Post by Sato on Feb 26, 2009 5:26:52 GMT 4
Japan: Introduction of the foreign dividend exemption system
On December 12 2008, an outline of the proposed tax reform for 2009 was released by the Liberal Democratic Party, which introduced the foreign dividend exemption system to encourage Japanese domestic corporations to repatriate profits earned by their foreign affiliates. There will also be considerable changes to the existing foreign tax credit system and tax haven rules due to the introduction of this new foreign dividend exemption system.
Broadly, dividends received by a Japanese domestic corporation from its foreign subsidiary will be excluded from the calculation of the domestic corporation's taxable income, while 5% of the received dividend is still taxed.
A foreign subsidiary is generally defined as a foreign corporation in which a Japanese domestic corporation holds 25% or more of the total issued shares for at least 6 months before the decision to distribute the dividends. Foreign taxes withheld from dividends that are exempt will be treated as non-deductible expenses.
The direct foreign tax credit will not apply for exempt dividends. Also, the indirect foreign tax credit system will be abolished after the necessary transitional measures are implemented.
Under the proposed tax reform measures, the following revisions for tax haven rule will be introduced.
(1) Profit earned by a tax haven subsidiary will be added to the Japanese parent corporation's taxable income regardless of whether or not the profit has been distributed.
When the Japanese parent corporation receives a dividend from a tax haven subsidiary, the amount of such dividend, up to the amount of the tax haven subsidiary's earnings which have already been added to the Japanese corporation's taxable income in the past 10 years, including the year of dividend received, will be excluded from the taxable income of the Japanese corporation.
(2) Broadly, the following dividends received by a tax haven subsidiary will be excluded from the amount of earnings to be added to the Japanese parent corporation's taxable income.
* Dividends received by a tax haven subsidiary from its subsidiary in which the tax haven subsidiary holds 25% or more of the total issued shares
* Dividends paid to a tax haven subsidiary from another tax haven subsidiary
Further details are not yet released, however, this change requests Japanese companies to review the structure of the foreign affiliates in order to maximize the tax benefits.
Akio Takisaki (akio.takisaki@jp.ey.com) & Nobue Sato (Nobue.Sato@jp.ey.com)
On December 12 2008, an outline of the proposed tax reform for 2009 was released by the Liberal Democratic Party, which introduced the foreign dividend exemption system to encourage Japanese domestic corporations to repatriate profits earned by their foreign affiliates. There will also be considerable changes to the existing foreign tax credit system and tax haven rules due to the introduction of this new foreign dividend exemption system.
Broadly, dividends received by a Japanese domestic corporation from its foreign subsidiary will be excluded from the calculation of the domestic corporation's taxable income, while 5% of the received dividend is still taxed.
A foreign subsidiary is generally defined as a foreign corporation in which a Japanese domestic corporation holds 25% or more of the total issued shares for at least 6 months before the decision to distribute the dividends. Foreign taxes withheld from dividends that are exempt will be treated as non-deductible expenses.
The direct foreign tax credit will not apply for exempt dividends. Also, the indirect foreign tax credit system will be abolished after the necessary transitional measures are implemented.
Under the proposed tax reform measures, the following revisions for tax haven rule will be introduced.
(1) Profit earned by a tax haven subsidiary will be added to the Japanese parent corporation's taxable income regardless of whether or not the profit has been distributed.
When the Japanese parent corporation receives a dividend from a tax haven subsidiary, the amount of such dividend, up to the amount of the tax haven subsidiary's earnings which have already been added to the Japanese corporation's taxable income in the past 10 years, including the year of dividend received, will be excluded from the taxable income of the Japanese corporation.
(2) Broadly, the following dividends received by a tax haven subsidiary will be excluded from the amount of earnings to be added to the Japanese parent corporation's taxable income.
* Dividends received by a tax haven subsidiary from its subsidiary in which the tax haven subsidiary holds 25% or more of the total issued shares
* Dividends paid to a tax haven subsidiary from another tax haven subsidiary
Further details are not yet released, however, this change requests Japanese companies to review the structure of the foreign affiliates in order to maximize the tax benefits.
Akio Takisaki (akio.takisaki@jp.ey.com) & Nobue Sato (Nobue.Sato@jp.ey.com)