FY 2017 Tax Reform – Japan’s Tax Haven Rules
The Japan ruling coalition parties (LDP and Komeito) released “FY 2017 Tax Reform Proposals (“Proposals”)” on 8 December, 2016, and the Japan Cabinet approved the “Proposals” on 22 December, 2016. In this News, we will mention Foreign Subsidiary’s Aggregate Tax Rules (Japan’s Tax Haven Rules) which intend to deter tax avoidance more effectively without limiting Japanese companies’ overseas business expansion.
Please note that the contents of the “Proposals” could change in the course of discussions of the bills in the Diet.
2. Current tax treatment and issues to be discussed
As briefly mentioned in our News dated 30 June, 2016, under the current Japan’s tax haven rules, a “trigger rate (20%)” is a criteria for judging whether a foreign subsidiary is subject to aggregate taxation (a foreign subsidiary’s income is included in a Japanese parent company’s income for Japanese tax purposes). This situation brings “under-inclusion” issues, where a foreign subsidiary with the effective income tax rate exceeding just one-percent of the trigger rate is exempt from aggregate taxation. On the other hand, “over-inclusion” issues arise, where a foreign subsidiary which conducts active business is subject to aggregate taxation due to the effective income tax rate of lower than the trigger rate.
3. Summary of “Proposals”
The “Proposals”, consistent with the bases of the BSPS project, will make the following revisions in order to solve the above issues and deter tax avoidance through foreign subsidiaries.
(a) Revision of judgement of a foreign company subject to aggregate taxation
① Abolishment of trigger rate
The trigger rate for judging whether a foreign related company is a specified foreign subsidiary subject to aggregate taxation will be abolished.
② Revision of calculating indirect shareholding ratio for judging a foreign related company
The indirect shareholding ratio for judging a foreign related company will be calculated based on the shareholding ratio of a foreign intermediate company which has more than 50% of shareholding chain relationship with a Japanese parent company.
③ Introduction of de facto control standard for non-shareholding relationship
The de facto control standard will be introduced for a foreign company with no shareholding relationship. In detail, where a Japanese company or a Japanese resident individual have the right to claim almost all the residual assets of the foreign company, the foreign company is included in the range of a foreign related company and subject to aggregate taxation.
Considering the burden of taxpayers, the exemption rule by the trigger rate will partly exist, and a foreign related company with the effective income tax rate of 20% or more will not be subject to aggregate taxation except for the cases of paper companies, etc. mentioned below.
(b)Revision of entity-based aggregate taxation (full-inclusion system)
In entity-based aggregate taxation, the “Proposals” will revise the current exception conditions and rename it to the “economic activity conditions”. In detail, where at least one of the “economic activity conditions” is not satisfied, the foreign related company is subject to entity-based aggregate taxation.
Additionally, aircraft leasing companies or manufacturing companies satisfying certain requirements on each “economic activity condition” (business condition, substance condition, administrative and control condition, and country of location condition or unrelated party condition) are exempt from entity-based aggregate taxation.
(c) Passive income taxation (partial-inclusion system)
Even where satisfying all the economic activity conditions, partial taxation on passive income will be applied. In detail, the “Proposals” will revise the range of dividends and interest and also include security lending fees, capital gains/losses from the transfer of securities, capital gains/losses from derivatives, foreign exchanges gains/losses, royalties on intangible assets, gains/losses from the transfer of intangible assets, etc. (However, there are special rules for financial subsidiaries satisfying certain conditions.)
Also, the exemption rule of the total amount of passive income (currently, JPY 10 million) will be increased to JPY 20 million.
(d) Entity-based aggregate taxation to paper company, etc.
The following companies are subject to entity-based aggregate taxation.
① Paper company
A foreign related company which meets neither of the following:
・It has a fixed place of business to conduct its main business.
・It administrates, controls, and manages at its own discretions.
② De facto cash-box company
A foreign related company where both of the following proportions exceed certain levels:
・The proportion of the total amount of certain passive income to the total assets.
・The proportion of the total amount of securities, loans, and intangible assets to the total assets.
③ Black list Company
A foreign related company whose head office is located in jurisdictions designated as non-corporative for exchanging tax information by the Minister of Finance Japan.
However, in the case where a foreign related company’s effective tax rate for the fiscal year is 30% or more, the foreign company is exempt from the entity-based aggregate taxation.
4. Effective Date
The above amendment will be applied from foreign related companies’ fiscal year starting on or after 1 April, 2018.
In this News, we have mentioned “FY 2017 Tax Reform – Japan’s Tax Haven Rules”.
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.
FY 2017 Tax Reform Proposals