Even if they die within five years of leaving Japan, ex long-term expatriates would be subject to Japanese inheritance tax on their worldwide assets. 2018 tax reform will make an end to this harsh chasing rule.
If long-term expatriates (non-Japanese nationals with residence status who have lived in Japan for more than 10 years over the past 15 years) pass away during working in Japan, their worldwide assets will be subject to Japanese inheritance tax. Plus, the Japanese tax authority is allowed to claim their global assets even if they die within five years of leaving Japan. According to the current chasing rule, non-Japanese nationals who are no longer living in Japan but have lived more than 10 years over the past 15 years will still be subject to the worldwide taxation. This rule is making expatriates to think to leave Japan before they go over the limit of 10 years. No one can guarantee you live next 5 years in safe.
Thanks to lobbying by expatriates’ communities, LDP announced in the Outline of the Tax Reform Proposals that they will do away with the chasing rule. This seems in line with the government’s effort to increase long-term foreign residents.
Why did the tax authority chase expatriates who had left Japan?
5-year follow-up rule was not intended to target foreign expatriates. It was the side effect generated by the reinforcement of inheritance tax on Japanese rich people.
Last tax reform 2017 introduced a new rule “If the deceased has lived in Japan within the past 10 years, overseas assets shall be subject to inheritance tax even if he/she dies outside of Japan. This rule was introduced to prevent this kind of case. They have their children with US citizenship (given birth in like Hawaii) to stay overseas, and they jump out of Japan just before they die. In this case, inheritance tax could not be imposed on their overseas assets.
As the new prevention rule would also give an impact to foreign expatriates, 2017 tax reform also set up an exemption rule. If ex-expatriates die outside of Japan who have lived there for 1o years or less over the past 15 years will be exempted from inheritance tax on their overseas assets. However, this exemption did not cover long-term expatriates. Expatriates communities have been speaking up for further exemption.
In the first place, why does the Japanese inheritance tax apply to foreign expatriates?
Tax reform 2013 strengthened inheritance tax on Japanese wealthy people. Children with no Japanese citizen ship living outside of Japan could escape from inheritance tax on overseas assets. To plug this loophole, overseas assets inherited by non-residents with no Japanese citizen ship started to be taxed. This change gave an huge side effect to expatriates in Japan.
Last tax reform 2017 relaxed this too strict rule for expatriates. Heirs with no Japanese citizen ship living outside of Japan who succeed assets located outside of Japan will not be imposed Japanese inheritance tax if ancestors die in Japan who were short-term foreign residents (with no Japanese citizen lived in Japan for 10 years or less over the past 15 years). Flip side, long-term foreign residents will be subject to Japanese inheritance tax on their overseas assets. Plus, some people who had wished to obtain permanent status wonder whether or not they should (see another blog “Gift and inheritance tax reforms might be a disincentive to spouse visa”).
With this amendment in tax reform 2018, Japanese inheritance tax will not be charged on overseas assets for foreign expatriates if they leave Japan before they pass away. Still, there remains 10 years rule for foreign residents. No one can deny the possibility of the accidental death during your assignment in Japan. You still wonder whether or not to stay in Japan before you go over the 10-year limit. I think 10 year is not a long time for a working career in your life, though.