Japan Gift Tax; All Expats Need to Know

Written by Lloyd Danon

The gift tax is arguably the most misunderstood of all taxes in Japan. This is due to its complexity, criteria for payment, and constantly changing regulations.

Many people often wonder why they have to pay taxes on the gifts given to them. Well, the answer is not far-fetched. The government imposes gift taxes to prevent individuals from dodging the inheritance tax, which is extremely high in Japan. Without gift taxes, people who give out their assets avoid the inheritance tax. In addition, gift taxes are required to discourage taxpayers from transferring their assets in a bid to evade income taxes.

Who Pays Gift Tax?

Gift taxes are typically owed by donors but levied on the gift recipients. This means if you receive the gift, you are liable for the gift tax. However treatment on gifts received abroad and that stay abroad can be exempt depending on an individuals circumstances. Getting guidance on this is recommended.

Although gift taxes and inheritance taxes are often considered together because they share the same rate and lifetime exemption amount, they are different. Gift taxes are paid due to gifted assets made by a living person or corporate entity. On the other hand, inheritance tax is paid by a person who inherits the money or property of a deceased person.

In Japan, the annual gift exemption for each recipient is JPY 1.1 million. Every gift(s) received in excess of this exemption value is subject to the Japan gift tax at a 20% tax rate. Apparently, income taxes increase with an increase in income. In the same vein, gift taxes also increase with an increase in the gift’s value. It is noteworthy that the Japan gift tax rate can increase to as much as 55%, depending on the gift’s value.

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How Does the Japan Gift Tax Law Operate?

When gift taxes are about to be calculated, the value of the gifted assets is frozen. This is done to prevent the value of the gifted asset from increasing during the calculation period. It should be noted that any gifting or transfer of assets that are located in Japan is always subject to the Japan gift tax, irrespective of who or when the transfer take place.

It is vital to consider the previous and current gift tax laws to have a clear picture of how the Japan gift tax laws operate.

The Previous Japan Gift Tax Law

It is important to note that the Japan gift tax laws bind both Japanese citizens and non-Japanese citizens.

In the past Japan gift law reform, the only expatriates who were exempted from paying gift taxes were those deemed to be “temporary foreigners.” For an expatriate to be regarded as a temporary foreigner, they must have met two criteria:

  • Firstly, they must hold a “Table 1” visa. People who can get a table 1 visa include diplomats, officials, professors, artists, journalists, investors or business managers, researchers or people that render medical, legal, or accounting services, students, engineers, etc.
  • Secondly, they must have resided in Japan for a period of years less than ten (10) in the past 15 years, from the gift date.

It is noteworthy that expatriates who hold a “Table 2” visa, regardless of their residency period, are not exempted from paying the gift tax, as they do not qualify as temporary foreigners.

Table 2 visa holders include the spouse or child of a permanent resident, permanent residents, long-term residents, spouse or child of a Japanese resident.

Japan Gift Tax All Expats Need To Know 02

The Current Japan Gift Tax Law

Changes in the gift tax laws were proposed in December 2020 to encourage more foreigners and expatriates to migrate to Japan and promote the employment of highly skilled foreigners. They were reviewed by the Japanese parliament in early 2021 and became effective on April 1st, 2021.

With the new changes in the Japan gift tax law, any overseas asset received by expatriates, who reside overseas or in Japan temporarily, is excluded from the scope of taxable gift assets when the gift is given by a foreigner who resides in Japan, regardless of their residence period.

This updated law is with respect to the length of the period of residence in Japan and does not apply to the recipient of overseas assets. In fact, with this new law, if the expatriates (both the donor and the recipient) have a “table 2” visa, they will not be exempted from paying the gift tax.

The amendment to the gift tax law takes effect on two scenarios:

  1. Where the donor of the asset is an expatriate who resides in Japan
  2. Where the donor of the asset is an expatriate who offers the gift after leaving Japan.

In the first case, the recipient of the gifted asset will be exempted from the gift tax regardless of their residence period.

In the second case, the recipient of the gifted asset will also be exempted from the gift tax, regardless of their residence period, whether they reside in Japan or not before the gifting.

For instance, suppose an expatriate who does not have a permanent residency in Japan receives a gift that’s above the gift tax threshold from another expatriate or a non-Japanese national who resides in Japan or gives the gift before leaving Japan. In that case, the recipient will be exempted from paying the gift tax.

In contrast, if an expatriate’s child receives a gift (above the gift tax threshold) from his/her grandparents who live outside Japan, the child will need to file a gift tax return and pay the gift tax because he/she is classified to have a table 2 Visa.

Effects of Changes in The Gift Tax Laws on Expats in Japan

The changes in the gift tax laws have both positive and negative effects on expatriates living in Japan, depending on their residence periods.

Since foreigners with “Table 1” visas cannot stay permanently in Japan, these changes in the law will relieve short-term residents of the burden of being subject to the gift tax on overseas assets. In addition, these changes will reduce the concerns some expatriates might have about seeking and accepting assignments in Japan. It will also encourage more skilled personnel to seek employment in the country.

However, since these reviewed gift tax laws do not address those with “table 2” visas, it means that long-term foreigners will have their overseas assets exposed to the gift tax laws, even up to (five) 5 years after they depart Japan.

Final Thoughts

Due to the obvious implications of the revisions and the complex nature of the Japan gift tax laws, both short- and long-term expats may need to consider ways to address their potential gift tax burdens. As such, they should seek professional guidance before deciding to reside or retire in Japan. What better way to understand and minimize tax burdens than to engage the services of professional financial advisors?

At Argentum Wealth, we provide the highest quality financial and estate planning strategies since for expats in Japan. Contact us to schedule your free financial consultation today.

Argentum Wealth does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Argentum Wealth Management is licensed through the Japanese Financial Services Authority to give financial advice. The FSA strongly recommends that you only receive financial advice and services from a locally licensed and regulated firm.

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