JAPAN Law and Practice Contributed by: Mikito Ishida (Mori Hamada & Matsumoto) and David Azcu (Simpson Thacher & Bartlett LLP), Mori Hamada & Matsumoto
In order to perfect the statutory safe harbour from PE requirements, an eligible foreign investor must submit a filing (via partnership) in a predetermined form to the local tax authority to declare its intent to apply for this special exemption. The 25/5 Rule and the Statutory 25/5 Rule Exemption for Foreign Investors in Japanese Partnerships If a foreign investor who does not have a PE in Japan invests in a private equity fund organised as a tax- transparent partnership that invests in a Japanese company and such foreign investor owns (or together with its “specially related” shareholders is deemed to own) 25% or more of the equity interest in a Japanese company during a particular holding period, such for - eign investor may, absent an applicable exemption, become subject to Japanese tax and filing obligations on capital gains from the disposition of such Japanese company if 5% or more of the shares in such Japa - nese company are disposed of during an applicable period (the 25/5 Rule). This is because such share disposition may be deemed to constitute a “business transfer”, which would be considered a taxable even for such foreign investor. Under the aggregation principle referenced above, an investor’s equity interest in the underlying portfo - lio company is aggregated with its “specially related” shareholders, which are generally deemed to com - prise the other partners in the partnership into which the investor invests. In other words, the 25% thresh - old is calculated on an entire partnership level basis rather than solely with respect to the individual part - ner. To illustrate, if the partnership through which the non-Japanese investor invests owns 100% of equity of a Japanese portfolio company, the non-Japanese investor will be deemed to own 100% of such com - pany even if it has contributed only 1% towards the partnership’s investment in such company. A statutory safe harbour was introduced in a 2009 amendment to the 25/5 Rule that permits a foreign investor in a partnership that otherwise meets certain requirements to perfect an exemption from taxation on disposition of the shares of the Japanese portfolio company. Among other requirements to perfect such exemption, the foreign investor must not hold 25%
or more of the interest in the relevant Japanese com - pany, calculated based solely on the non-Japanese investor’s individual interest in the partnership (in other words, the aggregation principal is waived for pur - poses of determining the foreign investor’s eligibility for the safe harbour). To avail itself of the 25/5 Rule exemption, the foreign investor must timely make certain filings with the Jap - anese regulatory authorities. The partnership would also need to meet certain criteria, similar to that of the PE exemption above. 4.9 Double Tax Treaties Japan has a number of tax treaties with foreign coun - tries that offer benefits to eligible investors who invest from those countries. It should be noted that not every country has such a double taxation treaty, and the benefits vary from country to country for those that do. Consequently, when foreign investors invest in a Jap - anese corporation through a fund, to the extent that such fund is treated as a pass-through entity for tax purposes both in Japan and in the country where the foreign investor is domiciled, such investor must care - fully examine whether a double taxation treaty is avail - able for such country and further examine the extent to which it would be able to avail itself of any benefits under such tax treaty with respect to the treatment of income derived from the Japanese corporation, such as dividends and interest. This assessment requires consideration of wheth - er the tax treaty between Japan and the investor’s country of domicile provides for reduced withholding tax rates or other favourable treatment. In addition, investors should review the administrative procedures necessary to claim treaty benefits, such as filing appli - cations with the Japanese tax authorities or obtaining certificates of residence. Ensuring compliance with these procedures is essential to secure the intended tax relief and avoid unnecessary withholding or double taxation.
172 CHAMBERS.COM
Powered by FlippingBook