Japan Gift Tax
Many individuals often question why they must pay taxes on the things that have been provided to them. The response, however, is not absurd. To prevent people from evading the federal inheritance tax, which is quite high in Japan, the government charges gift taxes. People who transfer their possessions to others escape the federal estate tax if there are no gift taxes. Gift taxes are also necessary to deter taxpayers from transmitting their assets to avoid paying income taxes.
Gift recipients are normally responsible for paying the givers’ gift taxes. Perhaps the most misunderstood tax in Japan is the gift tax. This is a result of its complexity, payment requirements, and ever-changing restrictions.
Despite having the same rate and lifetime exemption limit, gift taxes and inheritance taxes are not the same even though they are sometimes grouped. Gifts of property made by a live individual or corporate organization are subject to gift taxes. On the other side, a person who receives the money or property of a dead person must pay inheritance tax.
The yearly gift exemption in Japan is JPY 1.1 million for each recipient. Every gift received more than this exemption amount is subject to a 20% tax under the Japan gift tax. It seems that income taxes rise along with income. In a similar spirit, gift taxes rise in proportion to the value of the gift. It is noted that, depending on the amount of the present, the gift tax rate in Japan may rise to as high as 55%.
How Does the Gift Tax Law in Japan Work?
The value of the assets being transferred is frozen when gift taxes are going to be computed. To avoid the donated asset’s value rising throughout the calculating time, this is done. It should be emphasized that regardless of who or when the transfer occurs, any giving or transfer of assets held in Japan is always subject to the Japan gift tax.
To understand how the Japanese gift tax rules function, it is essential to take into account both the prior and present gift tax legislation.
Japan’s former gift tax law
It is essential to remember that both Japanese and non-Japanese people are subject to Japan’s gift tax rules.
Only individuals considered to be “temporary foreigners” were excluded from gift taxes under the previous Japan gift law amendment. An expatriate must have complied with two requirements to be considered a temporary foreigner:
They must first possess a “Table 1” visa. Diplomats, government employees, educators, artists, journalists, corporate executives or investors, researchers, those who provide medical, legal, and accounting services, students, engineers, etc. are among those who may be granted a table 1 visa.
Second, they must have lived in Japan for fewer than ten (10) years in the 15 years before the gift date.
It is important to highlight that since “Table 2” visa holders do not meet the criteria for temporary foreigners, they are not exempt from paying the gift tax regardless of how long they have lived abroad.
Permanent residents, long-term residents, and the spouse or child of a Japanese resident are among those who have a Table 2 visa.
The current gift tax law in Japan
To attract more foreigners & expatriates to move to Japan and support the employment of highly trained foreigners, changes to the gift tax regulations were suggested in December 2020. They went into effect on April 1st, 2021, after being examined by the Japanese parliament in early 2021.
With the recent changes to the Japan gift tax law, regardless of the length of residence, any overseas asset received by expatriates who temporarily or permanently reside overseas or in Japan is now exempt from the definition of taxable gift assets when the gift is made by a foreign national who resides in Japan.
The beneficiary of assets from outside is not covered by this new regulation since it only pertains to the duration of residency in Japan. In reality, under this new regulation, ex-pats who hold “table 2” visas—both the giver and the recipient—will not be excluded from paying the gift tax.
The new gift tax legislation is applicable in the following two situations:
- if the asset’s donor is an ex-pat who lives in Japan
- where the present is being given by an expatriate who has left Japan.
Regardless of their length of residence, the beneficiary of the donated asset will not be subject to gift tax under the first scenario.
In the second scenario, regardless of their residency time or whether they lived in Japan before the donation, the beneficiary of the donated asset will likewise be free from the gift tax.
Consider the scenario when an ex-pat who does not have permanent residence in Japan gets a present from another ex-pat, a non-Japanese citizen who lives in Japan, or someone who gave the gift before departing Japan, that is more than the gift tax level. The receiver won’t be required to pay gift tax in such a situation.
In contrast, if a child of an expatriate gets a present from grandparents who reside outside of Japan that is more than the gift tax level, the kid will be required to submit a gift tax report and pay the gift tax since they are considered to have a table 2 Visa.
Effects of Changes in Japan’s Gift Tax Laws on Foreigners
Depending on how long they have lived in Japan, the changes to the gift tax legislation might either benefit or hurt foreigners residing there.
These legal amendments will alleviate short-term residents of the burden of being liable for the gift tax on abroad assets since foreigners with “Table 1” visas cannot remain in Japan permanently. Additionally, these modifications may allay some expats’ worries about finding and taking jobs in Japan. Additionally, it will encourage more qualified workers to look for work in the nation.
However, since people with “table 2” visas are not covered by these new gift tax regulations, long-term foreign residents will have their abroad assets subject to the laws, even up to (five) 5 years after they leave Japan.
Final Thoughts
Both short and long-term ex-pats may need to think about strategies to deal with their prospective gift tax responsibilities due to the clear consequences of the modifications and the complexity of the Japanese gift tax legislation. As a result, people have to get expert advice before selecting to live in or retire in Japan. The use of a skilled financial counselor is the best approach to comprehending and reducing tax obligations.
