Japanese tax litigation: Takefuji, hostesses and the ‘Rule of Law’

February 25, 2011  |  Court, News

News, information

On the 19 February the Japanese Nikkei Newspaper published an article commenting on recent trends in Japanese tax litigation.  The article outlined a number of high profile cases that the Japanese tax authorities had lost in recent months and commented on the extent to which such lost cases reflected a change in approach by the Japanese judiciary to tax litigation.

The Takefuji case

The Nikkei article was prompted by the widely reported victory in a Japanese gift tax case of the elder heir of the recently bankrupt Japanese Takefuji consumer finance company.  One aspect of the case that drew particular media attention was the loss to the Japanese state through the payment of around JPY40Bn (USD450m) of interest and penalties to the taxpayer in addition to the taxes repaid of around JPY133Bn (USD1.6Bn).

In the case the taxpayer had received a gift of Takefuji shares during a period when he was living in Hong Kong, where he spent approximately two thirds of his time while spending just over a quarter of his time visiting Japan and the remainder elsewhere. 

Tax residence in Japan

The tax authorities had asserted that the taxpayer was resident in Japan during the period concerned, despite his relatively short period of residence in Japan.

The authorities asserted that he had an “address” in Japan and hence the gift of shares to him was a taxable transaction by virtue of such residence. In Japanese address is “住所” – see this article for a similar case and this article for a discussion of this term and more information about individual tax residence for Japanese tax purposes.

Note that further to a change in the law in Japan in 2000, where either the recipient or transferor of gifted assets has been resident in Japan for five years tax can apply to such assets even when they are not located in Japan.

Strict interpretation of the tax law and regulations

The Nikki article quoted from the court ruling in the case and commented that the words represented a warning from the Japanese courts against abusive interpretation of the tax law by the tax authorities.

In particular the ruling noted the words of the Japanese Constitution, that “…taxes should be assessed according to the law…” (in Japanese “…税金は法令の規定通りに課すべき…”).

The Nikkei article also quoted a further passage from the ruling noting that “…that a strict interpretation of related law and regulations is required; to easily apply an expansive interpretation despite having no basis is not permitted…” (in Japanese “…厳格な法令の解釈が要求され、明確な根拠がないのに容易に拡張解釈することは許されない…”).

The Hostess case

The article also referred to another recent taxpayer victory in the Japanese High Court last March.  This case concerned the calculation of withholding tax when applied to the remuneration of a hostess.  A host or hostess is an individual employed to provide casual conversation and promote a cordial atmosphere in often expensive Japanese bars and clubs, most often used for business entertaining purposes.

In the case, the taxpayer asserted that deduction used for the calculation of periodic withholding taxes on employee remuneration (taxes similar to those under the UK PAYE system) should be calculated based on the total of the number of days in the period to which the remuneration relates.

The tax authorities, however, asserted that such deduction should only be allowed based on the number of days within the period when the taxpayer visited their place of work to provide the services concerned.  The court descison in favor of this taxpayer in this case applied a strict reading of the legisation and noted that the tax authorities should not “…arbitrarily apply a distant interpretation to the wording of the tax law without any grounds….”.

The ‘Rule of Law’

The Nikkei article noted that the above trend in court decisions in favor of the taxpayer in tax litigation seems to arise from a change in the attitude of the court system to apply a strict interpretation of related law and regulations.  The article quoted a prominent lawyer who commented on the ‘Rule of Law’ now being applied to such cases.

The article also noted that, notwithstanding the tax authority defeat in the Takefuji case, the authorities were continuing to strengthen their scrutiny of transactions overseas that were difficult to examine but where the wealthy were continuing to try and evade or avoid or evade tax.

Recent measures taken by the authorities included the recent conclusion of tax protocols with tax haven countries such as Cayman Islands.  The authorites had, for example, recently identified a case where inheritors to an estate had concealed JPY1.1Bn of assets in a Swiss Bank in order to avoid related inheritance taxes.


Japan was long been known as a graveyard for taxpayer litigation, with partial victories for taxpayer cases never getting above around 5 to 10 percent of cases taken and complete victories perhaps 2 or 3 per cent at most.

What is less well known is that among the few cases taken by taxpayers many were initiated by individuals or organisations outside the mainstream of Japanese society, with such cases often having a political or social agenda rather than significant merit based on the technical tax issues of the cases concerned.

More recent years however have seen prominent Japanese companies prepared to litigate tax cases, sometimes with success – for example, TDKs victory in a recent transfer pricing case in the high court.

A combination of the Japanese judiciary appling the ‘Rule of Law’ to tax litigation together with major Japanesese companies being prepared to litigate tax matters may see a new dawn in the world of Japanese tax litigation.

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