Dividends and short term share holdings

July 28, 2010  |  Dividend Taxation, Domestic

Center Gai, a main shopping street in Shibuya

In order to apply the Japanese Dividends Received Deduction (‘DRD’) a holding period requirement (the ‘Holding Criteria’) has to be met relating to the shares on which the dividend concerned is paid (below, relating to the ‘Shares’).   The Holding Criteria is an anti-avoidance measure intended to prevent companies buying shares shortly before a dividend is due, holding the shares over the dividend date, receiving the dividend and applying the DRD and then selling the shares concerned.   In the absence of the Holding Criteria a company entering into such a transaction may be able to generate an overall taxable loss depending on the sizes of the tax deductible loss on the purchase and sale of the shares and the amount of the DRD (net of attributable funding costs that reduce the DRD) with limited economic risk if the shares are held for only a very short time.

Holding Criteria – required holding period

Under CTL 23-2, CTLEO 20 where a Japanese Domestic Company receives a dividend on Shares on which the DRD can potentially apply then if the Shares were:

  1. acquired within one month or less from before the Dividend Base Date; and
  2. transferred within two months or less after the Dividend Base Date

…then the DRD cannot be applied to the dividends from such Shares.  This period is referred to the Holding Period below.

Note that, with one exception, the Holding Criteria does not apply to Deemed Dividends, being transactions explained in this post.  This exception was introduced under the 2010 tax reforms relating to Deemed Dividends arising from the purchase of Shares that was foreseen as part of certain share buy back or other transactions.  Further details will be found in posts on 2010 tax reform.

Calculation of the amount of  DRD

The Holding Criteria rules recognise that where a company is frequently buying and selling shares it may, at the time a dividend is paid, own a mixture of shares of the same type that were acquired or disposed of before or during the Holding Period.  CTLEO -20 (2) to (5) prescribes a formulae that can be used to calculate the number of Shares the dividends from which cannot  apply the DRD in these circumstances.  This formulae is as follows:

A x [ B x ( C / {D + E})] / [ F + G ]

  • A = Shares transferred within two months or less after the Dividend Base Date
  • B = Shares held on the Dividend Base Date
  • C = Shares acquired within one month or less before the Dividend Base Date
  • D = Shares held one month before the Dividend Base Date
  • E = the same figure as C
  • F = the same figure as B
  • G = the number of Shares acquired within two months or less after the Dividend Base Date

Note that if during the period covered by the above calculation a Qualified Merger takes place then adjustment is required to the calculation to reflect this.    Companies in a Japanese tax consolidated group also a apply the above regulations in a corresponding manner.

Example Calculation

Japanese company A KK has received a dividend of JPY900,00 from Japanese company B KK.  20% withholding tax of JPY180,000 was withheld, with A KK receiving a net dividend from B KK of JPY720,000.  The Dividend Base Date was 31 March 2010 and A KK held positions in or undertook the following transactions in shares of B KK at the dates shown below.

  • On 28 February 2010 A KK held 300,000 shares in B KK = D
  • Between 1 March 2010 and 31 March 2010 A KK acquired 200,000 shares in B KK = C, E
  • Between 1 March 2010 and 31 March 2010 A KK disposed of 350,000 shares in B KK.
  • On 31 March 2010 A KK held 150,00 shares in B KK (300,000 plus 200,000 acquired less 350,000 disposed of) = B, F
  • Between 1 April 2010 and 31 May 2010 A KK acquired 250,000 shares in B KK = G
  • Between 1 April 2010 and 31 May 2010 A KK disposed of 100,000 shares in B KK = A

Given the above date the formulae above gives:

100,000  x [ 150,000 x ( 200,000 / {300,000 + 200,000} ) ] / [ 150,000 + 250,000 ]

= 15,000

Therefore the DRD is not allowed with respect to dividends from 15,000 shares or (15,000 / 150,000 ) x JPY900,000 = JPY90,000 in this example.

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