Inbound, outbound investment

This page provides access to articles on a range of international tax issues of interest to foreign investors in Japan.

Despite its poor record in inbound investment, Japan has a sophisticated body of international tax law together with supporting academic literature.

Japanese companies are increasingly litigating on tax issues with some degree of success, and precedent from the cases concerned is becoming more valuable.

This page has links to topics and articles looking at these matters in greater depth. Articles on taxable presence, Japanese source income and withholding tax are likely to be of prime concern to foreign investors.

Inbound investment

The financial crisis and Japan’s parlous fiscal state seems finally to have encouraged the Japanese authorities to give genuine consideration to introducing tax incentives for foreign investors and potentially to lowering the corporate tax rate.

Outbound investment

Japan’s high corporate tax and concerns about an un-competitively high yen have encouraged Japanese outbound investment. Articles on the Japanese CFC system and the dividend exclusion system explain the related Japanese tax rules.

Tax Treaties

The tax treaty section collates data on Japan’s tax treaties together with articles on their interpretation.

Tax treaty data

Articles include a listing of the Japanese forms required to claim tax treaty benefits and links to English translations of Japan’s tax treaties where these are available on the internet.

Tax treaty news.

The site includes commentary on tax treaties recently signed by Japan such as those with Hong Kong or with the Netherlands or discussing topics such as the drive to encourage better information exchange under the treaty network. Read more.

Taxable presence

The taxable presence section addresses the threshold issue of what level of activity of a foreign entity in Japan gives rise to a taxable presence, or “permanent establishment” of the entity and hence an obligation to file a Japanese tax return.

Agent permanent establishment

The agent permanent establish concept determines under what circumstances a person in Japan acting as an agent on behalf of a foreign company may create a taxable presence of the foreign company concerned. Read more.

Japanese CFCs

Japan has rules similar to the UK and American ‘Controlled Foreign Company’ or CFC rules that can impose current taxation in Japan on un-repatriated lowly taxed profits of a Japanese group’s foreign subsidiaries.

Flowchart, overview

Articles give an overview of the Japanese CFC legislation including diagrams showing CFC relationships and a flowchart highlighting the different tests or exemptions that are applied to determine CFC status. Read more.

Japanese CFC definitions

Articles also cover important definitions in Japanese CFC legislation, scope of the CFC rules and summaries of court cases concerning the CFC rules. Read more.

International Tax Issues

The benefits of industrialization

A woodcut print from the Meiji era illustrating the benefits of industrialization achieved following the opening of Japan by Colonel Perry in the mid 19th Century. In the background is one of the ‘Black Ships’ that helped bring about the ending of Japan’s cultural and commercial isolation from the rest of the world.

Withholding taxes

Tthe Japanese tax system still relies extensively on withholding taxes, especially when assessing foreign companies to tax on Japanese source income.

Withholding tax rates

Articles summarise withholding tax rates across a wide range of different sources of Japanese income, inclduing dividend income, royalty income, distributions from silent partnerships, and interest. income Read more.

Legal and practical aspects

Articles examine legal aspects of withholding taxes such as how to determine who is liable for their collection and procedural matters such as correcting errors on withholding tax payments. Read more.

Thin capitalisation

The thin capitalisation section outlines Japanese rules that are equivalent to US earnings stripping legislation intended to prevent foreign groups over-leveraging their Japanese operations and hence artificially reduce profits taxable in Japan.

Rules, diagrams

The section includes an explanation of how the thin capitalisation rules operate and diagrams illustrating different transactions where thin capitalisation may apply. Read more.

Thin capitalisation filings

Articles on concepts valuable to understanding thin capitalisation, including an English translation of the tax return forms required to calculate disallowed interest and an overview of the make up of the Japanese company’s capital account. Read more.

Foreign dividend exclusion

The Japanese rules relating to the exclusion from taxation of dividends from overseas entities are only a couple of years old, replacing the prior tax and credit system.

Definitions, application

This section includes articles explaining which dividends qualify for the scheme, how the scheme operates and critical definitions for understanding the scheme. Read more.

Japanese source income

Japan taxes the Japan source income of foreign persons. Therefore understanding whether an item of income has a Japan tax source is critical to understanding the territorial scope of Japanese tax and effective international tax planning.

The scope of Japanese source income

Japanese tax law has complex definitions governing the different sources of income on which foreign persons are taxed. Articles in this section explain the scope of taxation for foreign companies and non-resident
individuals
. Read more.

Source of income rules

Different types of income each have their own source rule which defines whether or not the income has a Japanese source and hence is potentially taxable. Read more.

Transfer pricing

Japan has a developed set of
transfer pricing regulations and successful Advanced Pricing Agreement program, being a reflection of Japan’s status as a key US trading partner.

Practical transfer pricing

This section includes a mini-case study on profit split transfer pricing as well as an article on the conflict between the domestic “donation” regime and Japan’s international transfer pricing regulations. Read more.

Diagrams

The transfer pricing section will be expanded to include diagrams illustrating transfer pricing aspects of different transactions, such as in this article explaining the definition of related parties for Japanese transfer pricing purposes. Read more.