JAPAN Law and Practice Contributed by: Hiroki Aoyama, Yuki Matsuda and Shuhei Takaishi, Mori Hamada
4.3 Foreign Lenders or Non-Money Centre Bank Lenders As mentioned in 4.1 Withholding Tax , a cross-border payment of interest on a loan by a Japanese borrow- er may be subject to Japanese withholding tax. To address the withholding tax issue, a cross-border loan agreement usually contains a tax gross-up clause. In addition, offshore lenders of a syndicated loan are often excluded from the qualified assignees of loans due to withholding tax considerations. The typical forms of security interest and perfection requirements corresponding to each type of asset are set out below. If the security is not perfected, the lender cannot assert its preferred position vis-à-vis third parties. Such third parties include perfected secured creditors, perfected acquirers of the target’s properties, and the bankruptcy trustee of the security- provider. Real Estate 5. Guarantees and Security 5.1 Assets and Forms of Security A mortgage is the most typical form of security for real estate. The secured obligation can be speci- fied (ordinary mortgage; futsu-teito ) or designated as a certain group of unspecified obligations (blanket mortgage; ne-teito ). Lenders register the mortgage at the relevant legal affairs bureau in order to perfect the mortgage. The registration fee is 0.4% of the amount of secured obligation. To reduce the upfront cost, some lenders permit the borrower to make a provisional registration only, which costs JPY1,000 per property. Once the mortgage is provisionally registered, the mortgagee reserves priority over other mortgagees who regis- ter their mortgages after the provisional registration. However, provisional registration is of little use unless formal registration is completed, so lenders need to ensure that they are always in possession of all docu- ments necessary to allow them to register the mort- gage formally.
company borrows loans or issues corporate bonds with financial covenants, and the aggregate amount of the loans or bonds represents 10% or more of the consolidated net assets of the company, the company will be required to submit an extraordinary report with an outline of the underlying contracts and details of the financial covenants. In the case of a tender offer bid, the offeror is required to disclose documentary evidence (typically, a com- mitment letter) of its financial ability to fund the tender offer, which will be publicly available on EDINET. (See 3.8 Public Acquisition Finance ). A cross-border payment of loan interest by a Japa- nese borrower to a foreign lender is subject to Japa- nese withholding tax, subject to certain exemptions. The tax rate is 20.42%, unless an applicable tax treaty provides otherwise. 4.2 Other Taxes, Duties, Charges or Tax Considerations A written loan agreement is subject to stamp duty, the amount of which differs depending on the amount loaned and the nature of the loan transaction, such as whether the loan is a term loan or a line of credit. The maximum duty amount is JPY600,000 per loan document. Corporate taxation differs depending on the status of each party. International lenders should note that their Japanese tax treatment changes depending on whether or not the profit relating to the loan arises through their permanent establishment in Japan. Other taxes and charges that may become relevant to a loan transaction include registration fees and notary fees for the perfection of security interests, and court fees for the commencement of the judicial enforce- ment of security interests. 4. Tax 4.1 Withholding Tax
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