Case study: Thin cap – matters equivalent to a guarantee

February 10, 2011  |  Thin Capitalisation  |  No Comments

A sculpture from the Sapporo snow festival. Hokkaido, Japan's northernmost island of which Sapporo is the capital, remains home to a high concentration of wild bears.

The following case study considers whether or not a transaction that does not have the legal form of a guarantee may still be treated as, in substance, being a guarantee from a Foreign Controlling Shareholder for the purposes of the Japanese thin capitalisation regulations.

This section should be read in conjunction with the articles on the Japanese thin capitalisation regulations which can be found here.

Capitalised terms below are as defined in the thin capitalisation section.

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Case study: Thin cap and stock borrowing

February 9, 2011  |  Thin Capitalisation  |  No Comments

A rainy night in Shinjuku, probably taken on the streets of Kabukicho, one of the liveliest districts in town.

The following article is a case study looking at the application of the Japanese thin capitalisation regulations to a stock borrowing transaction.

This article should be read in conjunction with the articles outlining Japanese thin capitalisation regulations which can be found here.

Terms in capitals are as defined in the thin capitalisation articles unless otherwise explained below.

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Thin capitalisation – diagrams

Thin capitalisation in Japan

This article consists of three diagrams which illustrate how the Japanese thin capitalisation regulations are applied. The first diagram illustrates the most straightforward application of the rules, the second illustrates the impact of a parent company guarantee Read More

Dividend Taxation – Japanese companies’ capital account

The Mejiro or White Eye a charming Japanese native bird about the size of a sparrow

This post is the first in a series looking at how the return of funds to shareholders is treated for Japanese tax purposes.  Funds can be returned to a company’s shareholders through dividends, deemed dividends, share-buy backs, return of surplus on a liquidation and other transactions (below ‘Shareholder Distributions’).

In order to understand how Shareholder Distributions are taxed Read More

Thin capitalisation – tax filing schedule

Light summer kimono's - Yukata in Japanese

Attached here is the form required in a Japanese tax return that is used to calculate the leverage ratios required for thin capitalisation purposes (see this post for details) and hence any disallowance of interest for Japanese thin capitalisation purposes.

The form has been annotated in English to show the information required to complete the calculations required for Japanese thin capitalisation purposes.

The original form can be found here on the NTA website. Of course, proper professional advice should be sought before completing the form for real.

Thin capitalisation rules in Japan

Thin capitalization – kashou shihon zeisei

The Japanese thin capitalization system is intended to prevent foreign over-leveraging their Japanese subsidiaries or branches in order to claim excess corporation tax deductions through interest charges. It can be compared to earning stripping legislation in the US.

In more concrete terms, the system has applied from financial years starting on or after 1 April 1992 in circumstances where interest is paid on liabilities due to a Foreign Controlling Shareholder (kaigai shihai kabunushi) or a Capital Supplier (shihon kyouyosha). Where the average balance of liabilities due to either a Foreign Controlling Shareholder or Capital Supplier exceeds three times of the capital in the paying entity held by the Foreign Controlling Shareholder then the amount of interest payable on the excess amount of such liabilities is not deductible. Read More