Inheritance tax (International inheritance)
In recent years, whether due to the internationalization of the employment market, international marriage, or for other reasons, the numbers of Japanese people living overseas, and non-Japanese people who are resident in Japan are increasing. Even for people whose life is wholly based in Japan, it is no longer rare to acquire overseas property, such as stocks and shares in overseas businesses, financial products such as investment trust, overseas bank accounts, holiday homes overseas and so on. And even as the investment behavior of Japanese people is changing, so too the frequency of engaging in estate planning, to ensure the smooth inheritance of property both in Japan and overseas to heirs and other concerned parties, has increased.
For example, consider the case of the Japanese employee working for a foreign-affiliated company, who is granted stock options in a foreign company, and who uses those options to acquire stock. Securities of value in a company with a head office overseas are treated by Japanese tax law as overseas property. Thus, even people who have little awareness of foreign investment in Japan may acquire foreign property without so much as realizing it.
Within this context, when it comes to inheritance matters, in recent years we have been increasingly confronted with the following issues:
・A foreign person may be involved either as the deceased or as an heir
・The residence or place of death of the deceased; the location of the property to be inherited; the place of residence of the heir; any or all of which may be overseas
International inheritance is regarded as any inheritance with any kind of international connection, such as those above, but even though it is an important event which touches lives deeply, there are many cases where sufficient information is hard to come by.
At Nakamura Tax Consultation Office, we work together with Japanese lawyers and judicial scriveners who are experts, not just in Japanese inheritance matters, but also international legal affairs, to provide the following services:
Determining the governing law, and investigate overseas law in conjunction with local experts
Where a spouse is not Japanese, due to international marriage, or the deceased is a Japanese person living overseas, there can be doubt as to which country’s laws to follow in order to carry out the inheritance paperwork. In international inheritance, the law to be applied is called the governing law. For example, if the deceased is not Japanese, generally the governing law is designated as foreign law, and Japanese civil law will not be applied.
At first glance, this seems like a simple rule, but in a country where the law differs by state, such as the USA, it can be understood that there is no overarching quasi-private international civil law that defines the governing law under federal law.
In this case, the location to which the deceased has closest ties becomes the home country of the party concerned, and it is this region’s law which becomes the governing law (closely related region law). In some situations, establishing this may be complicated.
Moreover, when the applicable law is regarded as being that of a country outside Japan, it is extremely complicated to research and interpret local laws therefore consultation with local experts who are familiar with the said local law, judicial precedents and common law etc is indispensable.
At Nakamura Tax Consultation Office, we work together with lawyers and judicial scriveners who are familiar with international legal affairs, to establish and investigate the governing law, and then clarify a specific framework of procedures to follow.
Division of inheritance
If the deceased is Japanese, and the governing inheritance law is Japanese law, it is only necessary to conduct consultations about division of inheritance based on Japanese civil law even if the said inheritance were overseas assets.
Nevertheless, there are many cases where we attempt to carry out the procedures of cancelling bank accounts and transferring the titles of real estate etc. for division of inheritance in accordance with Japanese law, but without being familiar with the practice in that country where the asset is based. Despite being valid in Japanese law, these procedures are often not accepted in the other country because they do not conform to local procedures for division of inheritance. In this case, actual inheritance procedure would become different from that defined in division conference documents, which oblige heirs to adjust the property transfer to match the actual procedure noted in the documents. As a result of the adjustment, new taxable transactions may occur.
To avoid this kind of complication, at Nakamura Tax Consultation Office, we support the division of inheritance in consultation with overseas specialists.
Valuation of overseas real estate
In Japanese inheritance law, land is valued based on the price of personal use by way of “average value of square meter land method”etc,(but if the land is subject to established leasehold or house leasehold, we need to multiply the price of personal use by leasehold, or house leasehold proportion) for the purposes of land tax calculation. However, the same method as that used in Japan is not practicable for the valuation of real estate assets overseas. With regard to this, the test case response from the National Tax Agency in Japan stated that “Regarding the valuation of land, in principle, evaluation is carried out by taking into account the purchase price, official appraisal value, price based on an official land price etc.” and “Unless this is contrary to the interests of taxation, the valuation should be calculated based on the purchase or transfer price, and requires point-in-time adjustment by multiplying price change rates”
Accordingly, we can conclude that previous sales data and valuation by an expert etc. must be taken into account, and in the interests of fairness an appraisal by a third party needs to be obtained. At Nakamura Tax Consultation Office, we can support the process of valuation of property overseas by working in conjunction with local experts in the country concerned.
Support for probate formalities
Unlike in Japan, countries such as the USA initially place the property of the deceased under the control of a court of law. The court appoints an administrator for the property (will executor or administrator of the estate), who takes control of the property under the supervision of the court, pays off debt and estate tax, and distributes the remainder to the heirs. Normally this administrator of the estate will be someone close to the deceased, but in the case of the deceased being a Japanese person leaving property in the USA, there are many instances of a US attorney being appointed as administrator. At Nakamura Tax Consultation Office, we support probate formalities in collaboration with local lawyers etc.
Managing inheritance tax returns (compliance with US-Japan convention on inheritance tax )
The inheritance system in the USA is such that, prior to the inheritance being passed on to the heir(s), the gross estate is subject to tax, a system which is known as estate tax. This differs from the inheritance tax system in Japan, in that the deceased is held to be the tax-payer, rather than the heir(s). In practice, if there is a will, then the will executor will make the tax declaration, or if there is no will, the administrator of the estate will do so. The time limit in which this tax return needs to be made is generally within 9 months after the death occurs.
This means that in Japan it is the heir that pays tax on the amount inherited, but in the USA federal estate tax is imposed on the deceased, so if the deceased was resident in the USA, and the heir is resident in Japan, then all of the inheritance would be subject to tax both in the USA and Japan, and double taxation issues arise.
This double taxation may be eliminated by applying the system of foreign tax credit specified in Japanese inheritance tax law, without applying the provisions of the Japan-US Convention. However, due to tax laws in both Japan and the USA, the foreign tax amount applicable to foreign tax credit is limited to the tax amount imposed in the country where the property is located, and where foreign inheritance tax is imposed by laws of countries other than the country where the property is located, this is not subject to adjustment of double taxation. So, for property located in a third country, other than Japan or the USA, the foreign tax credit system cannot be used for the estate tax imposed in the USA.
Under Article 5 of the Japan-US Inheritance Tax Convention, which was established to eliminate such double taxation peculiarities, it is possible to adjust the double taxation by the amount of either the estate tax(USA) or the inheritance tax (Japan), whichever is the lesser amount.
Moreover, if the deceased is a non-resident, while it is said to be possible to use the special calculation system of the Japan-US Convention to obtain a unified transfer tax deduction, clearly the inheritance tax system, the estate tax system, and the provisions of the Japan-US Inheritance Tax Convention are difficult for an ordinary taxpayer to navigate.
It is therefore important to establish if the Japan-US Tax Convention can be applied, whenever inheritance tax and estate tax returns need to be filed both in Japan and the USA.
At Nakamura Tax Consultation Office, we support the tax returns required for international inheritance.
- Address：Frontier Shinjuku Tower（previously known as “TSI Shinjuku Tower”）, 3-9-7, Nishi-shinjuku, Shinjuku-ku, Tokyo, 160-0023 Japan
- e-mail: info@japantax.tokyo
- Tel：+81-3-5366-4749
