JAPAN Trends and Developments Contributed by: Sadao Maeda, Yusuke Hayashi and Masato Tanaka, TMI Associates
In 2024, the Investment Limited Partnership Act was amended, and certain types of foreign enti - ties (eg, the foreign arm of a Japanese company) were allowed to be exempt from the 50% limit. Also, (i) membership interests in Godo Kaisha and (ii) crypto-assets, etc, were added to the assets that JLPSs can acquire and hold. When overseas investors invest in JLPSs, there is a possibility of being taxed in Japan on the income distributed from such JLPSs, consid - ering the overseas LPs having a permanent establishment (PE) in Japan. However, there are exceptions if certain requirements are met, while it is advisable for Foreign Investors (defined below) to consult with tax advisers when invest - ing in JLPSs. Overseas VC funds that raise funds from Japa - nese investors are often conducted through overseas limited partnerships. Limited partner - ships formed in jurisdictions such as the Cay - man Islands, California, Delaware, Luxembourg, Ireland and Singapore are frequently utilised. Financial Instruments and Exchange Act (FIEA) Regulations on the formation of funds Overview of registration requirements and certain exemptions under the FIEA Interests in VC partnerships are considered as “securities” under Japan’s FIEA, thus making the solicitation thereof subject to the provisions of the FIEA. Those conducting (a) solicitation to Japanese residents are generally required to register as Type II Financial Instruments Busi - ness Operators, and those engaging in (b) the management of contributed assets in securities are generally required to register as Investment Management Business Operators. However, if the investors include at least one qualified institutional investor (QII), and the oth -
er investors (if any) are all certain sophisticated investors (Non-QIIs), and the number of Non- QIIs is fewer than 50, instead of the above regis - tration, a notification for the “Specially Permitted Businesses for Qualified Institutional Investors, etc.” (SPBQII Exemption) can be submitted to the Kanto Finance Bureau, allowing the conduct of activities (a) and/or (b). Considering the complexity of procedures and the duration of processes, the hurdle for register - ing as a Financial Instruments Business Opera - tor is quite high. Therefore, in cases where VC partnerships receive LP investments from Japa - nese residents, it is common for GPs to submit notifications for the SPBQII Exemption on the condition that the partnership meets certain requirements including the above-noted investor requirements. However, on occasion, overseas fund GPs are unaware of these regulations, lead - ing to omissions in such notifications. Especially when the GP of an overseas fund receives LP investments from Japanese residents, it is advis - able to consult with legal advisers in advance, including regarding the issue of whether QIIs are included among the investors. A list of the GPs who have submitted notifica - tions for the SPBQII Exemption and their funds is published on the Financial Services Agency (FSA) website. Regarding the licence for (b) Investment Man - agement Business Operators, there are specific exceptions for overseas funds. Registration as an Investment Management Business Operator is not required in cases where: • all of the Japanese investors (including indi - rectly invested investors) are QIIs;
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