JAPAN Law and Practice Contributed by: Atsushi Oishi and Makoto Sakai, Mori Hamada & Matsumoto
Trusts A trust is sometimes used in the same way as a Will. The value of the underlying assets transferred to the heirs through beneficiary rights is generally subject to inheritance tax. 4.2 Succession Planning Popular family business succession planning strate - gies include the following: • ownership and management of the family busi - ness are passed on within the family – ie, the family continues to own and manage the business upon succession; • the family withdraws from the operation and man - agement of the business but continues to own the business, leaving the management to professional managers outside of the family; or • the family sells the business and quits the manage - ment and ownership of the business. The first two options generally require certain tax plan - ning to reduce the fair value of the family business so that the family can afford to pay inheritance tax or gift tax. However, if the family chooses the first option and obtains a special approval from the Japanese tax office, those taxes may be completely waived. 4.3 Transfer of Partial Interest Transfers by individuals to other related parties must be conducted at a fair value for tax purposes. The fair value is calculated in accordance with tax circulars and notices issued by the Japanese government, but is usually lower than the real fair market value. In particular, as the fair value of real properties for tax purposes is usually much lower than the fair mar - ket value, wealthy individuals buy real properties for tax planning purposes. However, the tax authorities sometimes challenge the value of those properties; see 5.1 Trends Driving Disputes .
trustee (unless Japanese CFC rules apply to a foreign trustee). Foundations A donor to a foundation (including a foreign founda - tion) who is a Japanese resident is not subject to Japanese individual income tax on the income of the foreign foundation. However, if the donated assets have unrealised gains, they will be subject to Japa - nese capital gains tax at the time of donation. Such capital gains taxation may be avoided if the founda - tion is established under Japanese law, but not if the foundation is established under foreign laws. 3.4 Exercising Control Over Irrevocable Planning Vehicles Trusts In Japan, whether a trust is revocable or irrevocable should not affect tax treatments, if it is transparent for tax purposes. Therefore, even if the settlors retain extensive power to revoke the trust, it should not be problematic from a tax perspective. Foundations If the founder wants to avoid corporation income tax on the foundation and capital gains tax on them, the donation must be irrevocable. 4. Family Business Planning 4.1 Asset Protection Several popular methods and tools are used for asset protection under Japanese laws. Foundations The foundation is the most popular tool to avoid inher - itance tax; see 3.1 Types of Trusts, Foundations or Similar Entities . Wills Many Japanese high-net-worth individuals make Wills to protect their intentions after their death. However, the assets transferred to the heirs are generally sub - ject to inheritance tax.
5. Wealth Disputes 5.1 Trends Driving Disputes
Tax authorities have been quite active of late in audit - ing inheritance tax and gift tax on wealthy individu -
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