JAPAN Law and Practice Contributed by: Mikito Ishida (Mori Hamada & Matsumoto) and David Azcu (Simpson Thacher & Bartlett LLP), Mori Hamada & Matsumoto
the first such products have now begun to be distrib - uted to Japanese retail and high net worth investors. 4.6 Private Placements The rules on private placements and general solici - tation under the FIEA are generally less restrictive than those in the United States. For example, there are no strict gun-jumping rules with respect to private placements of partnership interests in Japan; in prac - tice, some Japanese private equity funds issue press releases announcing the initial closing of a fund even while continuing to fundraise and hold subsequent closings. Although rules on solicitation are generally more lib - eral than in the United States, practitioners should still note that there are some significant compliance regulations under the FIEA’s marketing regime. For example, fund managers relying on the Article 63 Exemption are required to make a significant notice filing and disclose certain information in their offer - ing materials, and in some cases must make certain information publicly available. 4.7 Compensation and Placement Agents While many Japanese private equity funds conduct self-marketing of interests in their funds, some funds engage placement agents to expand their universe of potential investors. A placement agent involved in the offering of partnership interests must be registered as a Type II FIBO under Japanese law. There is no specific prohibition under Japanese law against a fund’s own personnel receiving compensa - tion in connection with the marketing of their fund interests. However, such personnel must exercise caution to ensure that their activities are not construed as providing placement services in the capacity of an independent third party, which would otherwise require separate registration. 4.8 Tax Regime for Investors Please see 2.4 Tax Regime for Funds regarding the general tax treatment applicable to investors. Non-Japanese investors without a permanent estab - lishment (PE) in Japan that invest through a tax-trans - parent collective investment scheme are generally
not deemed to be subject to taxation in Japan, with certain exceptions. Notwithstanding such rule, two statutory safe harbours are available to non-Japanese investors that would, subject to qualification, shield such investors from becoming subject to Japanese taxation and tax filing obligations on account of such investor’s participation as a limited partner in a part - nership. The two statutory safe harbours – one for PEs and the other for the so-called 25/5 Rule – are summarised below. Permanent Establishments and the Statutory PE Exemption for Foreign Investors in Japanese Partnerships A non-Japanese resident investor without a PE in Japan that invests as a limited partner in a partner - ship (eg, IBLP or NK) that is managed in Japan may be deemed to engage in the conduct of business in Japan, which would cause such non-Japanese inves - tor to be deemed to have a PE in Japan and, there - fore, absent an applicable exemption, become sub - ject to Japanese tax and filing obligations. To avoid being deemed to have a PE in Japan on account of its investment in a Japan-managed fund, an otherwise eligible non-Japanese resident investor without a PE in Japan may avail itself of a statutory safe harbour from permanent establishment so long as the non- Japanese investor, among other things: • holds less than 25% of the equity interest in the Japanese fund; and • is not deemed to engage in the conduct of the “business operation” of the fund. The Ministry of Economy, Trade and Industry (METI) has issued guidance on what constitutes “business operation” with respect to a fund, although the rules and the guidance are nuanced. A deep analysis of what constitutes engagement in the “business opera - tion” of a fund is beyond the scope of this article, and foreign investors considering an investment in a Japan-focused fund formed as a partnership should consult with the fund manager, the fund sponsor or qualified Japanese legal and tax advisers to assess whether their participation in such fund might be deemed to constitute participation in the “business operation” of such fund and what the consequences of such a determination would be.
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