JAPAN Law and Practice Contributed by: Mikito Ishida (Mori Hamada & Matsumoto) and David Azcu (Simpson Thacher & Bartlett LLP), Mori Hamada & Matsumoto
of limited liability for investors (ie, limited partners), to the amount of their capital contribution. The manager of the fund acts as the general partner and has unlim - ited liability for the debts and obligations of the IBLP. Similar to an NK, an IBLP does not have separate legal personality under Japanese law. IBLPs are generally prohibited from investing 50% or more of their assets in foreign corporations, and must be registered in the commercial registry within two weeks of formation. Limited Liability Partnerships (LLPs) A Japanese LLP ( yūgen sekinin jigyō kumiai ) is a varia - tion of the Civil Code partnership (NK) and is permitted under the Japanese Limited Liability Partnership Act, which became effective in 2005. In a Japanese LLP, each partner’s liability may be limited to the aggre - gate amount of its contributions to the LLP. Similar to NKs and IBLPs, Japanese LLPs do not have separate legal personality under Japanese law. They are typi - cally treated as pass-through (ie, tax transparent) for purposes of Japanese law. A key requirement for a Japanese LLP is that all part - ners must actively participate in the partnership’s activities; passive investment is not permitted. As a result, Japanese LLPs are typically not suitable for pri - vate equity funds seeking to raise capital from a broad range of passive institutional investors. However, where there are only a few investors who contemplate being actively involved in the fund’s investment activi - ties, as may be the case with corporate venture capital funds, a Japanese LLP may be a suitable option. Like IBLPs, Japanese LLPs must be registered in the commercial registry within two weeks of establish - ment. Tokumei Kumiais (Silent Partnerships or TKs) Another type of fund-like arrangement commonly used by alternative investment funds is a tokumei kumiai , commonly known as a “silent partnership” or a TK. TKs have been permitted under the Japanese Commercial Code since it became effective in 1899. Originally based on the German form of silent partner - ship ( stille gesellchaft ), a TK is not technically a fund and does not have separate legal personality; rather, it is a bilateral contractual relationship between a TK operator and a TK investor that meets certain require -
ments required of TKs under the Japanese Commer - cial Code. In a TK, the TK investor and TK operator enter into a TK agreement that sets forth the terms under which the TK investor must contribute capital to a particu - lar business operated by the TK operator, and under which the TK operator must distribute the TK inves - tor’s share of profits from that business. The TK inves - tor must be “silent” with respect to the operation of the TK operator’s business, with all business activities conducted in the operator’s name (and not, eg, in the name of a “fund”). Funds contributed by the TK investor become the property of the TK operator. A TK investor does not have a direct interest in the assets of the business, and their liability is limited to the amount of their contribu - tion. There are no registration requirements for form - ing a TK, although it must meet certain requirements set forth under the Commercial Code, including that the TK investor remains silent with respect to manage - ment and governance of the bilateral arrangement. Being characterised as a TK will permit TK investors to achieve certain preferential tax treatment. A TK is essentially pass-through, although the tax treatment of a TK differs from other pass-through partnerships, particularly for individual TK investors, in that the TK investors will generally be subject to tax on its share of profits at the same rate as would be the case for ordinary income (instead of being taxed at a lower rate as capital gain income). TKs are often used in combination with a Japanese gōdō kaisha (GK), which is a limited liability company that acts as the TK operator, in an arrangement known as a GK-TK scheme. Multiple parallel GK-TK arrange - ments may also be used to mimic a fund arrangement, subject to each GK-TK meeting the legal requirements applicable to TK arrangements. GK-TK arrangements are commonly used for real estate transactions, often below investor-facing aggregation vehicles. Investment Trusts (Tōshi Shintaku or Tōshin) Investment trusts, known as tōshi shintaku or tōshin , are domestic trusts that are established pursuant to a trust agreement and are subject to regulation under
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