This article provides an overview of taxation for Japanese residents and explains how their Old Mutual International bond will be taxed.
Tax on full or partial encashment
The cash value of both full or part encashments will be taxed as occasional income.
Tax on maturity
If the premium was paid by the policyholder, then the maturity benefit is taxed in the same way as a full encashment. If the premium was paid by a different individual, then the maturity benefit could be subject to gift tax.
Tax on death of the life assured
The taxation of the death benefit depends on the relationship between the policyholder and the life assured and also who paid the premium. The following table summarises:
- Case Life assured Policyholder Premium paid by Taxation applying
1. A B B Income tax
2. A B A Inheritance tax
3. A C B Gift tax
- Case 1
The cash value of the death benefit is taxed as ‘occasional income’
- Case 2
Where the life assured (A) paid the premium, the death benefit is subject to inheritance tax.
- Case 3
Where the life assured (A), policyholder (B) and the person who paid the premium (C) are all different, gift tax is imposed on the death benefit which is paid to the policyholder.
Assignments and pledges
There is no tax payable in respect of pledging a policy; however assignment of the legal ownership of a policy is likely to trigger capital gains tax (‘juoto-syotoku’) which is a part of individual income tax paid by Japanese residents. The amount of the gain which will be taxable depends on the length of time the policyholder assigning the policy has held the policy.
There is no tax payable in respect of fund switches.
There is no tax payable in respect of policy loans.
There are no exemptions or reliefs which apply for any of the local taxes.
Trusts are generally recognised in Japan under Trust Law and Trust Business Law. Japanese income tax, gift tax and inheritance tax are the primary taxes to consider in structuring and administering trusts. However, even though trusts are recognised, this does not guarantee that all foreign trusts would be recognised. Independent advice should be sought where a policy is written subject to a non Japanese Law trust.