Foreign Dividend Exclusion – glossary, definitions

Their convenience in crowded trains is one reason for the ubiquity of mobile phones in Japan

This post summarises some of the key Japanese terms relevant to the recently introduced system that allows Japanese companies to exclude certain foreign dividends (Qualifying Distributions, as explained in this post) received from affiliated companies (as defined) from Japanese taxation.

外国子会社配当益金不算入制度/gaikoku kogaisha haitou ekikin fusannyu seido/Foreign Dividend Exclusion System/FDES the Japanese name for the system, abbreviated as FDES below and defined in the following section of the Japanese corporate law – CTL22-2, 3

剰余金の配当等/jyouyokin no haibun tou/Qualifying Distributions Dividends, distributions and other items that can qualify from FDES defined above. Note that these are limited to distributions on shares or Invested Capital. Also distributions of capital surplus and shares received in a ‘Bunkatsu Style Corporate Split’ are excluded.

Note also that the term 剰余金の配当/jyoyokin no haitou itself (only the final kanji is different to the term above) is a defined corporate law term that refers to dividends made by companies (CorpL 453) or by co-operative associations (Agricultural Business Co-operative Law 52). The term defined here and translated as Qualifying Distributions is the broader term covering items that may be benefit from the FDES system.

剰余金の配分/jyouyokin no haibun/Distribution out of Surplus
This is a more narrow term referring to distributions by Mutual Companies (Insurance Business Law 55-2) or by Shipowners Mutual Insurance Associations (Art 24 of relevant ship owners law)

利益の配当/rieki no haitou/Profit DividendThis term refers to dividends from special classes of Japanese entity, namely gomei gaisha, gosho gaisha, godou gaisha (CorpL 621) and tokutei mokuteki gaisha (Law Related to Asset Liquidity 141) . The first two of these types of entities are rarely used by foreign investors; godou gaisha are the relatively new ‘Japanese LLC’ that is a useful entity for Japanese investors while tokutei mokuteki gaisha are REIT like Japanese entities.

相互会社/sougo kaisha/Mutual Company – a corporate form still adopted by many Japanese insurance companies

船主相互保険組合/senshu sougo hoken kumiai/Shipowners Mutual Insurance Association

みなし配当/minashi haitou/Deemed Dividend corporate actions that, while not having the legal form of a dividend, are recognised as a dividend for Japanese tax purposes probably as a result of their economic nature being a return of assets or profits to shareholders.

みなし経費/minashi keihi/Deemed Expenses a 5% reduction in the amount of dividend that can be excluded under the FDES intended to recognise related costs effectively allowing 95% exclusion of the foreign dividends. This is scheduled to be eliminated in 2010 tax reform, thus allowing full exclusion of qualifying foreign dividends.

出資/shusshi/Invested Capital equivalent to share capital for certain Japanese entities that do not issues shares.

協同組合/kyoudou kumiai/Cooperative Association an entity not often used by foreign investors commonly seen in agricultural and similar associations.

分割型分割/bunkatsu gata bunkatsu/Bunkatsu Style Corporate Split – a corporate reorganisation whereby under a Japanese process of law a business splits off from one company (Split Co) to form another company (New Co) but where the shareholders of Split Co receive shares in New Co rather than Split Co itself receiving the shares in consideration for the split.

資本剰余金/shihon jyoyokin/Capital Surplus – part of the capital of a company that is not share capital or retained earnings, similar to share premium in UK accounting.

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