JAPAN Law and Practice Contributed by: Raku Raku, Gen Takahashi, Yoshihiro Morisato and Taku Matsumoto, Anderson Mōri & Tomotsune
more than 2% of the total outstanding stocks of a real estate related corporation on the last date of the preceding business year) sells stocks in that corpora - tion, the capital gains from the transaction are subject to Japanese taxation. 9.5 Anti-Evasion Regimes Below are the special anti-avoidance rules that may be imposed on FDI in Japan. Transfer Pricing Rules If the price of a transaction between a Japanese com - pany and its foreign affiliated company deviates from the price that would be used in the same transaction if carried out between unrelated parties, that trans - action is deemed to have been conducted using the transaction price between unrelated parties. In such a case, the relevant tax liability will be recalculated accordingly. Thin Capitalisation Rules Thin capitalisation rules apply if a Japanese subsidi - ary receives a loan from its foreign parent entity in the amount of more than three times the amount of capital contributed by such foreign parent into the subsidiary. In that case, that Japanese subsidiary may not include the interest for the excessive amount into deductible expenses. If both the thin capitalisation and the earnings strip - ping rules apply to a corporation, the larger amount between them will be used as the amount against which the revenues of the corporation in the relevant fiscal year cannot be offset. Controlled Foreign Corporation (CFC) Rules A corporation may try to avoid Japanese taxation by establishing a subsidiary in a foreign country. To counter this, the CFC rules were introduced. The CFC rules focus on each activity of a subsidiary in a foreign country. For example, if a subsidiary in a foreign coun - try falls within the category of a paper company, a company deemed to be an actual cash box or a com - pany located in a blacklist country, the profit of the subsidiary will be included in the parent company’s gross revenue amounts for Japanese tax purposes unless the tax rate applying to the subsidiary is 27% or more. If a subsidiary in a foreign country (other
than a paper company, etc) does not satisfy certain economic activity requirements, the profit of the sub - sidiary will be included in the parent company’s gross revenue amounts for Japanese tax purposes unless the tax rate applying to the subsidiary is 20% or more. Anti-Hybrid Rules Under general tax rules, 95% of the amount of divi - dends from a foreign subsidiary are exempted from counting as profits of the Japanese parent compa - ny. However, if a Japanese company receives divi - dends from its foreign subsidiaries and all or a part of the amount of dividends is included in deductible expenses in the country where such a subsidiary’s headquarters are located, the amount included into the deductible expenses at the subsidiary’s end will be excluded from such exemption. Global Minimum Tax Corporate tax will include a top-up tax based on the international minimum tax amount, the international minimum tax residual amount, and the domestic mini - mum tax amount for each applicable fiscal year in accordance with the three rules of the global minimum tax (the Income Inclusion Rule, Undertaxed Profits Rule, and Qualified Domestic Minimum Top-Up Tax) agreed upon in October 2021 under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shift - ing (BEPS). Domestic corporations belonging to multinational enterprise groups, etc, where the annual revenue of each target fiscal year for two or more of the four pre - ceding target fiscal years is EUR750 million or more, will be taxed up to the standard rate of 15%. 10. Employment and Labour 10.1 Employment and Labour Framework Employment and labour matters in Japan are gov - erned by a combination of various laws, including the Labour Standards Act (LSA), the Labour Contracts Act (LCA) and the Labour Union Act (LUA). While the LSA and LCA stipulate the fundamental princi - ples of labour relationships between employers and employees, the LUA mainly governs matters related to collective labour management relationships. In addi -
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