Taxation of TK operator and investor

February 14, 2010  |  Tokumei Kumiai

Rice - as used for making sake

The TK Operator in a TK Contact is responsible for carrying out the TK Business. In a securitisation, context the TK Operator will typically be the SPV bankruptcy remote entity which owns the underlying securitised assets. The TK Operator tax treatment described below applies to all corporate tax paying TK Operators, which can include Japanese kabushiki kaishi, goudo kaishi, the old corporate tax law yugen gaisha among other Japanese corporate tax paying entities.

TK Operator Income recognition under TK Contracts

This is straightforward.  The TK Business is by definition carried on by the TK Operator who should calculate the revenue from the business less necessary expenses.  However this calculation should be based on Japanese tax law (and hence on Japanese GAAP). When the TK Contract is recognised as valid for Japanese tax purposes, then when required conditions are met for distributions to be made to the TK Investors, such distributions can be included in the deductible income of the TK Operator (or the loss borne by the TK Investor effectively added to the income of the TK Operator).

The above treatment under CTLTT 14-1-3 allows the pass through of gain or loss from the TK Operator to the TK Investor for Japanese tax purposes, which is useful for many tax and commercial purposes.

Treatment of Japanese consumption tax for the TK Operator

The obligation to charge consumption tax on the disposal of assets or pay consumption tax on the purchase of inventory or similar related to assets attributable to the TK Business is borne by the TK Operator alone (JCoTLTT 1-3-2).

Tax Treatment of the TK Investor

The tax treatment of the TK Investor raises a wider range of issues than the taxation of the operator such as the application of Japanese withholding taxes, in a cross border context the application of tax treaties. The main issues are discussed below.

Timing of recognition of gain or loss

For cases where the TK Investor is a corporation, the amount of distribution that is expected to arise from a TK investment is included in the financial year end of the TK Investor that includes the last day of the income calculation period for the TK Contract and treated as taxable or income or deductible expense. This is regardless of whether or not distributions have actually been received (or further contribution recognised) (CTLTT 14-1-3).

Unlike ninikumiai, there is no rule for TKs that requires the preparation of financial statements for the partnership once per year at a specified time so accordingly the timing and frequency of distributions can be decided freely by contract by the parties concerned. If the distribution period extends over more than a year then the income arising from the TK Business would still be taxed as income of the operator. In contrast for a ninikumiai, given an NK is fiscally transparent then an annual accounting would be required to work out the income that would be attributable to the NK members for their particular tax year

Similar to the position of a member of an NK, consideration should be given as to whether a TK Investor is also a “Specified TK Investor” (tokutei tokumei kumiai in/特定匿名組合員). Limits to the detectability of losses arising from a TK apply similar to an NK.

A Specified TK Investor here is a corporation that is involved in important decisions around the TK Business such as having the ability to deal with or transfer important assets related to the TK Business or the execution of significant borrowings. Also the Specified TK Investor should not be able to execute imporant parts of the TK Business concerned such as the being able to negotiate contracts related to the TK Business. Accordingly in many cases a TK Investor would not be expected to be treated as a Specified TK Investor if the legal nature of the TK Contract is respected by the form and operation of the TK Contract.

When (1) a corporation is a Specified TK Investor and (2) when for the TK Business, the limit to the responsibility to repay the obligation to the TK Investor concerned is in substance equivalent to the value of the TK Business assets or (3) according to other rules of the CTLEO then limits to the deductibility of losses arising on the TK Investment apply. Condition (2) here suggests that these rules are aimed at more highly structured transactions – leasing or similar, where the assets (e.g. aircraft?) may be a large part of the TK Business – rather than, say, a real operating TK Business. The limit on deductibiliy of losses from the TK Investment is also of more significance for entities that are taxed on a net basis from their income from a TK investment, such a Japanese corporations, than investors taxed on a withholding basis, which may included foreign corporations  when tax treaty benefits do not apply.

The limit to deductibility of losses from the TK investment works as follows: Where the loss of the TK Business exceeds the amount calculated as the investment of the TK Investor (the chousei shusshikinn tou kingaku/調整出資等金額 Adjusted TK Capital) (or for TK Businesses in substance where a loss is not foreseen – perhaps because the transation has limited economic risk etc – then the amount of loss of the TK Business) then such excess is not treated as tax deductible. Such non deductible loss can effectively be carried forward only for offset against future surplus arising from the TK Investment concerned.

Reporting obligations also arise for a Specified TK Investor. Regardless of whether or not a non-deductible loss arises the Specified TK Investor would have to include in its tax return a report showing the calculation of its Adjusted TK Capital and whether or not it exceeds the limit concerned.


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