Post by Sapphire Capital on Jul 12, 2008 21:08:23 GMT 4
Recently the Tokyo High Court ruled that a US LLC (limited liability company) shall be treated as a foreign corporation for Japanese tax purposes and that its distribution to a Japanese taxpayer shall be taxed as dividend income in Japan.
In this court case, the LLC, which was established in New York, had been engaged in real estate business and was selected to be taxed as a pass-through entity under the US check-the-box provisions. The plaintiff, an individual Japanese taxpayer who is one of the members of the LLC, insisted that the profit earned by the company should directly belong to him as his own real-estate income and that the payment from the LLC was a return of the contribution, not income. However, the National Tax Administration corrected it, insisting that the real-estate income should belong to the company because the LLC is a corporation and that the payment from the LLC was dividend. In the first trial, the Saitama District Court upheld the correction by the NTA, which was appealed by the taxpayer.
On October 10 2007, the Tokyo High Court rejected the taxpayer's appeal and decided that the NTA's correction was a correct interpretation of the tax law. The court's decision included the following points:
* Whether the LLC shall be recognised as a corporation shall be determined based on the definition in the New York State Law, as well as the substance of the LLC. In this case, it was recognised that the LLC can, based on the NY LLC Law, i) be a litigant in a law-suit, ii) acquire and dispose assets, and iii) conclude contracts under its own name, for those applicable to the LLC. In addition, the LLC Law presents the LLC as a separate legal entity, where the members of the LLC have no interests in the LLC's assets. From these perspectives, since the LLC Law recognises the LLC as a corporation, the LLC should be treated as a corporation also for Japanese tax law purposes.
* Being taxed as a pass-through entity in the US would not be grounds for denying its character as a corporation because the LLC is allowed to select to be either a pass-through entity or a corporation freely under the check-the-box rules.
* The payment from the LLC to the taxpayer consisted of the built-in gain of buildings and the profit from the real-estate business. It is appropriate that the LLC distributed these gains to the taxpayer, thus, the distribution should be treated as dividend.
These views support the NTA's traditional policy that a LLC basically is a foreign corporation, which is expected to have a major impact on other issues related to a LLC, for example, offsetting loss from real-estate business of a LLC with profit from other types of business of the taxpayer.
In this court case, the LLC, which was established in New York, had been engaged in real estate business and was selected to be taxed as a pass-through entity under the US check-the-box provisions. The plaintiff, an individual Japanese taxpayer who is one of the members of the LLC, insisted that the profit earned by the company should directly belong to him as his own real-estate income and that the payment from the LLC was a return of the contribution, not income. However, the National Tax Administration corrected it, insisting that the real-estate income should belong to the company because the LLC is a corporation and that the payment from the LLC was dividend. In the first trial, the Saitama District Court upheld the correction by the NTA, which was appealed by the taxpayer.
On October 10 2007, the Tokyo High Court rejected the taxpayer's appeal and decided that the NTA's correction was a correct interpretation of the tax law. The court's decision included the following points:
* Whether the LLC shall be recognised as a corporation shall be determined based on the definition in the New York State Law, as well as the substance of the LLC. In this case, it was recognised that the LLC can, based on the NY LLC Law, i) be a litigant in a law-suit, ii) acquire and dispose assets, and iii) conclude contracts under its own name, for those applicable to the LLC. In addition, the LLC Law presents the LLC as a separate legal entity, where the members of the LLC have no interests in the LLC's assets. From these perspectives, since the LLC Law recognises the LLC as a corporation, the LLC should be treated as a corporation also for Japanese tax law purposes.
* Being taxed as a pass-through entity in the US would not be grounds for denying its character as a corporation because the LLC is allowed to select to be either a pass-through entity or a corporation freely under the check-the-box rules.
* The payment from the LLC to the taxpayer consisted of the built-in gain of buildings and the profit from the real-estate business. It is appropriate that the LLC distributed these gains to the taxpayer, thus, the distribution should be treated as dividend.
These views support the NTA's traditional policy that a LLC basically is a foreign corporation, which is expected to have a major impact on other issues related to a LLC, for example, offsetting loss from real-estate business of a LLC with profit from other types of business of the taxpayer.