Tax controversy – Denso’s Singapore subsidiary a CFC

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The Asahi Newspaper reported in July 2010 that Denso, the largest automotive parts manufacturer in Japan and part of the Toyota group, had received direction during its last tax audit that the company had under-reported JPY11.4Bn of taxable income in the two years to March 2009.  It would seem the auditors asserted that dividends received by a Singapore subsidiary of Denso should be subject to the Tax Haven Counter Measures Regulations (THCML) and hence subject to Current Taxation in Japan.  Including local taxes, the additional tax payment for Denso would be JPY120m.  Denso intends to appeal this tax treatment.

According to persons related to the events the Denso Singapore subsidiary, DIAS, had received dividends from a number of its own subsidiaries based in Thailand, Malaysia, the Philippines and other countries.  The income of DIAS for the two years up until March 2008 of JPY11.4Bn was mainly dividends.  Since 2003 tax reform in Singapore, such dividends were not treated as taxable.

Under the THCML where the main business of a foreign subsidiary is the owning of shares and receiving of dividends then such a subsidiary cannot be exemptd from application of the THCML law on grounds of business activity and hence the income of the subsidiary may be subject to Current Taxation.  DIAS’s corporate registration recorded the company to be a ‘Holding Company’

Denso asserted that DIAS was not a pure holding company but combined activities related to distribution and purchasing of materials and accordingly the THCML did not apply.  However the authorities view was that the majority of income was dividends from DIAS’s subsidiaries and the company did not meet the conditions for exclusion from the THCML.  Under the application of the THCML, DISA’s income for the years to March 2007 and 2008 was treated as taxable in each following accounting period for Denso.  Given that the company was loss making for tax purposes in the period to March 2009, the total additional income subject to tax was JPY500m.

According to public documentation dated 2007, DIAs was established in 1998 with 30 employees and JPY2.4Bn as a 100% subsidiary and as a “holding company and regional unification company”.  Denso manufactures cooling and heating systems, electrical systems and similar automotive parts and the group includes 134 foreign subsidiaries and eighty domestic subsidiaries – the largest group within the Toyota family quoted on the first market of the Tokyo Stock Exchange.

Denso’s view reported to the Asahi Newspaper was that the company had fulfilled the conditions for exemption from the application of Current Taxation under the THCML and had explained this quite sufficiently during the tax audit, so would not be prepared to accept the tax treatment asserted by the authorities.


Where the main business of a foreign company is the holding of shares, capital or debt of other companies the foreign company cannot be excluded from the application of the THCML rules (Japanese CFC rules) on grounds of business activity.  In this case the auditors appear to look at what proportion of the company’s income came from the holding of such assets when determining the company’s status under the THCML. 

Note that examination of the status of the foreign company for the purpose of applying the Japanese CFC rules is made every financial year, not just once for the lifetime of the company, hence status can change from year to year.

Foreign subsidiaries in a Japanese group that are relying on not being treated as a holding company for Japanese THCML purposes would be wise to check the status periodically through the year to ensure that the majority of their revenue or does not come from dividends or capital gains from holding shares in other subsidiaries.

This page collates articles on Japanese CFC rules and exemptions that can apply and this article addresses in more detail a Japanese court case that addressed an identical issue as case reported here.

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