JAPAN Law and Practice Contributed by: Kunihiko Morishita, Masayuki Hashimoto and Koichi Miyamoto, Anderson Mori & Tomotsune
2.5 Fund Finance While there is no restriction on borrowing in respect of an investment trust/corporation under the Investment Trusts Act, the rules of the ITAJ provide that a securities investment trust/cor - poration may borrow funds only to the extent that doing so is necessary for the purpose of providing funds for payment of redemption and distribution. Collective investment schemes have no restric - tions on borrowing. 2.6 Tax Regime Taxation of Investment Funds Investment trusts are generally exempted from Japanese taxation. Investment corporations are subject to income tax, but distributions payable to investors can be included in tax deductible expenses if cer - tain conditions are met, such as distributing an amount equal to more than 90% of profit avail - able for dividend to investors. Collective investment schemes are pass-through entities and are non-taxable at the investment fund level. Taxation of Investors For Japanese tax purposes, investment trusts are classified into public and corporate bond investment trusts and stock investment trusts. The former invest in public and corporate bonds, but may not invest in any stocks, shares or equi - ties, while the latter comprise investment trusts other than public and corporate bond invest - ment trusts. There is no such classification for investment corporations, which are generally treated in the
same way as stock investment trusts for tax pur - poses. For individual investors, investment in a stock investment trust is treated the same as a direct investment in unlisted stocks for tax purposes. Ordinary distributions are subject to withholding taxes at the rate of 20.42% and, thereafter, to an aggregate taxation whereby tax is calculated in combination with other types of income by a final return. Special distributions are exempted from taxes because they are, in substance, a refund of capital. Capital gains are subject to separate self- assessed taxation at the rate of 20.315%, whereby tax is calculated separately from other types of income by a final return. Investment in a public and corporate bond investment trust is treated the same as a direct investment in public and corporate bonds for tax purposes. Ordinary distributions are subject to a withholding tax at a rate of 20.315%. Capital gains are subject to a separate self-assessed taxation at the rate of 20.315%. For corporate investors, ordinary distributions and capital gains arising from an investment trust are subject to a withholding tax at a rate of 15.315%, which can be deducted from a corpo - rate tax payable by the investors. Collective investment schemes are transparent for Japanese tax purposes. Profits or losses of collective investment schemes are attributed directly to investors and recognised as their own profits or losses by them.
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