In Japanese real estate transactions rather than owning real estate directly, it is common for a real estate special purpose company (‘SPC’) to own a real estate trust beneficiary certificate (referred to below as a ‘Trust Certificate’) which evidences ownership of an interest in a trust whose underlying asset is Japanese real estate.
For example, the Japanese GK-TK (goudou kaishai-tokumei kumiai) real estate investment structures commonly used for non public real estate investment schemes will more often than not invest in Trust Certificates in order to ensure that they are outside the scope of the Japanese Law Concerning the Operation of Co-operative Real Estate Business as explained below. The certificates are also widely used in other Japanese real estate structures such as the Tokutei Mokuteki Kaisha (TMK) schemes and Japanese REIT schemes.
This article explains more about the Japanese Trust Certificates and some of the advantages they offer in Japanese real estate transactions.
Overview of the Japanese Trust System
This article explains the background to Japanese trust taxation. However, in a real estate context trusts would be expected to be fiscally transparent for Japanese tax purposes. The Japanese trust system is based on the Japanese trust law (in Japanese the ‘信託法’ or ‘Shintakuhou’). To paraphrase the definition in this law, a trust arises when ‘A Trustor entrusts certain assets through their transfer to a Trustee. The Trustee manages and deals with those assets on behalf of a Beneficiary and distributes to the beneficiary profits arising from the trust assets concerned’.
In other words, much like most trusts in the rest of the world, a Japanese trust arrangement is made up of three parties: The person who entrusts the assets, the Trustor (in Japanese the ‘委託者’ or ‘Itakusha’) the Trustee (in Japanese the ‘受託者’ or ‘Jutakusha’) and the Beneficiary (in Japanese the ‘’受益者 or ‘Juekisha’) of the assets underlying the trust. Note that these three parties do not have to be separate persons. The Trustor and the Beneficiary will typically be the same person at the commencement of a Japanese real estate trust for example. The beneficiary’s rights to receive the profit of the trust are referred to as Trust Beneficiary Rights (in Japanese ‘信託受益権’ or ‘Shintakujuekiken’).
Trust Usage in a Japanese Real Estate Transaction
In a typical Japanese real estate trust transaction the Trustor is typically the seller of the real estate and the Trustee a Japanese trust bank. The seller of the real estate will place the asset into trust with themselves as the Beneficiary at the start of the transaction. A real estate investment SPC will then buy the Trust Beneficiary Rights from the original Trustor/Beneficiary with money raised from investors and then the SPC will receive future distributions of income or capital gain from the Trust.
The advantages of using a Japanese real estate trust
There are a number of benefits to using the above Japanese real estate trust arrangement, as follows:
A reduction in transactional taxes
Japanese local real estate acquisition tax and Japanese national registration and licensing Tax are normally imposed on the sale of real estate. However, the real estate acquisition tax is not imposed on the sale of the Trust Certificate and the registration and licensing tax is accessed at a far lower rate. Furthermore, if the property is going to be used as collateral, registration and licensing tax is also accessed on the establishment of a Japanese mortgage right (in Japanese a ‘抵当権’ or ‘teitoken’). However, in the case of a Trust Certificate a security interest can take the form or a Japanese pledge of the certificate without the imposition of registration and licensing tax.
Support for the quality of investment in the trust
Trustee status is closely regulated under Japanese trust law. When the Trustee, accepts real estate as a trust asset, he will carry out a degree of due diligence on the appropriateness of the asset as a trust asset. This can give additional confidence to a potential buyer of an interest in the trust.
Raising the scope and quality of collateral
As the legal owner of the property, the Trustee will collect guarantee moneys from the tenants as well as accumulating funds to pay for repairs and improvements. The deposits and cash collected for these purposes can also act as collateral for real estate pl in trust. If a lender establishes a security interest over a Trust Certificate he can also effectively take security over such deposits and similar cash assets accumulating in the trust.
Japanese Law Concerning the Operation of Co-operative Real Estate Business
Finally the key advantage of ownership of a Trust Certificate is that as an asset it us outside the scope of the Japanese Law Concerning the Operation of Co-operative Real Estate Business (in Japanese the ‘不動産特定共同事業法’ or ‘’). Real estate transactions within this law require approval and licensing from the relevant government Ministry as well as minimum capital of JPY100m.