Related parties for transfer pricing purposes

August 13, 2010  |  Group Taxation, Transfer Pricing

Foreign related parties - capital relationship

This article outlines the definition of Special Relationship and Foreign Related Party (‘FRP’) for Japanese transfer pricing purposes and includes diagrams giving examples of the application of the definition.  Transactions with an FRP with whom a Japanese company has a Special Relationship are subject to Japanese transfer pricing regulations and must be carried out at arms’ length to avoid tax adjustment.

Foreign related parties - substance relationship

Note that Special Relationship for these purposes includes two classes of relationship, firstly a relationship where one company has a majority interest in the share capital of the other company and secondly a relationship where one company is able to exert influence over another company through their economic relations or other substantive relations without having an interest in the other company’s capital.

These relationships are explained in more detail below along with references to the relevant sections of the Special Taxation Measures Enforcement Order (STMEO) that gives more detail on the application of the FRP definition.

Special relationships

Special Relationship Type 1, STMLEO 39-12-1-1

Where one company owns directly or indirectly 50% or more of the total number of issues shares or amount of invested capital (excluding shares that the company owns in itself – below ‘Issued Share or Capital’) in the other company.

Special Relationship Type 1, STMLEO 39-12-1-2

One person (including an individual and also defined persons related to that individual) owns 50% or more of the Issued Shares or Capital of the other companies (excluding relationships already formed under Type 1 above).

Special Relationship Type 3, STMLEO 39-12-1-3

A relationship where one company can in substance determine the course of the whole of or a party of the business of the other company.  In particular this definition includes the following situations:

  • The Corporate Officers or employees of one company are at the same time appointed as  two thirds or more of the Corporate Officers of the other company or comprise the Corporate Officers who are able to exercise authority over the company or are officers of employees of the first company.
  • A significant part of the business activity of the other company depends on carrying out transactions with the first company.
  • A significant part of the funds used for the business activity of one company is borrowed from the other company or such funds are raised with a guarantee from the other company.

Special Relationship Type 4, STMLEO 39-12-1-4

A relationship with another company through a company with which it has one of the above relationships.  This establishes a continuous chain of relationships – as shown in the diagrams.

Special Relationship Type 5, STMLEO 39-12-1-4

Two companies are related to the same person through the above relationships.  This establishes two parallel chains of where the parties on the different branches of the chain may be treated as FRPs as shown in the diagram.


The diagrams below give examples of companies that are treated as FRPs.  These are only illustrative so when deciding whether two companies are treated as FRPs advice should be taken from a qualified Japanese tax accountant based on the actual facts concerned.

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