Japan’s Tax Haven Rules
The topic of ‘Tax Haven’ triggered by the leak of the Panama Papers is still fresh in our memory. From this background, we will mention Tax Havens and other related tax issues in this News.
2. What is a Tax Haven?
A Tax Haven is a country or a region where the burden of corporation tax or income tax is low or not at all. It is translated as ‘Sozei-kaihichi’ in Japanese. Countries in the Caribbean Islands such as Cayman Islands, Hong Kong, Singapore, Luxembourg, etc., whose national lands are small and not abundant with natural resources are eager to attract holding assets of corporate entities and wealthy individuals.
3. Foreign Subsidiary’s Aggregate Tax Rules
(Anti-Tax Haven Rules, CFC Rules)
Foreign Subsidiary’s Aggregate Tax Rules are set to prevent tax avoidance through offshore subsidiaries located in the countries or regions called tax havens (sozei-kaichichi). Under the aggregate tax rules, if a foreign subsidiary’s tax burden is below a certain level (20%), the portion equivalent to the foreign subsidiary’s income is treated as the income of a domestic corporation (a parent corporation) and subject to aggregate taxation with the income of the domestic corporation.
However, even where the foreign subsidiary is located in the low tax rate region, it is exempt from the aggregate taxation on the condition that it has legitimate business activities and there is no intention of tax avoidance.
The foreign subsidiary satisfying all of the following conditions (exception conditions) is exempt from the aggregate taxation.
(1) Business condition: The foreign subsidiary’s primary business is not holding
share certificates or certain businesses.
(2) Substance condition: The foreign subsidiary has an office, etc. necessary for
conducting its primary business in the country where its head office is located.
(3) Administration and control condition: The foreign subsidiary administrates,
controls, and manages business at its own directions in the country where its
head office is located.
(4) Either of the following conditions:
- Country of location condition: The foreign subsidiary conducts its primary
business mainly in the country where its head office is located.
- Unrelated party condition: The percentage of conducting business with
unrelated parties is above 50%.
Additionally, even where the foreign subsidiary whose tax burden is below a certain level (20%) meets the above exception conditions, passive income derived from asset investment is treated as the income of the domestic corporation and subject to aggregate taxation with the income of the domestic corporation.
The aggregate tax rules are also known as anti-tax haven rules (CFC rules).
4. International Tax Trend
Tax avoidance has been an international issue. In order to cope with it among countries, the OECD made the final report regarding the BEPS Project on 5 December 2015. With the effect of the final report, each country including Japan is expected to continuously reform its own tax rules and tax treaties concluded with other countries.
The National Tax Agency (the NTA) is enhancing the exchange of information with the tax authorities of other countries based on tax treaties and other agreements. In addition, the NTA is expanding the network of exchange of information with tax haven countries. It increases the number of countries or regions concluding the agreements on exchange of information on tax matters and actively exchanges the information among contracting countries.
About the foreign subsidiary’s aggregate tax rules, with the increase of Japanese companies expanding business overseas, there are cases where domestic corporations are subject to aggregate taxation even though they operate ordinal business activities. We suggest that Japanese parent companies should pay closer attention to tax systems and other related issues of offshore subsidiaries.
In this News, we have mentioned ‘Tax Haven’.
Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually.
If you have any questions, please feel free to contact us.
Ministry of Finance Japan, Website
The 2015 Tax Reform Proposals
The 2016 Tax Reform Proposals