Typical Investment Structures

This article is designed for those who wish to invest in Japan real estate as an entity not an individual. Typical choices of investment structures used by foreign investors for Japan real estate investments are:

• GK - Godo Kaisha

• TK - Tokumei Kumiai

• TMK - Tokutei Mokuteki Kaisha

Real estate investment vehicles frequently hold trust beneficial interests in real estate rather than holding the real estate itself. The choice of a certain vehicle leads to a certain investment structure. Choosing the structure involves a consideration of legal, accounting and tax implication as these factors can be the driving factors in determining the investment vehicle.

• Concept

  A Godo Kaisha (GK) is a corporate entity loosely based on the U.S. LLC in that the liability of the investors in the GK is limited to their capital contribution. However, unlike the U.S. LLC for US tax purposes, it is not a pass through entity for Japanese tax purposes.

• Taxation

  A GK is considered as a corporation and subject to Corporation tax as the same manner as a Kabushiki Kaisha.

• Concept

  A Tokumei Kumiai (TK) is provided for under Japan’s Commercial Code. It consists of a TK operator and one or more “silent” TK investors. A TK is not a legal entity for Japanese tax purposes, but rather an agreement between the TK investor and the TK operator under which the TK operator agrees to operate the business on behalf of itself and the investor. The TK investor makes a contribution to the TK operator in exchange for a percentage of the TK operator’s profits or losses. Critically, the TK investor must not have any control in the management of the TK operator.

• Taxation of the TK Operator

  The TK operator is subject to normal Japanese corporate/income tax as a taxable entity doing business in Japan, however the TK operator is able to claim any income distributions made to the TK investor as a deductible expense. The TK operator will report net income in the case net losses are distributed.

• Taxation of the TK Investors

  The Japanese tax implications of a TK investor may vary, depending on whether the TK investor is a resident of Japan, and in the case where the TK investor is a non-resident of Japan (i) whether it has a PE in Japan, or (ii) the jurisdiction in which the TK investor is a resident.

• Japan resident partners

  The Tokumei Kumiai profit/loss allocation is treated as normal taxable income/loss of the TK investor for the particular period in which the income/loss is received. While no withholding tax was levied on TK profit distributions to Japanese resident partners where there are less than 10 TK investors, from January 2008, 20% withholding tax will be levied on such distributions, regardless of the number of partners. Profit/loss distributions received by the investor will be aggregated with the taxpayer's other income and taxed at the applicable marginal rate. With respect to a TK arrangement in which the investment is real estate, an active individual TK investor may be able to offset losses against other income, however a passive TK investor is prohibited from doing so. An active TK investor is one who plays an active role in the business decisions of the Japan TK operator.

• Foreign partners having a permanent establishment (PE) in Japan

  The profit/loss allocation from the TK to a TK investor deemed to have a PE in Japan is treated as normal taxable income/loss of the TK investor for the period in which the accounting period end date of the TK operator falls. The TK investor is required to file a tax return and pay income tax at the applicable marginal rate. The distributions from a TK to foreign partners are subject to 20% withholding tax, which is creditable for the TK investors when declaring such income in their Japanese tax returns.

• Foreign partners not having a permanent establishment (PE) in Japan

  A TK investor who doesn’t have a PE in Japan is taxed 20% withholding on the actual distributions of the TK‟s profit allocations. There are no further Japanese tax obligations in respect of the TK allocations and no requirements to file a tax return in Japan. It should be noted that non-resident TK partners residing in certain jurisdictions may be able to claim a tax exemption by virtue of that jurisdiction\s Double Tax Agreement (“DTA”) with Japan containing an “Other income” article which provides such income is only taxable in the country in which the investor resides, meaning such TK distributions are not taxed in Japan. One example is the Netherlands-Japan DTA, although a new tax treaty is currently being agreed. While Japan’s DTAs with other jurisdictions such as the US and the UK also contain an “Other income” provision, protocols to these agreements give Japan the right to impose Japan domestic withholding tax rates on such income, resulting in the 20% rate being levied.

• Concept

  A Tokutei Mokuteki Kaisha (TMK) is a special purpose company which allows a flow through tax treatment, similar in certain respects to a US Regulated Investment Company. A TMK is only permitted to engage in certain securitization and liquidation activities that are specified in the approved TMK rules and government approvals are required to establish one.

• Taxation

  Provided that 90% or more of annual income is distributed (and other requirements are met,) a TMK is entitled to a tax deduction for qualifying dividend distributions to its shareholders and so most of the earnings are taxed at the shareholder level. Dividends paid to foreign shareholders are subject to a 20% withholding tax, unless reduced by a treaty. Capital gains are taxable in principle unless a foreign shareholder is resident in a treaty jurisdiction with a full capital gains exemption. However some treaties (such as the US-Japan Tax Treaty) contain an exception to this exemption for TMKs that are treated as real estate holding companies.