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Investing in Japan

Investment News

Jun. 8, 2009
Tax Reforms to Encourage Foreign Investments through Funds

Under amendments to Japanese tax laws in 2009 (effective April 2009), it is now easier for foreign firms to make investments in Japanese firms through funds (venture capital funds, corporate restructuring funds, etc.). Below outlines these changes and criteria for their application.

<Special Treatment for Direct PE Taxation>

A non-resident individual/foreign corporate member ("specified foreign member") of an Investment Business Limited Liability Partnership (LPS), that invests in shares of Japanese companies through the LPS’ general partners and other business bases in Japan, is now deemed not to have a permanent establishment (PE) in Japan (i.e., exempt from capital gains tax in Japan), if such investor:

  1. is a limited liability member of an investment business LPS or other similar foreign partnership ("Investment Partnership");
  2. is not involved in the business of the partnership;
  3. holds less than 25% of the partnership assets;
  4. does not have a special relationship with the general partners (not either family relationships or at least 50% share holding); and
  5. does not have a permanent establishment in Japan other than the one related to investment partnership business

<Exception to 25/5 rule>

Under the so-called "25/5 rule," a foreign investor who invests in a Japanese firm through a fund that has no PE in Japan, and holds a total of 25% or more shares in the company, is taxed on capital gains from disposals of 5% or more of such shares. An exception to this rule was introduced, and capital gains tax is not levied only when an investor (and not the fund) 1) holds less than 25% of shares in a company, 2) has held the share for at least one year, and 3) the shares are not those in a failed or distressed financial institution. The investor must also be:

A) a specified foreign member; or
B) a non-resident individual/foreign company member that satisfies the following conditions:

  1. the investor is a limited liability member of an Investment Partnership;
  2. the investor does not execute partnership operation;
  3. share holding ratio at each investor level is less than 25%; and
  4. the investor does not have a PE in Japan

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