JAPAN Law and Practice Contributed by: Atsushi Oishi and Makoto Sakai, Mori Hamada & Matsumoto
1. Tax 1.1 Tax Regimes Income Tax
income. To reduce the tax burdens arising from real estate, certain special tax structures (eg, TMK or TK- GK schemes) are commonly used by non-resident investors. Inheritance Tax Inheritance tax is imposed on an individual who acquires property by inheritance or bequest upon the death of the decedent. It is imposed on the aggre - gate value of all the properties acquired. The taxable base of property for inheritance tax purposes is the fair value at the time of death of the decedent. If the aggregate value does not exceed the basic deduction, no inheritance tax will be levied. Currently, the basic deduction is equal to JPY6 million multiplied by the number of statutory heirs, plus JPY30 million. The total inheritance tax is calculated based on the entire estate, regardless of how the assets are trans - ferred to each heir and legatee, at progressive tax rates ranging from 10% for JPY10 million or less, to 55% for more than JPY600 million. The total amount of tax is then allocated among those who will actu - ally receive the estate assets in accordance with the decedent’s Will or the agreement among the heirs. Since there is a special exemption for spouses, in many cases they do not have to pay inheritance tax. Gift Tax Gift tax is imposed on an individual who acquires properties as a gift during the lifetime of the donor. The gift tax is calculated based on the fair value of all gifts at the time of transfer during a calendar year, after deducting an annual basic exemption of JPY1.1 million, at progressive tax rates ranging from 10% for JPY2 million or less to 55% for more than JPY45 mil - lion, in the case of gifts received by a person aged 18 years or older from a lineal ascendant. Who is Subject to Inheritance and Gift Taxes? For Japanese inheritance tax and gift tax purposes, all individuals are classified as either residents or non- residents, depending on their place of domicile. Their nationality and the length of the residency also matter.
The annual tax rate is based on taxable income, rang - ing from 5% for income of JPY1.95 million or less, to 45% for income over JPY40 million. In addition, an income surtax will be applied on income earned through 31 December 2037 at the rate of 2.1% of the base income tax liability, to secure the financial resources for recovery from the Tohoku Earthquake in 2011. Municipal income and prefectural income taxes are also imposed on taxable income, at a combined rate of 10%. Certain types of capital gains are treated separately from other types of income. For example, capital gains from the sale of real estate owned for more than five years or from the sale of stock in a corporation will generally be subject to a flat rate of 20.315% (national tax and local tax combined). For capital gains from the sale of real estate owned for five years or less, a flat rate of 39.63% (national tax and local tax combined) will apply. Starting in 2025, a minimum tax will be applied to ultra-wealthy individuals. Specifically, taxpayers with annual income exceeding JPY330 million will be sub - ject to additional income tax on the excess amount, ensuring that the overall tax rate on their income is at least 22.5%. For Japanese income tax purposes, all individuals are classified as residents (including non-permanent resi - dents) or non-residents. Residents will generally be subject to Japanese income tax on their worldwide income. However, non-permanent residents who do not have Japanese citizenship and who have spent a total of five years or less within the past ten years as residents in Japan are taxed on their Japan-sourced income and on their non-Japan-sourced income to the extent that it is remitted to Japan. Non-residents are persons who are not treated as residents. Jap - anese income tax on non-residents is assessed on Japan-sourced income only. Rental income and capital gains from real estate located in Japan are always treated as Japan-sourced
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