

However, you do not need to be pessimistic. There are measures you can take before moving to Japan, and also measures you can take after moving to Japan. In this article, we would like to explain the overall picture.

Why International Couples Need Special Attention

Under Japanese inheritance tax and gift tax, the scope of taxation changes depending on who the person is, where the person lives, and what nationality the person has.

• If you have a domicile (address) in Japan, in principle, all assets in Japan and overseas become subject to Japanese tax.
• Even a foreign national spouse or children can become subject to worldwide taxation once they move their address to Japan. In particular, please note that if a foreign national starts living in Japan with a spouse visa, worldwide assets become subject to Japanese inheritance tax from the first day of residence. (The special treatment for “temporary foreigners” is available only for certain working visas, not for a spouse visa.)
• For Japanese nationals, even after leaving Japan, overseas assets can still be taxed if the person had an address in Japan within the past 10 years.

In other words, the tax burden changes greatly depending on the timing of the move and the residence and nationality status of each family member. This is exactly why international couples have room for planning.

What You Can Do Before Moving to Japan — Now Is the Chance, While You Are Still a “Non-Resident”

Before you move your address to Japan, under certain conditions, a gift of overseas assets is outside the scope of Japanese gift tax. The period before moving to Japan is a valuable period when you have the most freedom to transfer assets.

However, there are important points to consider.

It is not a simple story of “just transfer everything to the children.”

• You need to secure your own retirement and living funds.
• Giving large assets to young children may be good for tax, but it is not always good for the children themselves, from the viewpoint of their education and money management.
• If your children also move to Japan in the future, those assets will come into the Japanese tax net again.

How much, to whom, and from which assets should you transfer? A design based on the life plan of the whole family and the tax systems of each country is essential.

What You Can Do After Moving to Japan — There Are Several Measures

Even after moving to Japan, you still have sufficient options. As a basic point, Japanese inheritance tax has a large tax credit for the spouse (up to JPY 160 million or the spouse’s statutory share), and this is available regardless of nationality. However, since this can make the second inheritance heavier, planning for the whole family is still important.

With this in mind, here we introduce three typical measures.

1. Lifetime Gift — Transfer Assets at a Tax Rate Lower Than Inheritance Tax

If your marginal inheritance tax rate is high, you can reduce the total tax burden by making gifts every year within a range where the effective gift tax rate is lower than the inheritance tax rate. Of course, you can use the annual basic exemption of JPY 1.1 million. In addition, in many cases, it is actually more advantageous to pay some gift tax intentionally and transfer more assets. How to use the “taxation at the time of inheritance” system (souzokuji seisan kazei) is also an important point.

One point to be careful about: gifts made within 7 years before the death of the giver are added back to the taxable estate under the Japanese rules (this period was extended from 3 years to 7 years by the recent tax reform). In other words, gifts made just before inheritance may not have the expected effect. This is exactly why starting early is so important.

2. Asset Reallocation — From Financial Assets to Real Estate

Cash and securities are valued almost at face value for inheritance tax purposes. On the other hand, real estate, especially rental real estate, is generally valued lower than the market price under the Japanese valuation rules.

By reallocating a part of financial assets into income-producing real estate, you can lower the inheritance tax valuation while keeping the real value of the assets. This is a standard measure widely used in Japan. However, if the reallocation is done excessively only for tax saving purposes, there is a risk that the tax authority will deny it. A design with economic rationality is important.

3. Set-up of an Asset Management Company

If you have assets above a certain size, one method is to establish an asset management company (private company) and hold the assets through the company.

• Income can be distributed among family members (for example, directors’ remuneration to family members)
• Succession can be planned in the form of company shares
• There are also merits from the viewpoint of inheritance tax valuation

On the other hand, an asset management company involves costs for incorporation and annual tax filings, so it is generally suitable for families whose assets exceed a certain size.

As a rough guide, we recommend considering an asset management company when the family’s assets exceed JPY 300 million (approximately USD 2 million). In fact, this level is almost the same as the standards used by the tax authorities — for example, the USD 2 million net worth test of the U.S. expatriation tax, and the JPY 300 million standard of the Japanese statement of assets and liabilities (zaisan saimu chousho). If your assets are at this level, we think it is worth considering an asset management company seriously.

There are also practical merits unique to international families. Overseas private banks generally prefer corporate accounts to individual accounts, so an asset management company works well if you wish to continue your relationship with a private bank after moving to Japan.

In addition, the company can be used in a trust-like way. Trusts are commonly used overseas, but they are not always easy to set up under Japanese law, so an asset management company can play a similar role. For example, suppose you gifted funds to your children tax-free while living overseas. As discussed in the previous section, letting young children hold a large amount of money freely is not a good idea. In practice, the children lend those funds to the family’s asset management company in Japan, and the company manages the assets until the children reach a certain age. The children hold a loan receivable from the company — the funds are still the children’s assets, but they cannot spend the money freely. In this way, you can complete the tax-efficient transfer at the right time, while keeping the actual management of the assets in the hands of the parents’ generation.

In the case of international couples who have overseas assets or foreign currency assets, the viewpoint of international taxation is essential when designing the company structure. Also, an asset management company needs proper operation every year, so ongoing support from a tax professional is important.

One important point to note: if a U.S. citizen or U.S. green card holder becomes a shareholder of a Japanese company, the PFIC (Passive Foreign Investment Company) rules of the U.S. tax law may apply, which can result in heavy taxation. Careful consideration is necessary in advance, so please consult with us about your individual situation.

The Important Thing Is a Consistent Design Starting Before the Move

Gifts before the move, lifetime gifts after the move, asset reallocation, an asset management company— these are not just separate “techniques.” They show the best effect when they are designed as one consistent story based on your family structure, nationality, residence history, and the location of assets.

Especially for international couples, it is necessary to consider not only the Japanese side, but also the tax system and inheritance law of the spouse’s home country and the countries where you have lived. (The rules of how to divide the estate itself are different in each country.)

We Can Support You

At our firm, we support families returning to Japan from overseas and internationally married couples with:

• Asset transfer planning before moving to Japan
• Proposals after moving to Japan: lifetime gifts, asset reallocation, and asset management company (establishment and ongoing corporate advisory)
• Cross-border inheritance and tax planning in cooperation with professionals in other countries

We provide these services as one-stop support, in both English and Japanese.

If you are wondering, “What about our case?”, we recommend consulting us at an early stage, ideally one or two years before your return to Japan. The more time you have, the more measures you can take. Please note that our initial consultation is provided on a fee basis. We look forward to hearing from you.

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This article is for general information purposes only and is not individual tax advice. Before taking any action, please consult a professional based on your specific situation. Tax laws may be revised in the future.