Status of foreign entities as corporations or passthrough

September 18, 2010  |  Guidance, Guidance, News


Whether or not a non-Japanese entity is fiscally transparent for Japanese tax purposes is often a key issue for the taxation of both Japanese inbound and outbound investment.

Regrettably Japanese tax authority guidance on factors to consider when understanding whether or not an entity is fiscally transparent is somewhat sparse and indirect, often giving rise to frustration for foreign investors and a further reason to consider investing elsewhere.


The NTA home page includes a tax “Question and Answer” section which lists a range of questions on tax topics that can be read as giving insight into tax authority thinking on the topic concerned.  One of these “Q&As” (link in Japanese) addresses whether or not a US limited liability company (‘US LLC’) should be treated as a corporation or as a pass through entity for Japanese tax purposes, with the conclusion under the assumptions stated that the entity is a corporation for Japanese tax purposes.

For the classification of certain Japanese entities as pass through entities or corporations for Japanese tax purposes please see this article.  A translation of the Q&A is below:

Text of guidance on corporate status of US LLCs

Whether or not a business entity is treated as a foreign corporation for Japanese tax purposes is determined through considering whether or not the business entity concerned is treated as a foreign company under Japanese private law.

In relation to a US LLC established based on the LLC Law, for the reasons stated below, such an entity would in principle for the purposes of Japanese public law be expected to be treated as a foreign corporation.

(1)   An LLC is a business entity established under the LLC law of each US state formed for the purpose of carrying out commercial activities and hence is recognized as a foreign commercial company,

(2)   Along with the establishment of the business entity a commercial registration or similar is carried out.

(3)   The LLC is recognized as a juridical entity able to be a party to litigation as an entity itself.

(4)   The unified LLC law includes regulations to the effect that the members of the LLC are separate from the juridical person of the entity and that in order to carry out business activity an LLC has the necessary and sufficient powers and rights as those of an individual.

Given the above, regardless of the choice made among the alternative treatments available for US tax purposes for an LLC to be treated as a corporation or as a pass through entity, in principle for Japanese tax purposes it is appropriate for the entity to be treated as a foreign company.

However US LLC law is independently regulated for each state and the make up of the rules is different for each state.  Accordingly, whether or not each individual LLC will be regarded as a foreign corporation will be made clear from each state’s LLC law (the law under which the LLC is established) so it is necessary to determine the status on a separate basis.


The above Q&A has no statutory authority so is best read with caution as a guide to factors that should be considered when determining whether or not an entity would be treated as a foreign corporation for Japanese tax purposes.

The article suggests that commercial registration, ability to sue and be sued in your own name, the members and the entity being separate from each other and having sufficient powers are in combination likely to give rise to corporate status.  Regrettably the Q&A gives no clue as to whether, if an entity possesses some but not all of these factors, this is sufficient for it to be treated as a corporation.  Nor does it shed much light on whether there are other factors that could also help characterize an entity as a corporation or pass through entity.

Practical points

In theory determining the status of a foreign entity as a corporation or pass through can be done by listing up indicia of status of the foreign entity and then comparing these indicia to corresponding law applied to Japanese entities to see which entity the foreign corporation most closely resembles and hence whether it is a pass through entity or corporation.  However this is not an easy exercise given the difficulties in establishing what indicia should be included in such a list and then establishing a correspondence with Japanese law given the law concerned will of course not be the same.

It is possible to contact the tax authorities to discuss such status but such a process may take several months to complete with an uncertain result.  This is a complex but critical area of tax law, so proper advice must always be obtained before acting.

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