DOUBLE TAXATION TREATY BETWEEN THE UNITED STATES AND JAPAN 

The US and Japan concluded a bilateral estate tax treaty in 1954. It applies to US Federal estate and gift tax and Japanese inheritance and gift tax and to other taxes of a substantially similar character imposed subsequently by either Japan or the US.

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Key Points:

• The State imposing a tax in the case of a decedent who at the time of death was a national or citizen of the other State allows an exemption which would be allowable under its law if the decedent has been domiciled in that State. The exemption is restricted to the amount of the value of the US property as a percentage of the worldwide estate value.

• The State imposing a tax in the case of a decedent or the beneficiary of a decedent who, at the time of death, was a national or domiciliary of that State allows a credit against its tax for the tax imposed by the other State with respect to property situated in that other contracting State.

• Where both States claim primary taxing rights and tax the entire estate, a secondary credit is applied, calculated as follows: the amount of the taxes imposed with respect to such property in the contracting State imposing the smaller amount of taxes, divided between the two States in proportion to the amount of taxes imposed in each of the two States with respect to such property.

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Example         

Jennifer, a widow, with no lineal relatives, was a citizen and domiciliary of Spain at the time she died (in 2022). Her estate comprised a vacation home in San Diego valued at $15,000,000, a yacht registered in the US valued at $1,000,000 and personal assets in Tokyo valued at ¥40,000,000 which she transferred by will to a distant cousin, Yoko,  a citizen and domiciliary of Australia.

 

Assets in the Estate:

US Assets $16,000,000

Japanese Assets: ¥40,000,000

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Tax Rates and Exemptions for Year 2022:

US Exclusion Amount:                    $12,060,000 (citizens and domiciliaries)

US Exclusion Amount:                    $60,000

Estate tax on first 1m                      $345,800

Estate tax on balance                     40%

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US basis of taxation                        Citizens and domiciliaries - worldwide assets

                                                                   Non-resident non-citizen - situs assets

Japan basis of taxation                 Category 1: Resident unlimited taxpayer[1] – worldwide 

                                                                   assets.  

                                                                   Category 2: Non-Resident Unlimited Taxpayer[2] –

                                                                   worldwide assets.

                                                                   Category 3:  Limited Taxpayers[3] – domestic property

                                                                   only.

Japanese Exclusion Amount      ¥30,000,000 + ¥6,000,000 per heir

Japanese Tax Rate                          Up to ¥10,000,000 - 10%

 

Assume ¥100 = $1.0

∴ ¥40,000,000 = $400,000                          

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Calculation of US Tax Liability

The US property passing to Yoko is deemed to have a US situs under US law. 

                                                                                                                                                           $

Vacation home in San Diego                                                                                          15,000,000         

Yacht registered in the US                                                                                                1,000,000

Total Assets                                                                                                                            16,000,000

Tax on 1,000,000                                             345,800

Tan on balance @ 40%                             6,000,000

Tax Liability                                                                                        6,345,800

Less: Unified Credit                                                                         5,258,341*                                                        Net Tax Liability                                                                                                                      1,087,459                    Net Value of Taxable Estate                                                                                             14,912,541

Tax Liability: $6,321,800

*5,389,800 x 16,000,000 = 5,258,341

               16,400,000

 

Calculation of Japanese Tax Liability

                                                                                                                          ¥          

Apartment in Tokyo                                                                         40,000,000

Less: Exclusion Amount                                                               30,000,000                                          

                                                                                                                    10,000,000    

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Calculation of Yoko’s Japanese Tax Liability

                                                                                                                             ¥     

Personal Assets in Japan                                                               10,000,000

Less: Exclusion Amount                                                                   6,000,000    

Gross Taxable Estate                                                                         4,000,000

Tax at 10%                                                                                                   400,000 

Net Value of Taxable Estate                                                           3,600,000  

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Tax Liability ¥400,000  

Net Estate: $16,400,000  – ($1,087,459  + $4,000) = $15,308,541 (¥1,530,854,100)

 

 

[1] A resident unlimited taxpayer is an individual who acquired property through inheritance/gift and has a domicile/residence in Japan at the inheritance/gift. However, if a temporary resident, a person who has a certain working visa and whose total period of domicile in Japan within 15 years prior to the inheritance/gift is 10 years or less (“Temporary Resident”) acquires the property from a foreign resident decedent/donor who has a certain working visa (“Foreign Resident Decedent/Donor”) or non-resident decedent (i) who has no domicile in Japan at the inheritance/gift but had domicile in Japan within 10 years prior to the inheritance/gift but never had Japanese nationality during that period or (ii) who has no domicile in Japan at the transfer and not had domicile in Japan within 10 years prior to the inheritance/gift (collectively “Non-Resident Decedent/Donor”), inheritance/gift tax is imposed only domestic property.

[2]A Non-Resident Unlimited Taxpayer is subject to inheritance/gift tax on worldwide assets. (1) Even if a Japanese national who has acquired property by inheritance/gift does not have domicile in Japan at the inheritance/gift, the heir/donee is subject to inheritance/gift tax on the acquired worldwide property if any of the following applies: (i) If the decedent/donor (excluding Foreign Resident Decedent/Donor) has domicile in Japan at the time of inheritance/ gift; or (ii) If either the heir/donee or the decedent/donor (excluding a Non-Resident Decedent/Donor) has domicile in Japan within 10 years prior to the inheritance/gift; or (iii) If the decedent/donor has received an extension of due date of the exist tax (See 2.2). (2) A non-Japanese who does not have domicile in Japan at the time of inheritance/gift but the decedent/donor (excluding Foreign Decedent/Donor and Non-Resident Decedents/Donor) has domicile in Japan at the time of inheritance/gift or has had domicile in Japan within 10 years prior to inheritance/gift, the heir/donee is subject to inheritan

[3] A limited taxpayer is subject to inheritance/gift tax on the acquired domestic property only. A limited taxpayer is an individual (i) who acquired property by inheritance/gift, who does not have domicile in Japan at the time of inheritance/ and who does not fall under the category of non-resident unlimited taxpayer; or (ii) a Temporary Resident who acquired property by inheritance/gift from a Foreign Decedent /Donor or Non-Resident Decedent/Donor.