Statutory definition

For taxation when securities and similar assets are transferred to nonresidents by gift, inheritance or bequest under Article 60-3 (for details, see Exit tax on gifts and inheritances), Article 137-3 provides a tax-deferral mechanism. It identifies the persons receiving deferral as follows:

...Where a person to whom these provisions applied (including heirs) in respect of ... (hereinafter ‘covered assets’) ... provides security equal to the income tax deferred for the gift by the final income tax return deadline for that year as prescribed by Cabinet Order, ... payment is deferred from the gift date until four months after the day following the gift deferral reference date ...

For gifts, the resident donor receives deferral; for inheritance or bequest, all heirs of the deceased do. The next section explains this.

Overview

Who receives deferral for gifts versus inheritance?

Both Article 60-3 taxation and Article 137-3 deferral operate on the resident transferor's side. For gifts, the recipient of deferral is the resident donor, including heirs if deceased, rather than the donee. Gifts effective on death are treated as inheritance or bequest. For inheritance or bequest, all heirs receive deferral, including nonresident heirs acquiring covered assets. A donor receiving deferral who plans to leave Japan must notify appointment of a tax representative before departure. Deferral for the taxpayer's own departure is in Article 137-2 and is discussed in What is the tax payment deferral for the exit tax (tax on overseas transfer)?. The present deferral differs because it arises for the resident transferring the assets.

How long does deferral last, and what must be filed annually?

Deferral ends four months after the day following the reference date, which is the earlier of five years after the gift or commencement of inheritance and the date the recipient returns to Japan or another prescribed event occurs. An extension requires filing the prescribed notification by the five-year date or another statutory deadline, such as the day before an earlier return event; it cannot be filed at any time. During deferral, a continued-application notification for covered assets held each December 31 is due by March 15 of the next year. Failure to file makes the deadline four months after that filing deadline. If the taxpayer dies before the deadline, heirs inherit the payment obligation.

What should be checked where there are multiple heirs?

For transfers to nonresidents by inheritance or bequest, the security provider and the person notifying a tax representative are not necessarily the same. Heirs provide security, while all nonresidents acquiring covered assets must file representative notifications. This includes a nonresident legatee who is not an heir. Because heirs and nonresident asset recipients need not coincide, check each statutory actor's obligations separately.

Which request for correction applies when circumstances later change?

Three provisions address different later changes. Article 153-3 principally covers reversal of Article 60-3 taxation when a nonresident recipient returns to Japan or another listed event occurs, whether or not deferral was granted. The deadline is four months after that event. It also applies mutatis mutandis to other cases, such as sale or settlement during deferral below the gift-date value, with the period running from the sale or settlement. A nonresident who received assets by gift from a donor receiving deferral, and was notified of the deferral and reference date, including that nonresident's heirs, must notify the donor within two months after a transfer, settlement or succession by qualified acceptance or similar event before the reference date; for heirs in such succession, the period runs from learning of the inheritance. Recipients by inheritance or bequest have no such obligation. Article 153-4 applies where a resident sells inherited or bequeathed securities and a later change to the deceased's return changes acquisition cost. Article 153-5 applies where assets increase or decrease due to statutory estate-division or similar events affecting the deceased, not quoted here. Both have four-month deadlines from the relevant event.

Points that require care in practice

• If a recipient returns to Japan within five years of the gift or similar transfer, determine the reference date and deferral deadline by reading Articles 137-3 and 60-3 together.
• If a continued-application or extension notification is missed, check Article 137-3's notification provisions to determine when deferral ends.
• To identify the applicable correction provision—Article 153-3, 153-4 or 153-5—first identify whether the event is a return to Japan, acquisition-cost change, estate division or another relevant event, then check the statute.

Legal basis

• Income Tax Act, Article 137-3(1) (Tax deferral where special capital gains rules apply to assets transferred to nonresidents by gift, etc.) / Quoted wording: “Gift (excluding a gift effective upon the donor's death; hereinafter the same in this paragraph).”
• Income Tax Act, Article 137-3(1) (Same) / Quoted wording: “A person to whom these provisions applied (including heirs) ...”
• Income Tax Act, Article 137-3(1) (Same) / Quoted wording: “Only where the person provides security equal to the income tax deferred for the gift by the final income tax return deadline for that year as prescribed by Cabinet Order, notwithstanding that Subsection, payment is deferred from the gift date until four months after the day following the gift deferral reference date (the earlier of five years after the gift and the date a donee-return or similar event occurs, meaning cases under Article 60-3(6)(i) or (iii) or other cases prescribed by Cabinet Order; the same applies in paragraph (3)(i); the reference-date definition also applies in paragraph (6)).”
• Income Tax Act, Article 137-3(2) (Same) / Quoted wording: “Inheritance or bequest (including a gift effective upon the donor's death; hereinafter the same in this paragraph).”
• Income Tax Act, Article 137-3(2) (Same) / Quoted wording: “All heirs of a person to whom Article 60-3(1) through (3) applied (referred to in paragraph (4) as the ‘covered decedent, etc.’) ...”
• Income Tax Act, Article 137-3(2) (Same) / Quoted wording: “Only where the heirs provide security equal to the income tax deferred for inheritance, etc. as prescribed by Cabinet Order, and all nonresidents acquiring the covered assets through that inheritance or bequest notify appointment of tax representatives under Article 117(2) of the General Act of National Taxes (Tax representatives), as prescribed by Cabinet Order, by the final income tax return deadline for that year.”
• Income Tax Act, Article 137-3(3) (Same) / Quoted wording: “Where persons listed in the following items submit to the competent tax office director, by the respective specified date or deadline, a notification stating their wish to extend deferral under the preceding two paragraphs and other matters prescribed by Ministry of Finance Order, ‘five years’ in those provisions shall be read as ‘ten years.’”
• Income Tax Act, Article 137-3(3)(i) (Same) / Quoted wording: “Persons receiving treatment under the preceding two paragraphs: the date five years after the gift or commencement of inheritance (where a donee-return or heir-return event occurs earlier, the day before that event).”
• Income Tax Act, Article 137-3(4) (Same) / Quoted wording: “Application is limited to cases where the final return filed by a person seeking paragraph (1) treatment, or the covered decedent's return filed by heirs seeking paragraph (2) treatment, states the intention to apply those provisions and includes ... documents.”
• Income Tax Act, Article 137-3(7) (Same) / Quoted wording: “Must be submitted, as prescribed by Cabinet Order, to the competent tax office director by March 15 of the year following the year containing that date (referred to in the following paragraph and paragraphs (9) and (12) as the ‘filing deadline’).”
• Income Tax Act, Article 137-3(10) (Same) / Quoted wording: “A person receiving treatment under paragraph (1) who intends to depart Japan under Article 60-2(1) (Special capital gains rules on departure) must notify appointment of a tax representative under Article 117(2) of the General Act of National Taxes before departure.”
• Income Tax Act, Article 137-3(15) (Same) / Quoted wording: “The payment obligation for deferred income tax relating to the qualifying donor, etc. is succeeded to by that person's heirs.”
• Income Tax Act, Article 60-3(8)(i) (Special capital gains rules for assets transferred to nonresidents by gift, etc.) / Quoted wording: “Where the transfer price of the securities, etc., or their value upon inheritance by qualified acceptance or similar succession, is below their value at the time of the gift, etc. ...”
• Income Tax Act, Article 60-3(9) (Same) / Quoted wording: “A nonresident who received by gift from a donor receiving deferral securities, etc. or contracts for unsettled margin or derivative transactions, and received notice from that donor ... of deferral under Article 137-3(1) or (2) for the gift year's income tax and its reference date, including that nonresident's heirs ...”
• Income Tax Act, Article 60-3(9) (Same) / Quoted wording: “That person must notify the donor receiving deferral ... within two months after the transfer, settlement or inheritance by qualified acceptance or similar event (for an heir in such succession, the date the heir learned of the inheritance).”
• Income Tax Act, Article 153-3(1) (Special correction requests where nonresident recipients return to Japan, etc.) / Quoted wording: “A request for correction may be made to the tax office director within four months after falling within a case listed in Article 60-3(6).”
• Income Tax Act, Article 153-3(2) (Same) / Quoted wording: “The preceding paragraph applies mutatis mutandis to heirs receiving deferral under Article 60-3(8), individuals under paragraph (10)(i), and persons under paragraph (10)(ii), where paragraph (8), including as applied under paragraph (10), applies.”
• Income Tax Act, Article 153-3(2) (Same) / Quoted wording: “‘The date of falling within a case listed in Article 60-3(6)’ shall be read as ‘the date of transfer, settlement or transfer by inheritance with qualified acceptance or similar succession under Article 60-3(8) or (10).’”
• Income Tax Act, Article 153-4(1) (Special correction requests upon changes to acquisition cost of inherited securities, etc.) / Quoted wording: “Where a resident transfers securities, etc. prescribed in Article 60-2(1) (Special capital gains rules on departure) acquired by inheritance or bequest ...”
• Income Tax Act, Article 153-4(1) (Same) / Quoted wording: “The resident, including heirs, may request correction of income tax for the year of transfer from the tax office director within four months after the date specified in the relevant following item.”
• Income Tax Act, Article 153-5(1) (Special correction requests upon estate division, etc.) / Quoted wording: “The heirs may request correction from the tax office director within four months after the estate-division or similar event.”