1. Types of tax
1.1 Inheritance tax
The Japanese Inheritance Tax Law (sozoku zei ho) covers inheritance tax (sozoku zei) and gift tax (zoyo zei). Inheritance tax is imposed on an individual who acquires property by inheritance or bequest upon the death of the decedent. Gift tax is imposed on an individual who acquires properties by gift (or economic benefit by deemed gift). Gift tax is supplementary to inheritance tax. Both taxes are national taxes and no local tax is assessed on the transfer of property due to death or a gift.
Computation of inheritance tax
The individual heirs are taxed, not the estate. Inheritance tax is imposed on the aggregate value of all properties acquired by inheritance or bequest. Inheritance tax is calculated separately for each statutory heir and legatee, regardless of how and to whom the property is to be distributed. Then, the total amount of tax calculated is allocated between those who will actually receive the decedent’s properties in accordance with his or her will or as agreed upon by the heirs. The tax is calculated based on the statutory heirs and legatees, whereas the tax liability is attributed to those who actually acquire the properties.
The computation is based on the following steps:
- Aggregate the amount of taxable properties acquired by all heirs and legatees (net of the liabilities succeeded).
- Deduct the basic exemption of Y30 million plus Y6 million multiplied by the number of statutory heirs from the above “aggregated taxable estate value.”
- Allocate the aggregated taxable estate value to each statutory heir according to their statutory share.
- Calculate the inheritance tax separately for each statutory heir’s portion allocated above, by the application of the following progressive tax rates:
|Up to Y10 million||10%|
|Above Y10 million up to Y30 million||15%|
|Above Y30 million up to Y50 million||20%|
|Above Y50 million up to Y100 million||30%|
|Above Y100 million up to Y200 million||40%|
|Above Y200 million up to Y300 million||45%|
|Above Y300 million up to Y600 million||50%|
|Above Y600 million||55%|
- Aggregate the inheritance tax calculated above, “aggregated inheritance tax.”
- Allocate the aggregated inheritance tax to each of the heirs and legatees based on the ratio of the value of the taxable properties actually acquired by him or her against the aggregated taxable estate value.
- A 20% surtax is imposed on heirs or legatees of anyone who is not the decedent’s spouse, the decedent’s parents or the decedent’s children. Where the decedent’s grandchild became the decedent’s adopted child, he or she is also subject to a 20% surtax.
- Deduct applicable tax credits for each heir (see Section 4).
The property acquired by a gift from the deceased within three years of the death of the deceased is regarded as estate property. Any gift tax imposed on the acquisition of such property is creditable against the inheritance tax liability.
1.2 Gift tax
Gift tax is imposed on individuals who acquire property by gift during the lifetime of the donee. Gift tax is also imposed on economic benefits received by deemed gift.
Computation of gift tax
The taxable base of gift tax is determined as the value of properties obtained by a gift (or by a deemed gift) during each calendar year, after an annual basic exemption of Y1.1 million. The applicable tax rates are as follows:
|Not more than Y2 million||10%|
|Above Y2 million up to Y3 million||15%|
|Above Y3 million up to Y4 million||20%|
|Above Y4 million up to Y6 million||30%|
|Above Y6 million up to Y10 million||40%|
|Above Y10 million up to Y15 million||45%|
|Above Y15 million up to Y30 million||50%|
|Above Y30 million||55%|
1.3 Real estate transfer tax
Registration and license tax
The registration of the transfer of ownership of real property by inheritance or bequest is subject to registration and license tax at the rate of 0.4% of assessed value of the land and building. The registration of the transfer of ownership by gift or sales is generally subject to registration and license tax at a standard rate of 2%.
Real estate acquisition tax
The acquisition of real property by gift or sale is generally subject to real estate acquisition tax at 4%. Temporarily, the acquisition of land and residential buildings until 31 March 2018 is subject to real estate acquisition tax at 3%. However, the acquisition of real property by inheritance or bequest is exempt from real estate acquisition tax.
1.4 Endowment tax
There is no endowment tax in Japan. As described in Section 4, if the heir makes donations of property to certain specified nonprofit organizations or foundations of the Japanese Government or a local public organization by the filing due date of the inheritance tax, the property is exempt from the inheritance tax.
1.5 Transfer duty
There is no transfer duty other than real estate transfer taxes (see Section 1.3).
1.6 Net wealth tax
There is no tax imposed on net wealth in Japan.
2. Who is liable?
2.1 Unlimited liability
Nationality and domicile
An heir or donee who is domiciled in Japan when acquiring property by inheritance, bequest of a decedent or by gift has unlimited liability for inheritance tax or gift tax, regardless of his or her nationality. In addition, in cases where an heir or donee has Japanese nationality, but is not domiciled in Japan at the time of property acquisition, he or she will still be subject to unlimited liability if either the heir or the deceased or the donee or the donor has been domiciled in Japan any time within five years immediately before the time of death of the deceased or at the time of the gift (unlimited liability taxpayer with Japanese nationality). From 1 April 2013, in cases where an heir or donee without Japanese nationality is not domiciled in Japan, he or she is also subject to unlimited liability if the deceased or the donor is domiciled in Japan at the death of the deceased or at the time of the gift.
Unlimited liability taxpayers are subject to inheritance tax or gift tax on all of the properties acquired regardless of whether the properties are located in or outside Japan.
For the purposes of inheritance tax and gift tax, a “domicile” is defined as the principal base of living, which is determined based on facts and circumstances. The following individuals (as heirs or donees) will be treated as being domiciled in Japan, though they are actually located outside Japan:
- An individual who is studying abroad and is treated as a dependent of a Japanese resident for Japanese income tax purposes.
- An individual who is assigned to work or provide personal services outside Japan for a period of approximately one year or less.
2.2 Limited liability
An individual who is not domiciled in Japan when acquiring property by inheritance, bequest of a decedent or by gift excluding an unlimited liability taxpayer with Japanese nationality domiciled outside Japan, is categorized as a limited liability taxpayer. The limited liability taxpayer is subject to inheritance tax or gift tax only on the properties situated in Japan.
Whether the property is situated in Japan or not is
determined based on the following location rules:
|Kind of property||Location|
|Personal property||Place where the property is located|
|Real property||Place where the real property is situated|
|Ships or aircraft||Place where they are registered|
|Mining or quarry rights||Location of the mine or quarry|
|Fishing concession rights||Place where the coast is nearest to the fishing grounds|
|Deposits with a bank||Location of the office deposited|
|Insurance proceeds||Location of the head office or the principal office of the insurance company that issued the policy|
|Retirement allowances||Location of the head office or the principal office of the payer company|
|Loans||The domicile, the head office or the principal office of the debtor|
|Shares in a company or bond and debentures issued by a company||Place where the issuing company has the head office or its principal office|
|Interests in collective investment trusts or taxable trusts||Location of the trustee’s office|
|Patents, trademarks, etc.||Place where they are registered|
|Copyrights or publishing rights||Location of the publisher’s office|
|Trade receivables, goodwill and other rights related to business operation||Place of business to which they are related|
|Japanese government bonds||Japan|
|Foreign government bonds||Country of issue|
|Others||The domicile of the deceased or the donor|
This is not applicable in Japan.
4. Exemptions and reliefs
Exemptions and tax credits
There are several asset or purpose-related exemptions and personal exemptions and tax credits.
Main items of exemptions
- Donations of properties to certain specified nonprofit organizations or foundations of the Japanese government or a local public organization if the heir makes the donation by the filing due date of the inheritance tax.
- ¥5 million per statutory heir of life insurance proceeds (as deemed estate property).
- ¥5 million per statutory heir of retirement allowance (as deemed estate property).
- Only a certain portion (e.g., 20%) of the acquisition of small-scale business or residential land is subject to inheritance tax. A maximum of 330 sq. meters of land used as a residence and a maximum of 400 sq. meters of land used for a business qualifies for this treatment.
Main items of tax credits
- As for inheritance tax to be paid by a spouse, the portion of tax due attributed to the spouse pursuant to the statutory share (the greater amount of the spouse’s statutory share or ¥160 million) is creditable against the spouse’s inheritance tax due.
- For minor heirs under 20 years old, ¥100,000 x (20 – heir’s age)
- For handicapped heirs, ¥100,000 (¥200,000 in the case of special disabilities) x (85 – heir’s age)
- If a decedent has paid inheritance tax for the acquisition of property within ten years immediately preceding death, a portion of the heir’s inheritance tax will be creditable according to a certain formula.
- A foreign tax credit is available in order to avoid double taxation on the inheritance.
Assuming that (i) the heirs are the spouse and a child (in this case, the portion of statutory share is 50% for each), (ii) the aggregated taxable estate value is Y1 billion and the aggregated inheritance tax due is Y395 million, respectively, and (iii) the spouse inherits the properties in the amount of Y500 million, no inheritance tax is payable by the spouse, since tax due attributed to the spouse is based on the statutory share (i.e., ¥197.5 million; ¥395 million x ¥500 million/¥1,000 million) and is creditable. The child will have a tax liability of ¥197.5 million (i.e., ¥395 million x ¥500 million/¥1,000 million).
Gift tax exemptions
The following are exempt from gift tax:
- Gifts from a corporation, which is subject to income tax.
- Gifts to dependents for living expenses and education.
- Gifts of education funds up to Y15 million to dependents, made from 1 April 2013 to 31 March 2019, subject to a certain conditions.
- Gifts of child raising and marriage funds up to Y10 million to dependents, made from 1 April 2015 to 31 March 2019, subject to certain conditions.
- Gifts to a person engaged in activities for religious, charitable, scientific, educational or social welfare purposes, to be used for such activities.
- Gifts of money or goods from a specified public interest trust to students or pupils to support their educational costs.
- Providing a right to receive a subsidy from a local public organization to a handicapped person.
- Qualified donations to a candidate for a public election campaign, which are duly reported.
- Obtaining trust beneficiary rights up to ¥60 million by a special handicapped person according to a special support arrangement.
- One-time exemption of up to Y20 million of the value of a residential property transferred from a spouse where the period of marriage is 20 years or more and where the donee uses the property for residential purposes.
- Exemption of up to Y10 million (per donee) during 2015 for gifts made in cash by parents to their adult children to acquire a residential home.
5. Filing procedures
The inheritance tax return must be filed within 10 months of the time that the taxpayers become aware of the opening of the succession, with the relevant tax office located at the domicile of the deceased. Where two or more taxpayers are domiciled in Japan, a joint tax return will be filed. If the deceased is not domiciled in Japan at the time of death, each heir domiciled in Japan files the tax return with the tax office at his or her domicile. If neither the decedent nor heir are domiciled in Japan, the heir may elect any tax office to be filed.
In principle, the inheritance tax must be paid in one lump sum in cash by the filing due date. A deferral of the tax payment may be allowed up to 15 years. Furthermore, if a lump-sum cash payment is not possible, inherited property for payment in kind is allowed. The advantage of the property for payment in kind is to avoid income taxation on capital gains, if any, from the transfer of the property as the payment.
Gift tax settlement at time of inheritance tax
The rates for the gift tax are generally higher than those for inheritance tax. This is intended to prevent the avoidance of inheritance tax. On the other hand, there is an exception to the general method (i.e., calendar year taxation), a special taxation system for settlement at the time of inheritance, by election, which was introduced in 2003 in order to promote smooth passage of gifts from living parents to their children. When a parent or grandparent who is 60 years of age or older makes a gift to an adult child or grandchild, the following can be elected:
- If the total amount of the donated properties is ¥25 million or less, no gift tax is payable.
- If the total amount of the donated properties exceeds ¥25 million, a fixed tax rate of 20% is applied to the excess portion to calculate the gift tax due.
At the time of the parent’s or grandparent’s death, the above properties will be added to the taxable estate assets and will be subject to inheritance tax. The adult child or grandchild who elected the special taxation system will credit the gift tax already paid against their inheritance tax due. If the paid gift tax exceeds the inheritance tax liability, the excess portion will be refunded.
Filing procedures of gift tax
A gift-tax return must be filed and gift tax must be paid by 15 March of the year following the gift.
6. Assessments and valuations
Valuation of the property Introduction
The taxable base of properties for inheritance-tax and gift-tax purposes is the fair market value at the time of the transfer.
However, the Japanese tax authorities-issued Basic Property Valuation Circular introduced deals with a specific method of valuation for various properties, including land, buildings, tangible and intangible assets, shares in companies, bonds and debentures.
The value of land is generally determined based on the assessed value1 that the tax authorities annually publish. Shares
The value of listed shares and shares traded over the counter is generally calculated based on the share price on the valuation date. However, the lowest of the monthly average prices for the month including the valuation date and the two preceding months, may be used. The value of unlisted shares is calculated based on the size of the company depending on the number of employees, gross assets and annual sales.
- Large company — comparative value of similar company
The value of unlisted shares in a large company is calculated based on the share price of comparable listed companies.
- Small company — net asset value method
The value of unlisted shares in a small company is calculated based on the net asset revaluated for inheritance tax purposes.
- Medium company
The value of unlisted shares in a medium company is calculated based on the combination of the comparative value of similar company and net asset value methods.
However, unlisted shares acquired by a certain minority shareholder are calculated based on a dividend discount method.
7. Trusts, foundations and private purpose funds
For Japanese tax purposes, a trust is treated as either transparent, not transparent and not a taxable entity, or a corporation, depending on its legal character. When an individual acquires trust beneficiary interests due to a death or without arm’s-length consideration (i.e., by a deemed gift), inheritance tax or gift tax will be assessed on such individual.
Under a 2007 revision of the Japanese Trust Law, new types of trusts have become available:
- Trusts substituting testaments
- Trusts under which the subsequent beneficiaries can be designated in advance
By settling the latter type of trust, for example, the settlor of the trust designates his or her spouse as the beneficiary after his or her death and also designates his or her child as the beneficiary after the spouse’s death. This newly introduced arrangement of designating subsequent beneficiaries cannot be done by testament. For inheritance tax purposes, the new beneficiary is regarded as obtaining a beneficiary interest from the preceding beneficiary.
Foundations and private purpose funds
A noncorporate charitable organization, including foundations and private purpose funds, is subject to inheritance or gift tax, but an exemption may be available if the properties transferred to the charitable organization are to be used only for authorized charity under Japanese laws. A corporate charitable organization is not subject to inheritance or gift tax, but is subject to corporate income tax on gains by the gift. However, if this is an authorized nonprofit organization and the income is derived from nonprofit business (i.e., charity), the income is exempt from corporate income tax.
There is no general death grant, but if a burier applies, he or she may be able to receive a payment from a Social Security benefit (i.e., health insurance) to cover the cost of the burial.
9. Life insurance
For purposes of the civil law, life insurance proceeds are considered as properties of a recipient. On the other hand, life insurance proceeds are treated as a receipt of the properties on the succession for tax purposes (i.e., subject to inheritance tax).
10. Civil law on succession
10.1 Estate planning
The Japanese Civil Code prescribes the types of wills. A few high-net-worth individuals (HNWIs) sometimes furnish the will.
10.2 Japanese civil law on succession
According to the Japanese Civil Code, all rights and obligations of the deceased transfer to heirs automatically and comprehensively at the time of decedent’s death. For example, at the time of the deceased’s death, all heirs jointly own the estate properties, which are then distributed amongst the heirs as previously agreed upon. If an heir wants to waive the inheritance or accept the inheritance to the extent of the positive assets, notification to a family court has to be made within three months from the date the heir is informed of his or her inheritance.
According to Article 36 of the Act on General Rules of Application Laws, the law of the deceased’s home country (nationality) governs succession.
There are no regional rules on succession law (Civil Code) in Japan. Statutory heirs (houtei sozokunin)
The Japanese Civil Code prescribes for statutory heirship. The decedent’s spouse is always a successor. Other than a spouse, the Civil Code provides three priority levels for successors. The spouse always becomes a successor of equal rank to a successor in any of the priority levels. Anyone in the lower priority groups will not become a successor if a higher priority person survives at the time of the opening of the succession.
An individual who waives an inheritance is not regarded as an heir upon waiver.
The actual allocation of estate properties is made based on agreement among the heirs. The above statutory share is applicable in the case where an agreement is not reached among the heirs.
10.3 Forced heirship (iryubun)
The Japanese Civil Code provides forced heirship rules enabling certain persons to claim a share of an estate if they are excluded from succession by the decedent’s last will. Though the deceased determines the allocation of his or her estate property by testament, the spouse, lineal ascendants and lineal descendants as the heirs have a right to receive the following share, as a total, of the estate under the forced heirship rules:
- When the heirs do not include the spouse and only lineal ascendants: one-third of the estate property.
- Other cases: one-half of the estate
Brothers and sisters are not entitled to claim forced heirship Priority groups of statutory heirs and forced heirship
|Order||Statutory heirs||Statutory shares||Forced heirship|
|1||Son(s) and daughter(s) of the deceased (if the sons and daughters are already deceased, lineal descendants of these sons and daughters)||Spouse: one-half
Children: one-half in total (equally for each)
|Spouse and children: one-half in total Children only: one-half in total|
|2||Lineal ascendants of the deceased (i.e., father, mother, grandfather, grandmother)||Spouse: two-thirds
Lineal ascendants: one-third in total (equally for each)
|Spouse and lineal ascendants: one-half in total
Lineal ascendants only: one-third in total
|3||Brother(s) and sister(s) of the deceased (if the brothers and sisters are already deceased, their sons and daughters)||Spouse: three-quarters
Brother(s) and sister(s): one-quarter in total (equally for each)
|Spouse, brother(s) and sister(s): one-half for spouse only; no forced heirship for brother(s) and sister(s)|
10.4 Matrimonial regimes and civil partnerships
In Japan, the matrimonial property regime of strict separation is applied, under which each spouse holds his or her property independently in separate ownership.
A will is a legal document that regulates an individual’s estate after death. Wills are not as commonly used in Japan as in other countries. As Japan has ratified the 1964 Convention on the Conflicts of Laws Relating to the Form of Testamentary Dispositions, the validity of a foreign form will may be admitted.
If there is no will, the estate properties will be allocated among the statutory heirs pursuant to their agreement on the allocation. Until such agreement is reached, the estate properties are treated as being jointly owned by the heirs. Income earned from the properties during such period is subject to income tax and allocated among the statutory heirs pursuant to the statutory shares.
There is no probate system in Japan. All properties are comprehensibly transferred to the heirs at the death.
11. Estate tax treaties
11.1 Unilateral rules
This is not applicable in Japan.
11.2 Double-taxation treaties
Japan has concluded only one estate tax treaty with the US as agreed in 1955. This tax treaty is not based on the Organisation for Economic Co-operation and Development’s (OECD) inheritance tax model.