JAPAN Law and Practice Contributed by: Raku Raku, Gen Takahashi, Yoshihiro Morisato and Taku Matsumoto, Anderson Mōri & Tomotsune
banks or other financial institutions in Japan, is subject to withholding at source. The tax rate of withholding at source is, in principle, 20% (20.42%, including special income tax for recon - struction; hereinafter the same) with certain excep - tions such as 15% (15.315%) for dividends from listed companies, 15% (15.315%) for interest on bonds and debentures. Taxation Under Tax Treaties For the purpose of avoiding international double taxa - tion, tax treaties are in place between Japan and other countries. In the case where there is a conflict between a provision of tax treaty and that of local tax law, the former will prevail in principle. Tax treaties may provide rules regarding domestic source income or tax rates which are different from those provided by domestic tax laws. For example, under the Convention between the Government of Japan and the Government of the United States of America for the Avoidance of Dou - ble Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the Japan-US Tax Treaty), lower tax rates apply to dividends and interest (10% and 0%, respectively). In the case of dividends, if dividends are paid in a parent–subsidiary relationship (where the parent (i) has no less than 10% or (ii) has had no less than 50% of the subsidiary’s shares for six months or more), the rate is (i) 5% or (ii) 0% under the Japan-US Tax Treaty. There are no general limitations for “treaty shopping” under domestic tax law, but some treaties have the following to counter treaty shopping: • only the “beneficial owner” (not “receivers”) of divi - dends, interests and royalties are eligible to receive benefits by the treaty; • certain “limitation on benefits” clauses apply; and Tax Benefits of Offsetting Profits and Losses by Companies and Their Controlled Subsidiaries The consolidated return framework was replaced by a new group relief framework, which applies in respect of any fiscal year starting on or after 1 April 2022. The parent company and its wholly owned subsidiar - • a “principal purpose test” applies. 9.3 Tax Mitigation Strategies
ies may, with approval from the National Tax Agency, adopt the group relief framework. Under the group relief framework, each company within the group pays corporate tax calculated by offsetting profits and losses among the group com - panies, while under the previous consolidated return framework, the ultimate parent company paid corpo - rate tax on the group’s consolidated income. Earnings Stripping A foreign investor may avoid tax on its Japanese sub - sidiaries through the excessive payment of interest from them to persons in foreign countries. To pre - vent this, the earnings stripping rule applies in Japan. This rule provides that a corporation is not allowed to include “net interest” payments (excluding interest payment which is included in taxable income of the recipient in Japan) in excess of 20% of the “adjust - ed income” of such a corporation into deductible expenses. 9.4 Tax on Sale or Other Dispositions of FDI In principle, there are no general exemptions for capi - tal gains from sale or other disposition. However, capital gains from the sale or other disposi - tion of stocks in Japanese companies by a non-res - ident without permanent establishment are generally exempted from Japanese tax other than in certain situations such as those discussed below. Quasi-Business Transfer Capital gains from the sale or other disposition of cer - tain large portions of stocks in Japanese companies by an FDI may be taxed. Specifically, when an FDI, that holds 25% or more of the outstanding shares of a Japanese company, sells 5% or more of the outstand - ing shares of such a company, the capital gains from such a transaction are subject to Japanese taxation. Stocks in a Real Estate-Related Corporation Capital gains from certain sales or other disposition of stocks in a Japanese company whose real property accounts for 50% or more of the total assets of that company (a real estate related corporation) may be taxed. For example, in the case of stocks in a non- listed Japanese company, when an FDI (that holds
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