Deemed dividends – concept, transactions

July 19, 2010  |  Dividend Taxation, Domestic, Featured

Mount Fuji from the air, of course.

As explained in this post introducing the Japanese Dividends Received Deduction (‘DRD’), Article 23-1 of the Japanese Corporate Tax Law recognises that, in order to mitigate double taxation of corporate profits, certain distributions to shareholders of corporate surplus as defined in the Japanese Corporate Law can qualify for DRD treatment in the hands of the shareholders concerned.

Japanese tax law also recognises that a number of other transactions between an entity and its shareholders or members are economically equivalent to returns of surplus to those shareholders or members.  These transactions, although legally not directly having the form of a return of surplus to shareholders, are treated as ‘Deemed Dividends’ for tax purposes or in Japanese as  ‘みなし配当’ (minashi haitou).

This post explains which transactions are treated as Deemed Dividends for Japanese tax purposes and outlines how they are calculated and treated for DRD purposes.

Definition of Deemed Dividend

Article 24-1 of the CTL reproduced below is the key article defining Deemed Dividends, outlining the underlying concept, their calculation and listing which transactions are treated as Deemed Dividends for DRD purposes.

Deemed Dividend concept and calculation

(配当等の額とみなす金額)
第24条 法人(公益法人等及び人格のない社団等を除く。以下この条において同じ。)の株主等である内国法人が当該法人の次に掲げる事由により金銭その他の資産の交付を受けた場合において、その金銭の額及び金銭以外の資産の価額の合計額が当該法人の資本金等の額又は連結個別資本金等の額のうちその交付の基因となつた当該法人の株式又は出資に対応する部分の金額を超えるときは、この法律の規定の適用については、その超える部分の金額は、第23条第1項第1号(受取配当等の益金不算入)に掲げる金額とみなす。

This paragraph explains that, where one of the reasons listed from 1 to 6 below arise, then for a Japanese Domestic Company that is a shareholder of another Domestic Company (excluding Public Profit Companies and Defined Groups Without Juridical Personality) then the receipt of monetary or other assets may be treated as a Deemed Dividend.  The amount of the Deemed Dividend will be the value by which the assets concerned exceed the amount of the company’s Tax Based Capital (資本金等) or Consolidated Separate Tax Based Capital (連結個別資本金等) that is attributable to the Shares or Invested Capital which the concerned shareholder owns then the excess part is deemed to be a DRD Dividend as defined under JCL Article 23-1.

The above definition makes economic logic; given that in concept the Deemed Dividend will be taxed as income it makes sense that it should be the excess over an amount of capital returned to the shareholders.  However care should be taken to understand how capital is defined for Japanese tax purposes. This defintion is addressed in this post on Tax Based Capital.

Items potentially treated as Deemed Dividends

Article 24-1 then goes on to list six transactions that may give rise to Deemed Dividends to the extent that they involve a transfer of value to shareholders in excess of the Tax Based Capital attributable to the shares they own. These transactions are:

  1. Mergers (excluding Tax Qualified Mergers)
  2. Corporate Splits (excluding Tax Qualified Corporate Splits)
  3. Capital Repayment (out of Dividends out of Surplus (limited to those that are made along with a reduction of the amount of Capital Surplus) those Dividends out of Surplus other than those made further to a Bunkatsu Style Corporate Split). Distributions of residual assets further to liquidation.
  4. Acquisition of own Shares or own Invested Capital (excluding aquisitons made on-market for certain defined markets meeting other conditions and transfers of Shares or Invested Capital that meet the terms of CTL 61 no 2 14-1 to 3.  Note that CTL 61 no 2 14-1 to 3 refers to the aquisition of certain shares a company may issue with attached repurchase rights, these being  取得請求権付株式, 取得条項付株式 and 全部取得条項付種類株式.  Acquisitions of these shares should not give rise to Deemed Dividends.)
  5. Extinguishment of Invested Capital, return of Invested Capital, repayment of Ownership Interests on retirement of Members or other corporate investors or any other means that a company that has issued Shares or Invested Capital brings about  its extinction other than by its acquisition.
  6. Re-organisations (limited to those where at the time of the re-organisation the company carrying it out exchanges assets other than its Shares or Invested Capital with its shareholders – i.e. transactions involving “boot” in the form of cash or similar).

For the benefit of Japanese readers the transactions giving rise to Deemed Dividends are reproduced in Japanese below.

  1. 合併(適格合併を除く。)
  2. 分割型分割(適格分割型分割を除く。)
  3. 資本の払戻し(剰余金の配当(資本剰余金の額の減少に伴うものに限る。)のうち、分割型分割によるもの以外のものをいう。)又は解散による残余財産の分配
  4. 自己の株式又は出資の取得(金融商品取引法第2条第16項(定義)に規定する金融商品取引所の開設する市場における購入による取得その他の政令で定める取得及び第61条の2第14項第1号から第3号まで(有価証券の譲渡益又は譲渡損の益金又は損金算入)に掲げる株式又は出資の同項に規定する場合に該当する場合における取得を除く。)
  5. 出資の消却(取得した出資について行うものを除く。)、出資の払戻し、社員その他法人の出資者の退社又は脱退による持分の払戻しその他株式又は出資をその発行した法人が取得することなく消滅させること。
  6. 組織変更(当該組織変更に際して当該組織変更をした法人の株式又は出資以外の資産を交付したものに限る。)

Deemed Dividends and the DRD

The DRD can also be applied to Deemed Dividends. As will be discussed in later posts, the DRD is disapplied to shareholdings that are only held for a short time (less than one month before or two months after the Dividend Base Date (配当基準日)- see post for details).  This is in order to prevent the abusive application of the DRD to dividends on  shares that are held only for a short time in order to receive the dividend concerned. However this disapplication of the DRD does not apply to Deemed Dividends. This may be an important point in corporate reorganisation, share buy-backs or similar transactions where Deemed Dividends arise.

Calculation of the Deemed Dividend amount

In principle the amount of a Deemed Dividend is intended to reflect the amount of surplus above original invested capital that is returned to shareholders.  The basic formulae to calculate the amount of a Deemed Dividend reflects this concept, as below:

A = B – C

Where

  • A = the amount of the Deemed Dividend.
  • B = the total value of monetary or other assets (a their market value) exchanged with shareholders in the transaction.
  • C = the amount of the Tax Based Capital of the issuer company that corresponds to the shares or other capital in the transastion giving rise to the Deemed Dividend.

The above formulae represents the general principle, the Japanese tax law provides more specific formulae to calculate the amount of Deemed Dividend for each of the above transactions.  Worked examples using these formuale are given in this post.



Leave a Reply