How not to become a tax resident in Japan

[johnnyfred1]

I've reviewed numerous posts in this community, and here are the key steps to avoid becoming a tax resident in Japan for Japanese citizens with U.S. permanent residency status, as I understand them.

1: During each visit, ensure your stay in Japan does not exceed three months. You can have up to two separate three-month visits.

2: Do not work in Japan.

3: Maintain your primary residence in the U.S.

Is there anything else I should consider?

 

[mariangel]

@johnnyfred1 The 181 day rule does not necessarily apply to people who live year after year.

Once you have a repeating pattern then the 'center of economic interest' becomes the criteria. This is a subjective determination that depends on:

• location of savings;
• having a place to live year round if you wanted it;
• location of family, particularity spouse.
• source of lively hood;
• citizenship.

If you live 6 months in a hotel, do not have and bank accounts or savings in Japan. do not have family connections and you have a job that requires you to be in the US then you might be OK (i.e. not a remote job, not living off savings).

If you would like to be more certain then limit your stays to 3-4 months per any 12 month period (i.e. not a calendar year).

Having Japanese citizenship means you will likely be presumed to have Japanese residency if your status is ambiguous.

I would add the standard "get professional advice" because there may be things about your personal situation that make things better or worse for you.

Also remember that being a non-resident for income tax purposes does not necessarily mean your a non-resident for inheritance taxes.

 

[%C3%90oan9919]

@mariangel In other words. How about we pay taxes to the places we live instead of using their social services for free . Wild thinking eh?

 

[johnnyfred1]

@%C3%90oan9919 Understand your concern.

 

[mariangel]

@%C3%90oan9919 Not an unreasonable position for young people with no assets. For older people with any sort of assets the punitive inheritance and gift tax system in Japan can mean the taxes demanded will far exceed the cost of any services used and that is without considering the problem of being forced to sell family businesses or homes to pay the taxes.

 

[%C3%90oan9919]

@mariangel Not to sound like anyone is trying to gatekeep the country. But perhaps if that becomes as big of an issue as you explained, then moving to Japan as a vacation home is not really the best idea. The country doesn't owe anyone anything. These regulations pull double duty to specifically stop people from using Japan as their playground while making sure they contribute to the society they are attempting to live in.

That being said, its perfectly reasonable to attempt to minimize the amount of taxes you should be paying into. Its not, however, reasonable to attempt to circumnavigate the tax laws because someone doesn't feel like paying, is more or less my point.

 

[funker]

@%C3%90oan9919 The OP is talking about JPN citizens, but yes, and nicely put on that last part. Only idiots would or would expect anybody normal to pay more taxes than obligated.

 

[mariangel]

@%C3%90oan9919

That being said, its perfectly reasonable to attempt to minimize the amount of taxes you should be paying into. Its not, however, reasonable to attempt to circumnavigate the tax laws because someone doesn't feel like paying, is more or less my point.

The tax laws have rules. It perfectly reasonable find out what they are and follow them in a way that reduces risk and taxes owed. It is also perfectly reasonable to complain about subjective and unclear rules that make it impossible for someone to make plans.

 

[112358]

@mariangel

remember that being a non-resident for income tax purposes does not necessarily mean your a non-resident for inheritance taxes.

What is an example of this? Let's say I live in Japan 5 months for the past 6 years in a monthly rental (split 2 and 3 months at a time), but have US citizenship, family (Japanese spouse with me the same 5 months, US other times), children, relatives in US, and a permanent place to live outside of Japan, retired.

If I die in Japan, is there a possibility I would owe inheritance tax in Japan?

 

[mariangel]

@112358 If you have a domicile in Japan based on Japanese laws then you are liable for all taxes. If the tie breaker rules in the tax treaty mean you are a US resident for income tax then the Japanese government will treat you as if you are resident of the US when calculating income tax but that does not eliminate your Japanese domicile. This means you still would be liable for inheritance and gift taxes since they are not covered by the tax treaty.

The question of whether you have a domicile in Japan based on Japanese laws is complex and subjective. You should seek professional advice if you are spending 5 months per year because it is possible that you could have a domicile.

I was told that if a part time resident dies while in Japan the chances of the Japanese government deciding that they had a domicile increases significantly.

 

[112358]

@mariangel

The question of whether you have a domicile in Japan based on Japanese laws is complex and subjective.

Ok, is that law described somewhere online so I can review it myself? I imagine if I'm not staying in the same place each time ie doing a monthly rental in various locations, then I should be safe.

 

[mariangel]

@112358 There are online resources that discuss generalities but are limited use because the end determination is very subjective based on the details of the individual case. Even if you paid top dollar for professional advice you would likely find the best response would be "most likely not but no guarantees".

IMO, living in a rental each time you come would be a strong argument in your favor but the Japanese spouse complicates the issue. The only sure way to reduce risk is to reduce time in Japan. 4 months per 12 month period was the guideline I got but again "no guarantees" unless you spend 100% of your time outside of Japan. @kristhuy posted some examples of case law that provided good insights into how the NTA thinks but these seem to have gotten lost when they moved the wiki.·

 

[112358]

@mariangel That makes sense, thanks. Since I don't every stay at my wife's family's home, nor own anything there, I feel like I'm so far different from those case law examples that I would definitely be in the clear, even if there are no guarantees.

 

[112358]

I guess the real issue is if I were to die before Japanese wife, and she lived part time in Japan, that could be a problem.

 

[mariangel]

@112358 There are lots of potential gotchas. Lets say you did not space out your trips evenly so there is a period across 2 years from Jul to Jul where you were 7 months in Japan. That would establish residency for your wife which would restart the 10 year clock on her inheritance tax liability (i.e. as a Japanese, she would be liable for inheritance taxes for 10 years even if she left Japan and did not return).

It is also not clear to how the NTA handles retired people. In the case law the deciding factor was a job that required the person to be in Singapaore. Retired people do not have a requirement to be anywhere.

You should find a Japanese accountant with knowledge of international domicile issues and have them assess your complete situation. They would also be able to warn you about hypothetical changes to your situation that could have adverse effects even if you are currently OK.

 

[112358]

@mariangel Wow, I can see how complex this could be, fascinating, thanks!

 

[kristhuy]

@112358

is that law described somewhere online so I can review it myself?

The relevant statutory provision is Article 22 of the Civil Code. As you can see, however, it is quite a sparse provision, with most of the interpretative work having been done by the courts over the years. As @dike-Flintgrove mentioned, I wrote up the details of a couple of significant cases for the wiki here.

 

[112358]

@kristhuy Very interesting. There are only two cases listed and one seems to be for a Japanese citizen or one with seriously intertwined connections to Japan like on Japanese health insurance, co-owner of an apartment and on resident register.

If that's the kind of scenarios I need to watch out for then I feel much better as I do not stay at wife's family house, nor own anything there nor earned anything there either.

 

[112358]

I guess the real issue is if I were to die before Japanese wife, and she lived part time in Japan, that could be a problem.

 

[felicitypenny]

@mariangel I mean as mean as it sounds... what are they gonna do if you die?