The diagrams below illustrate a number of different varieties of tax grouping relationship defined for Japanese tax purposes.
Examples of use of these relationships are in the definition of Japanese tax consolidated groups, determining which sets of criteria apply for tax qualification in Japanese corporate reorganisations and for transfer pricing purposes when defining controlled transactions.
Japanese group relationships
This diagram illustrates two important Japanese tax grouping relationships – the Japanese tax consolidated group which can only include certain 100% owned Japanese domestic corporations and the Japanese group within which assets can be transferred on an intra group basis.
Foreign companies cannot be members of either of these groups but a group relationship can be traced through a foreign company for the second kind of group.
Three types of group relationship
This diagram illustrates three different types of group relationship used for different purposes in the Japanese tax law.
The first and second of these group relationships are used for defining the criteria for certain types of tax preferred mergers discussed here. The second relationship is also used for tax deferred intra-group transactions. The third relationship is used for Japanese tax consolidation.
Ownership by directors and employees
This diagram illustrates a concessionary treatment in the definition of 100 percent ownership for Japanese group relationship purposes. As illustrated in the diagram, the ownership by a company of its own shares or their ownership by certain defined directors or employees is permitted without breaking the tax relationship.
Given group relationships are often critical for tax purposes proper advice should always be taken to confirm the status of a group relationship.
Transfer pricing and foreign related persons – ownership relationships
This diagram illustrates which parties are foreign related parties for Japanese transfer pricing purposes based on ownership and capital relationships.
Note that the diagram should be used in conjunction with the diagram below which illustrates how certain “economic substance” relationships can make a Japanese company related to a foreign person.
Transfer pricing and foreign related persons – economic substance
This diagram illustrates which parties are foreign related parties for Japanese transfer pricing purposes based on economic substance relationships.
Factors giving rise to an economic substance relationship include the directors in common, level business relationships and debt or other financing relationships.