Japanese tax structuring

 

Tokumei kumiai 'TK' silent partnership tax benefits

8.  tokumei kumiai 'TK' tax benefits

In the previous section on the tax benefits of the yugen kaisha 'yg', I mentioned the 'Dutch TK' which uses the tokumei kumiai or 'tk'. The tokumei kumiai is the Japanese form of 'silent partnership' and is roughly equivalent to a 'limited partnership' in the US.

This section on Japanese tax planning would not be complete without a discussion of the tokumei kumiai (even though many Japanese tax accountants more used to dealing with the kabushiki kaisha and yugen kaisha) may not be familiar with it) because the tk is often used in very sophisticated cross-border tax structuring. If you want to structure your business in Japan using a tokumei kumiai, you will need assistance from Deloitte & Touche (who from personal experience provide excellent international tax advice) or PriceWaterhouseCoopers (who also seem to be very proficient in structures utilizing the tokumei kumiai, although I have never personally dealt with PWC).

A tokumei kumiai is created by a contractual agreement between two or more parties, one of which is the 'proprietor' or 'operator' the remainder of which are the 'silent' or 'limited' partners.

The silent partners contribute cash or other assets to the operator who then manages the assets for the business designated in the partnership agreement. The silent partners have:

  • no operational or voting rights,
  • no involvement in the conduct of the business,
  • no co-ownership interest or legal exposure with respect to any of the business assets or liabilities of the operator.
  • (if a silent partner is not a Japan resident) participation in a tokumei kumiai does not normally result in being considered to have a permanent establishment in Japan.
In legal effect then, the silent partners effectively benefit from limited liability.

The silent partners and the operator then share the profits (and potentially the losses) of the business based on the ratio agreed in the partnership agreement. The final tax liability of a non-resident partner will be a 20% withholding tax assessed by the Japanese tax office on the income distribution received. That 20% is often reduced by a loophole in many of Japan's tax-treaties which allows income distributions from a tokumei kumiai to be treated under the 'other income' provisions. The tax benefit of the famed 'Dutch TK' arises because under the Japan-Netherlands tax treaty, 'other income' is exempt from Japanese income tax.

The new US-Japan tax treaty closes that loophole and any income distributions from a TK to a US resident partner will incur the 20% Japanese withholding tax at source. This may prompt you to ask what happens if a US company incorporates a company in the Netherlands (or maybe the Netherlands Antilles which is under the umbrella of many Netherlands treaties) which is then a silent partner in a tokumei kumiai. In the first instance pre-tax profits would flow-through to the Dutch entity with no tax deductions (either income or withholding) but from the US perspective the IRS would apply anti-haven provisions which would make the Dutch entity's income subject to US income tax (which is anyway on a par with Japanese income tax). A further complication is that under the new US-Japan tax treaty, the treatment of tax 'conduits' (as in the US - Dutch -Japan example) is being made much more difficult and if the Japanese tax authorities became aware of the US-Dutch ownership they would probably assess the 20% withholding tax on the basis that the Dutch silent partner was simply a nominee shareholder for the US parent which is the true economic beneficiary.

PLEASE NOTE that this section is here for guidance only. Japan has 45 or more tax treaties in place, each of which is different and all of which are constantly being challenged and reinterpreted. Before using any form of non-standard structure YOU MUST GET INDEPENDENT TAX ACCOUNTING AND LEGAL ADVICE!

9.  tokutei mokuteki kaisha 'TMK' tax benefits >>


Japanese tax structuring

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