This post is the first in a series looking at Article 23 of the Japanese Corporate Tax Law which is the main article dealing with the Japanese Dividends Received Deduction (‘DRD’). In particular this post addresses paragraph 1 in Article 23 which defines which types of payment by a company or other entities to its members or shareholders are eligible for the DRD (i.e. which payments are ‘DRD Dividends’).
When a Japanese company calculates its DRD there are a range of factors to consider, such as the extent of its ownership in the entity paying the DRD Dividend, the period for which the company held the shares concerned, the attribution of non deductible funding costs to DRD Dividends, deemed dividends and other issues.
These factors will be discussed in subsequent posts. In the meantime the diagram to the right gives a summarised overview of the position. When considering the Japanese taxation of dividends it may also be helpful to refer to this post about the capital structure of Japanese companies.
Corporation Tax Law Article 23-1
CTL art 23-1 defines which amounts paid by a company or other entity to its shareholders or investors can potentially qualify for the DRD. Below is the original Japanese CTL art 23-1 together with an English commentary. Note that there is a requirement that the DRD Dividends be paid with respect to Shares or Invested Capital. This excludes certain types of distributions (for example, those made by insurance companies to their policy holders) from being treated as DRD Dividends.
受取配当等の益金不算入 – Dividends Received Deduction
The above paragraph explains that where a Domestic Company receives an amount listed in the three sections below (in Japanese a 配当等の額 or haitou tou no gaku) then for Related Company Shares and Shares in 100% Subsidiary Companies the full amount can be excluded from taxable revenue. When such amounts are received from other Domestic Companies then only 50% of the amount can be excluded. Note that if these amounts are received from Foreign Companies, Public Profit Companies and Defined Groups Without Juridical Personality these payments are not included in the definition of DRD Dividends and hence DRD treatment cannot apply.
Sub-paragraph 1 refers to three types of payment defined under the Japanese Corporate Law that are treated as DRD Dividends. These are
- Dividends out of Surplus (limited to those paid on Shares or Invested Capital and excluding amounts paid along with a reduction of Capital Surplus or those paid further to a Bunkatsu Style Corporate Split).
- Dividends out of Profit, excluding those made further to a Bunkatsu Style Corporate Split
- Distributions out of Surplus, limited to those made with respect to Invested Capital
二 資産の流動化に関する法律第百十五条第一項 （中間配当）に規定する金銭の分配の額
This sub-paragraph specifies TMK Interim Dividends, being distributions of monetary assets paid further to Article 115 of the Law Concerning Asset Liquidation (i.e. the law relating to certain securitisation transactions).
Distributions of income from Securities Investment Trusts other than Bond Investment Trusts where the distributions are made from amounts received from domestic Companies as calculated under relevant cabinet orders. This sub-paragraph preserves DRD treatment for certain Japanese collective investment vehicles where the underlying income comes in the main from dividends from Japanese Domestic Companies.
Example – which of the following are DRD Dividends?
The example below illustrate which types of payments to members, shareholders or other beneficiaries are treated as DRD Dividends. Suppose a Japanese Domestic Company receives the following distributions. Assume that the underlying interests have been held for some years and that the amounts are gross of withholding tax. Assume also for the purposes of the final calculation that the DRD Dividend Attributable Interest is JPY250,000.
- JPY180,000 in dividends from shares in a Japanese bank
- JPY50,000 distribution from a Bond Securities Investment Trust
- JPY60,000 distribution on Invested Capital in a Japanese Co-operative Bank (a ‘Shinkin’ or 信用金庫 Bank)
- JPY50,000 dividend from an open style Investment Trust
- JPY110,000 policy holder dividend from a life insurance company
- JPY30,000 in interest from a corporate bond with attached rights to conversion into new shares
- JPY20,000 in interest from a bank deposit
- JPY70,000 dividend from a foreign corporation
Item 1 can apply the DRD. Item 2 cannot apply the DRD – the criteria for the underlying investments is not met. Item 3 can apply the DRD – the Shinkin bank is a corporation under the relevant law and this amount is a distribution on its Invested Capital. Item 4 can apply half the DRD, assuming it is not treated as investing in certain foreign denominated securities (i.e. is not a 外貨建証券投資信託）. Item 5 cannot apply – the amount is not a dividend on Shares or Invested Capital. Item 5 is treated as interest and the DRD does not apply – classification as debt or equity for Japanese tax purposes follows legal form without a separate tax doctrine applying. Item 7 is also interest and DRD does not apply. For item 8 DRD does not apply to dividends from foreign companies. although please see here for details of exclusion from income of dividends from certain foreign subsidiaries.
Accordingly the amount of DRD from the above would be 50% x [(Item 1, JPY180,000 + Item 3, JPY60,000 + 50% of Item 4 JPY25,000) – DRD Dividend Attributable Interest JPY250,000)] = 50% x(265,000 – 250,000) = JPY7,500.