JAPAN Law and Practice Contributed by: Atsushi Oishi and Makoto Sakai, Mori Hamada & Matsumoto
3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions Trusts A beneficiary of a trust (including a foreign trust) who is a Japanese resident is subject to Japanese indi - vidual income tax on the income of the trustee, as long as the trust is treated as transparent for tax purposes. If the trust is treated as a deemed corporation for tax purposes, the beneficiary is generally not subject to Japanese individual income tax on the income of the 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 Tax Consequences of Fiduciary and Beneficiary Roles Even if a donor or a beneficiary concurrently serves as a fiduciary of a trust or a foundation, this does not immediately invalidate the legal nature of these enti - ties. However, when assets are transferred to these entities, the founder may face capital gains taxation, and the trust or foundation may be taxed on gains by donation, although such income could be exempt if certain conditions are met. 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. 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. Family governance structures utilising shareholder agreements or trust agreements are used in practice to support succession planning and reduce the risk of disputes. 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 -
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