Post by Sapphire Capital on Jul 12, 2008 21:09:33 GMT 4
On June 28 2007, the Tokyo high court ruled against the Japanese national tax agency's appeal to re-characterise a Tokumei Kumiai (TK) as a Nin-i Kumiai (NK) and treat the TK investor as having a permanent establishment in Japan. The decision is remarkable because it supports the taxpayer who established a tax-savings driven structure.
Under a TK contract, a TK investor generally contributes assets to a business operator in exchange for the right to receive a share of the profits or losses arising from the business specified by the TK contract. As the essential features of a TK contract, the TK investor cannot participate in the management of or have control over the TK business and cannot represent the TK operator. The profit (loss) allocable to the TK investor is deducted from (added to) the taxable income of the business operator, whereas the allocated profits to the TK investor are subject to income tax in Japan. If a foreign TK investor does not have a PE in Japan, the distributions will be subject to a final 20% Japanese withholding tax. The withholding tax can be zero if an applicable tax treaty (such as the treaty between Japan and the Netherlands) provides such a benefit. On the other hand, under a NK contract, NK members agree to co-manage the business and to share the profits and losses of the business. That is, each NK member participates in the management of or has control over the NK business. The profits of a NK business are attributed directly to the members. Generally, a foreign NK member is treated as having a PE in Japan, where the profit from the NK will be subject to Japanese corporation tax at the rate of 41%.
In the court case, a US multinational corporation owned two subsidiaries; a Japanese corporation that served as the business operator under a TK contract, and a Dutch BV that was the TK investor. The BV claimed treaty benefits under the Netherlands-Japan treaty to exempt the TK income from Japanese taxation. However, upon the tax examination, the NTA re-characterised the TK arrangement as an NK arrangement arguing that the BV was indirectly participating in the business of the business operator through the decision making activities of the US parent which owns both the TK investor and the TK operator. The NTA ruled that the BV was deemed to have a PE in Japan and should be subject to Japanese corporate tax. The BV appealed to the Tokyo district court.
The BV won on the appeals to both the district court and the high court. The courts decided that the NTA should not have re-characterised the TK arrangements purely based on economic substance since the TK arrangements had been properly structured and executed from a legal perspective. This should apply even if the TK arrangements were basically tax-savings driven.
The NTA has appealed the case to the supreme court so the final outcome should be closely monitored.
Under a TK contract, a TK investor generally contributes assets to a business operator in exchange for the right to receive a share of the profits or losses arising from the business specified by the TK contract. As the essential features of a TK contract, the TK investor cannot participate in the management of or have control over the TK business and cannot represent the TK operator. The profit (loss) allocable to the TK investor is deducted from (added to) the taxable income of the business operator, whereas the allocated profits to the TK investor are subject to income tax in Japan. If a foreign TK investor does not have a PE in Japan, the distributions will be subject to a final 20% Japanese withholding tax. The withholding tax can be zero if an applicable tax treaty (such as the treaty between Japan and the Netherlands) provides such a benefit. On the other hand, under a NK contract, NK members agree to co-manage the business and to share the profits and losses of the business. That is, each NK member participates in the management of or has control over the NK business. The profits of a NK business are attributed directly to the members. Generally, a foreign NK member is treated as having a PE in Japan, where the profit from the NK will be subject to Japanese corporation tax at the rate of 41%.
In the court case, a US multinational corporation owned two subsidiaries; a Japanese corporation that served as the business operator under a TK contract, and a Dutch BV that was the TK investor. The BV claimed treaty benefits under the Netherlands-Japan treaty to exempt the TK income from Japanese taxation. However, upon the tax examination, the NTA re-characterised the TK arrangement as an NK arrangement arguing that the BV was indirectly participating in the business of the business operator through the decision making activities of the US parent which owns both the TK investor and the TK operator. The NTA ruled that the BV was deemed to have a PE in Japan and should be subject to Japanese corporate tax. The BV appealed to the Tokyo district court.
The BV won on the appeals to both the district court and the high court. The courts decided that the NTA should not have re-characterised the TK arrangements purely based on economic substance since the TK arrangements had been properly structured and executed from a legal perspective. This should apply even if the TK arrangements were basically tax-savings driven.
The NTA has appealed the case to the supreme court so the final outcome should be closely monitored.