The Japanese ‘Fixed Place of Business’ PE

October 3, 2010  |  Taxable Presence
The 'Ohara Hadaka Matsuri' or 'Ohara Naked Festival', held once a year in Chiba. The shrine is carried in a rush into the sea.

The 'Ohara Hadaka Matsuri' or 'Ohara Naked Festival' held once a year in Chiba. The shrine is carried in a rush into the sea.

A long established convention of international tax law is that in order for the business income of a company to be taxable in a foreign country, the company must have a ‘permanent establishment’ or ‘PE’ in the foreign country concerned through which its business is conducted.

Accordingly, the definition of PE sets out the threshold level of activity of a foreign company in a country that, if exceeded, allows the country to tax its business income.

The OECD has over the years promulgated consistency among its members in approach to taxation under the PE convention. While the OECDs effort has been largely successful, differences remain in how each country has adopted the PE concept into its domestic law or how each country interprets the meaning of PE in their tax treaties or related OECD guidelines.

This article looks at the Japanese domestic law definition of the most basic type of PE – the fixed place of business.  Please also see this link for the scope of PE under Japan’s different tax treaties.

 

Article 141-1 ‘Fixed Place of Business PE’

Corporation Tax Law (‘CTL’) article 141 defines three different types of PE for Japanese domestic law purposes, referred to on this site as the  Fixed Place of Business PE, the Construction Site PE and the Agency PE.  As explained in this article, the scope of income subject to Japanese tax varies slightly between each different type of PE.

Article 141-1 simply states that a Fixed Place of Business PE is “…a branch, factory or other fixed place where business is carried on as determined in cabinet orders….”.

 

CTLEO 185-1 ‘Fixed Place of Business PE’

CTLEO 185-1 is the cabinet order supplementing the definition of Article 141-1, listing further examples of locations that are a Fixed Place of Business PE.  A translation is as follows:

Article 185: A branch or other fixed place of business owned by a foreign corporation.

(1) The places determined by cabinet orders as regulated under corporation tax law article 141-1 are the places as stated below:

  1. A branch, satellite office or other place of business or office work, a factory or warehouse (limited to warehouses provided by a person as part of his business).

  2. A mine, quarry other places where natural resources can be gathered.

  3. Any other fixed place where business can be carried on similar to the above previously stated sub-paragraphs.

(2) The following places are not included in the places specified in the previous paragraph.

  1. A fixed place used only for the purposes of purchasing assets

  2. A fixed place used only for the purposes of storing assets

  3. A fixed place used only for business activity that comprise functions that are incidental to the carrying out of the business concerned such as advertising, commercials, provision of information, market analysis, basic research and similar.

As seen in paragraph 2 above, CTLEO 185-also in (2)(3) provides the domestic Japanese tax law definition of “representative office” along with two exemptions from PE status, the maintenance of a fixed place of business – essentially warehouses or similar – for either storing or purchasing assets.

 

Tax instruction 20-2-1

Tax Instruction 20-2-1 is the only other source defining a Fixed Place of Business PE.  It is very brief, supplementing the CTLEO 185’s reference to “…places similar to the above..” in sub-paragraph 1-3 and says that places resembling a branch or satellite office and hence comprising a Fixed Place of Business PE include:

“…farms, places of cultivation [for example of pearls or fish], forested land, rented buildings and in addition rooms in a hotel that are used as a base for business activities by the foreign company, exhibition places used for immediate sales and other corresponding places….”.

 

A straightforward PE concept

The Fixed Place of Business PE is the most straightforward of the three definitions of PE under Japanese domestic law.  International tax problems more commonly arise in relation to Construction PEs, for the installation and maintenance of equipment or software, and Agent PE’s, especially in the financial services area.

The Tax Instruction however does have implications for certain business.  Investment bankers or private equity fund investors who are operating out of a hotel are one category of person who may be included in its scope.  Real estate investors should also take care to consider whether or not the building they own could be PE.  Distressed asset investors should remember that foreclosing on a building as collateral could also create a PE for them in Japan.


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