Case Study: Japanese companies incorporating an overseas branch

A monochrome picture of Modern Japan that manages to capture some of the atmosphere of the pre war Showa period.

The Japanese tax rules related to the taxation of corporate reorganisations (discussed here) can be applied, with some modification and additional considerations, to transactions involving foreign companies.

The following article gives an example of their application to a relatively simple transaction, the incorporation of a foreign branch of a Japanese company.



A Japanese company has an overseas branch office which it would like to incorporate as a newly formed foreign subsidiary (‘Foreign Co’).

Is it possible to characterise this transaction (below, the ‘Incorporation’) as a ‘Qualified Capital Contribution’ (in Japanese a ‘適格現物出資’ or ‘tekikaku genbutsu shusshi’) under the Japanese reorganisation regulations?. If so characterised, how will the transaction be treated for Japanese tax purposes?

Expected Treatment

To the extent that assets located in Japan are not transferred to Foreign Co and provided the criteria required for treating the Incorporation as a Qualified Capital Contribution under the Japanese reorganisation regulations are met, then the Incorporation can be treated as a Qualified Capital Contribution and carried out on a tax deferred basis without recognition of taxable gain or loss at the time it takes place (below, the transaction can be treated as ‘Tax Qualified’).


Article 2 no 12-4 of the Japanese Corporation Tax Law (‘JCTL’) defines the Contributor Company in a Capital Contribution transaction as “…a company that transfers its assets and together, along with them, its liabilities in a Corporate Contribution transaction…”.

Article 2 no 12-5. Similarly defines a Contributee in a Capital Contribution transaction as the recipient of both assets and liabilities in such a transaction.

The significance of the above definitions is that they are silent on whether the Contributor or Contributee corporation must be a domestic Japanese company or a foreign company. Accordingly, these articles are interpreted as applying to both domestic and foreign companies and hence both types of company can be entities participating in Tax Qualified transactions.

Provided the criteria for the Incorporation to be Qualified Capital Contribution discussed below are met and provided assets located in Japan are not involved as discussed below, the Incorporation can be Tax Qualified.

Criteria for Tax Qualification

A Capital Contribution transaction can be Tax Qualified where either the Contributee or Contributor company owns directly or indirectly 100 per cent of the issued shares (in Japanese 100 per cent of the ‘発行済株式等’ or ‘hakkou sumi kabushiki tou’) of the other company, where it is foreseen that after the transaction such 100 per cent ownership relationship will continue and where, in the transaction, only shares of the Contributee company are exchanged for assets and liabilities of the Contributor Company (in other words, a transaction where no “boot” is involved).

Given the above criteria a typical incorporation of a foreign branch can be Tax Qualified provided, for example, there is no intention to sell the shares in Foreign Co after incorporation. Note however, assets located in Japan should not be included in the transaction.

More complex foreign reorganisations, such as the contribution of assets of the foreign branch into a foreign joint-venture company in return for its partial ownership, can also be Tax Qualified when the more restrictive criteria in the Japanese reorganisation regulations related to corporate reorganisations that are not within a wholly owned group are met.

Please also see the ‘Reorganisations’ section for more information about the criteria for Tax Qualification

Assets located in Japan

Notwithstanding that the transaction may meet the above criteria for treatment as a Qualified Capital Contribution, assets located in Japan cannot be transferred to the newly formed Foreign Co (JCTL Article 2 no 12-14 reproduced below).

Definition of assets located in Japan

Assets located in Japan are defined in the Corporation Tax Law Enforcement Order (‘CTLEO’) article 4 no 2-9 (reproduced below) as including real estate in Japan, rights over real estate in Japan, Japanese mining rights, quarrying rights and other assets and liabilities attributable to business carried out in Japan.

Attribution to a business in Japan

Under Tax Instruction 1-4-12, whether or not an asset or liability is attributable to a business in Japan depends on their recordation in the books of account of either the home office (treated as attributable to business in Japan) or the foreign office (treated as attributable to the foreign office) of the company concerned.

Substance issues

However, Tax Instruction 1-4-12 also notes that where an asset is managed economically by an office based in Japan the asset or liability concerned will be regarded as having its location in Japan regardless or its being recorded in the books of account of the foreign office.

An important implication of this Tax Instruction is that it my raise doubts about whether or not certain intangible assets or goodwill, which often may be recognised in an incorporation transaction, are located in Japan or overseas if, for example, there is a question about whether the head office was involved in their creation or management. This is an area on which advice should always be sought.


Japanese Corporation Tax Law article 12 no 14

The definition of Qualified Capital Contribution for Japanese tax purposes, noting also that assets located in Japan cannot be transferred to a foreign company in a Tax Qualified transaction.

十二の十四  適格現物出資 次のいずれかに該当する現物出資(外国法人に国内にある資産又は負債として政令で定める資産又は負債の移転を行うもの及び新株予約権付社 債に付された新株予約権の行使に伴う当該新株予約権付社債についての社債の給付を除き、現物出資法人に被現物出資法人の株式のみが交付されるものに限 る。)をいう。
イ その現物出資に係る現物出資法人と被現物出資法人との間にいずれか一方の法人による完全支配関係その他の政令で定める関係がある場合の当該現物出資

CTLEO Article 4 no 2(9)

The definition of assets located in Japan for the purposes of determining whether a Capital Contribution is tax qualified.

9  法第二条第十二号の十四 に規定する政令で定める資産又は負債は、国内にある不動産、国内にある不動産の上に存する権利、鉱業法 (昭和二十五年法律第二百八十九号)の規定による鉱業権及び採石法 (昭和二十五年法律第二百九十一号)の規定による採石権その他国内にある事業所に属する資産(外国法人の発行済株式等の総数の百分の二十五以上の数の株式を有する場合におけるその外国法人の株式を除く。)又は負債とする。

Tax Instruction 1-4-12

Assessing whether assets or liabilities are attributable to a business in Japan depends on their recording in the books of the Japanese or foreign office and less they are in substance economically controlled by the Home Office.

1-4-12 令第4条の3第9項《適格現物出資の要件》に規定する「国内にある事業所に属する資産又は負債」に該当するかどうかは、原則として、当該資産又は負債が国内にある事業所又は国外にある事業所のいずれの事業所の帳簿に記帳されているかにより判定するものとする。

 ただし、国外にある事業所の帳簿に記帳されている資産又は負債であっても、実質的に国内にある事業所において経常的な管理が行われていたと認められる資 産又は負債については、国内にある事業所に属する資産又は負債に該当することになるのであるから留意する。(平14年課法2-1「三」により追加、平19 年課法2-17「二」、平22年課法2-1「五」により改正)

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