JAPAN Law and Practice Contributed by: Reid Monroe-Sheridan, Takahito Fujii, Haruya Suzuki, Yutaro Ito and Tomohiro Oshige, southgate
performance of the individuals who would be the targets of the suit. In many cases, investment agreements or share - holders’ agreements grant investors a right to have their shares in the start-up repurchased by the start-up and/or the founders if the agree - ments are materially breached. Despite having this strong remedy, investors rarely exercise their put options because they are viewed as a drastic remedy that could cause the exercising inves - tors to suffer reputational consequences. Disputes are usually resolved amicably and the particular facts that gave rise to the dispute will determine the specific resolution. For instance, a company that breaches a post-closing covenant may agree, in a side letter, to implement remedial measures designed to prevent the recurrence of the breach. In a case where a breach of a rep - resentation and warranty that has the effect of diminishing the company’s value is found post- closing, one resolution may be for investors to receive commensurate compensation in the form of warrants, though this outcome is uncommon. In 2022, the Japanese government announced that it was designating that year as the “first year of start-up creation” and announced “Five- Year Start-up Development Plan” (the “Plan” ) The Plan aims to increase investment in start- ups from approximately JPY800 billion in 2022 to JPY10 trillion by 2027, more than a tenfold expansion. It is structured around the following three pillars: • building talent and networks for start-up crea - tion; 4. Government Inducements 4.1 Subsidy Programmes
• strengthening funding for start-ups and diver - sifying exit strategies; and • promoting open innovation. As part of the Plan, several years ago the Japa - nese government established a tax incentive for individuals to invest in early-stage start-ups. The national government has also made some revi - sions to immigration procedures to make it eas - ier for foreign founders to use in a bid to attract more overseas entrepreneurs. 4.2 Tax Treatment As a general matter, start-up investments by individuals typically qualify for taxation at the capital gains rate (approximately 20%), which is generally lower than the tax rates applied to ordinary income. The Japanese government has also introduced some special incentives through tax reforms implemented under the Plan. The “open innova- tion tax incentive” currently provides that when Japanese companies or CVCs acquire shares in start-ups in Japan or overseas, they can deduct 25% of the acquisition cost from their taxable income. This is a temporary measure set to expire at the end of 2025, but there is a pos - sibility that it may be extended through future legislation. Individual investors may qualify for the so-called “angel” tax incentive, meant to incentivise angel investment. This tax incentive applies when an individual invests in a start-up that meets certain requirements, including being in business for less than five years. At the time of the investment, the investor may deduct the amount of the investment from their annual tax - able income or capital gains from the sale of stock, resulting in a tax reduction. Furthermore, if the investor recognises a capital loss instead of a capital gain when disposing of the invest -
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