Deemed dividends – calculation

July 28, 2010  |  Dividend Taxation

Sapporo station in the snow, Hokkaido

This post gives an example of the calculation of the amount of a Deemed Dividend for Japanese DRD purposes in a merger. You can find at this post an explanation of the Deemed Dividends concept, including the basic formulae for their calculation.   This post explains Tax Based Capital, which is an important concept when calculating which part of a distribution to shareholders is a Deemed Dividend and which part a return of capital for tax purposes.

The Japanese tax law includes formulae for calculating Deemed Dividends in each of the six situations outlined below.  The formulae specify in each situation what assets are used in valuing the amount of the distribution giving rise to the Deemed Dividend, although the underlying principal remains that the value of the distribution to shareholders is its economic value.  The amount of Tax Based Capital in each of these six transactions is calculated in the same way in each case.

Formulae for calculating Deemed Dividends

Specified formulae are used for calculating Deemed Dividends for the following transactions:

  1. Mergers (excluding Tax Qualified Mergers)
  2. Bunkatsu Style Corporate Splits (excluding Tax Qualified Corporate Splits)
  3. Returns of Capital (out of Dividends out of Surplus (limited to those that are made along with a reduction of the amount of Capital Surplus) those Dividends 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 acquisitions made on-market for certain defined markets
  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).

Mergers (excluding Tax Qualified Mergers)

The amount of the Deemed Dividend is A – B where:

  • A = the total value received in exchange for shares further to the merger in monetary and other assets (at their market value)
  • B = the amount of the capital of the issuer company that corresponds to the shares or other capital in the Deemed Dividend transaction.

Example facts:

Mergers - deemed dividends

A KK owns shares in B KK.  During this financial year B KK is the ceasing company in merger with C KK (assumed to be a non tax qualified merger).  Accordingly A KK will receive shares in C KK that potentially give rise to a Deemed Dividend for A KK.  A, B and C KK are all Japanese companies.  The following details also apply as also shown in the diagram to the right:

  • A KK owned 100,000 shares in B KK
  • Under the terms of the merger, A KK received 2 shares in C KK for each share in B KK (the face value of each C KK share was JPY50 with a market value of JPY250).  A KK also received boot of JPY3 for each B KK share.
  • C KKs capital (資本金等) was JPY35,000,000 immediately prior to the merger with 500,000 issued shares.


  • Total value of assets exchanged in the transaction:  (JPY250  x 2 shares + JPY3 per share) x 100,000 B KK shares = JPY50,300,000
  • Amount of capital attributable to the B KK shares surrendered in the transaction: (JPY35,000,000 / 500,00 shares) x 100,000 shares = JPY7,000,000
  • Amount of Deemed Dividend:  JPY(50,300,000 – 7,000,000) = JPY43,300,000.

In this transaction,  A KK has received shares in C KK in consideration for its shareholding in B KK (B KK ceases to exist as a result of the merger).  Accordingly for Japanese tax purposes the consideration A KK receives for the disposal of its shares in B KK (being the shares in C KK) is a Deemed Dividend in respect of the B KK shares and the Japanese DRD can apply.

Look out for future posts which will explain how Deemed Dividends are calculated in other transactions.  If you would like to see another example, please also feed free to calculate the site editor to ask for a further post on the topic.

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