JAPAN Law and Practice Contributed by: Mikito Ishida (Mori Hamada & Matsumoto) and David Azcu (Simpson Thacher & Bartlett LLP), Mori Hamada & Matsumoto
the partnership’s profits or losses for Japanese tax purposes, regardless of whether any monetary dis - tributions have been made to such partner or not. Corporate partners must calculate their share of the partnership’s profits or losses for their own fiscal year and include such amounts in their taxable income or deductible expenses for such period. However, if the allocation of profits or losses to a partner occurs within one year after such profits or losses arose, the amount can be calculated based on the partnership’s accounting period and is treated as income or loss for the partner’s fiscal year in which such accounting period ends. There are three methods for recognising profits and losses distributed from the IBLP, NK or LLP: • the gross method (ie, recognising income, expens - es, assets and liabilities in proportion to the part - ner’s share); • the intermediate method (ie, recognising income and expenses in proportion to the partner’s share); and • the net method (ie, recognising only profits or losses in proportion to the partner’s share). If a corporate partner wishes to exclude dividends it has received from taxable income or claim a tax credit, the gross or intermediate method must be used. If a partner wishes to use reserves or provisions in the tax return, the gross method is the only method that allows such treatment. For individual partners, income derived through the IBLP, NK or LLP must be classified according to its nature in the appropriate category of income under the Income Tax Act (eg, dividend income, miscellaneous income, business income, or capital gains from the transfer of shares). Individual partners may, subject to certain requirements, treat the partnership’s operating expenses as deductible expenses in calculating their taxable income. Non-Deductibility of Excess Partnership Losses For corporate partners, any portion of partnership loss allocated to such corporate partner that exceeds their aggregate capital contributions (ie, an excess part - nership loss) cannot be deducted in the fiscal year
in which it arises. However, if such corporate partner subsequently receives a profit distribution from the partnership in a later fiscal year, the excess partner - ship loss from prior years may be deducted up to the amount of such profit distribution. Other Matters If partnership assets are distributed in-kind to part - ners in proportion to their capital contributions, such distributions are not subject to taxation at the time of distribution. If a partner withdraws from the partnership or trans - fers or redeems its interest, the transaction is treated as a transfer of the portion of the partnership’s assets attributable to that partner. In addition, please see 4.8 Tax Regime for Investors for major tax exemptions applicable to foreign inves - Any lender that engages in the business of originat - ing loans in Japan is subject to the Japanese Money Lending Act. Only lenders that are registered under the Money Lending Act may engage in money lend - ing business, which is defined as the origination of loans; origination is broadly defined and may include, for example, the intermediation of loans. In 2024, the Japan Financial Services Association clarified an ambiguity as to whether the general part - ner of a partnership-type fund or the fund may make such registration by stipulating that either the general partner or the fund may register as money lenders. The number of Japan-focused private credit funds has increased in recent years. One issue that has arisen with this increase is whether the investors in such funds might be considered “money lenders” for pur - poses of the Act. If investors are considered money lenders, they would also need to be appropriately licensed. The FSA has since clarified that investors in a Japan-focused credit fund will not be deemed to be money lenders for purposes of the Act, so long as the private credit fund meets certain specified require - ments. tors investing in Japan. 2.5 Loan Origination
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