JAPAN Trends and Developments Contributed by: Yasuzo Takeno, Ken Miura and Nobuharu Onishi, Mori Hamada & Matsumoto
it is also necessary to alert investors to the risk that investments in alternative investment funds cannot be easily redeemed. Investor protection rules There are no rules in Japan that specify certain classes of investors as being inappropriate to invest in certain types of funds. However, the laws of Japan require a financial instruments business operator (such as distribu - tors in Japan) to ensure that its issuance of a solicitation in connection with an act that con - stitutes a financial instruments transaction which is found to be inappropriate in light of customer knowledge, customer experience, the state of customer assets or the purpose for which a financial instruments transaction contract is concluded does not result in nor is likely to result in insufficient investor protection. Therefore, even if the required procedures have been completed, it does not mean that the alter - native investment fund can be sold to anyone. Tax regime for investment trusts Under the Corporation Tax Act, Collective Invest - ment Trusts are treated as tax-exempt trusts. The following investment trusts are categorised as Collective Investment Trusts under the Cor - poration Tax Act: • Securities Investment Trusts (regardless of whether they are publicly offered or privately placed); • investment trusts publicly offered in Japan; and • Foreign Investment Trusts. Collective Investment Trusts are not treated as pass-through entities but they are tax-exempt,
so are not taxed in respect of capital gains and income paid to them. Investors in a Collective Investment Trust are subject to the relevant with - holding taxes in respect of profit distribution. Tax regime for investment companies Taxation is imposed on investment companies at the fund level. However, if certain conditions are fulfilled (eg, more than 90% of distributable profits must be distributed to investors), divi - dends paid to investors may be deducted for Japanese corporation tax purposes. Investors in investment companies are subject to the rel - evant withholding taxes in respect of profit dis - tribution. Tax regime for limited partnerships Limited partnerships are pass-through entities for Japanese tax purposes, with taxes being lev - ied on the investors in the fund rather than on the fund itself. Non-resident investors (both indi - viduals and corporates) are subject to relevant withholding taxes in respect of profit distribu - tion, whereas resident investors are not subject to withholding taxes. Summary As described, the appetite for alternative invest - ment funds focusing on real estate, private equi - ty or private credit has been increasing in the retail market in Japan, and this trend is likely to continue for the foreseeable future. Investors are certainly attracted by the potentially high return that alternative investments can pro - vide, which is difficult to achieve through invest - ments in traditional assets. However, it should be emphasised that an investment in alternative investment funds involves a higher degree of risk than an investment in traditional investment funds, and therefore it is important to strive to provide investors with accurate information on
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