Any individual, organization or company can acquire real estate in Japan. The most common investment structures used by offshore investors are as follows:
Direct acquisition by an offshore investor or an offshore special-purpose company (SPC) is common. In a direct acquisition, an offshore investor either directly or through an SPC acquires the target property or trust beneficial interest (TBI) in Japan. Generally speaking, there are no restrictions on foreign direct investment in Japanese real estate.
Since the investor or SPC is located offshore, incorporation of an on-shore acquisition entity in Japan is not required.
Indirect acquisition through a godo-kaisha (GK), which is an on-shore entity. A GK is similar to a limited liability company under US law. It allows more flexibility in regards to corporate governance and management decisions than a TMK (described below) or a conventional corporation (kabushiki-kaisha, or KK). Please note that a GK is not a pass-through corporation similar to a US limited liability company, which can elect to become a disregarded entity.
No minimum capital is required for establishment of a GK. A GK is established by way of a filing with the Legal Affairs Bureau and may be incorporated within approximately one month after the incorporation documents are executed.
A tokumei-kumiai (TK) is a form of partnership based on an agreement between a silent partner(s) (ie investors), (TK Partner(s) or tokumei-kumiai-in) and a GK (as the TK operator or eigyosha). Under a GK-TK structure, a GK is established as a special purpose company whose sole purpose is normally to hold assets (eg fee property interests or TBI).
The incorporation process for a GK is straightforward as discussed above. The TK agreement may be signed by the TK Partner(s) and a GK any time the parties desire but only after formation of the GK. The TK agreement is not filed or made publicly available.
A tokutei-mokuteki-kaisha (TMK) is a special purpose limited liability company that can only be used for the securitization of assets.
Property rights can be securitized by a TMK through the issue of asset-backed securities (shisan-taio-shoken) to investors, usually in the form of equities or bonds. Profits are distributed to investors by way of dividends on equities or interest on bonds, depending on the nature of the security issued to investors by the TMK. Because of its special role as an investment vehicle for securitized assets and preferential tax features, TMKs are subject to stringent regulatory requirements.
No minimum capital is required. A TMK may be incorporated within approximately one month. However, in order for TMK to acquire target assets or to issue asset-backed securities, an asset liquidation plan must be filed. It usually takes about three months for a TMK to be incorporated and become eligible to acquire assets.
Last modified 22 Mar 2024
Real property acquisition tax is levied on the acquisition of land or buildings; however, an acquisition by merger of real-estate-owning company is exempt. The tax base is the value of the real estate listed in the official ledger, which is in many cases lower than the market value. The tax base can be reduced under the GK-TK or TMK structures when certain requirements are satisfied. Currently, the tax rate is 3% on land and dwellings, and 4% on buildings other than dwellings.
The designated taxpayer for this tax is the acquirer of the real estate.
Under a plain interpretation of the statute, an acquisition of entrusted real property through TBI is not subject to this tax. To our knowledge, the tax authorities have not attempted to assess real estate acquisition tax on the transfer of TBI to date.
Registration is necessary for an acquisition of real estate or TBI for perfection purposes. The registration tax is levied on real estate transactions such as the purchase of real estate or the construction of a building. The registration and license tax for purchase of land, for example, is currently 1.5% of the value listed in the official ledger. Reduced tax rates can be applicable to a GK-TK and a TMK when certain conditions are satisfied.
Seller and purchaser are both legally subject to registration tax, however, a purchaser often bears the registration tax in practice.
Any documents listed in the Stamp Duty Act are subject to stamp tax to the extent it is executed in Japan. Contracts for the transfer of real estate or land leases are subject to stamp tax. The tax amount varies depending upon the amount stated in the conveyance or lease document (eg the tax amount is JPY100,000 when the stated amount is in excess of JPY100 million but less than 500 million. Mitigation treatments are not considered.) Meanwhile, a trust agreement or contract for a TBI transfer is also subject to stamp tax and the tax amount is only JPY200 regardless of the amount stated in the agreement.
Stamp tax is paid by affixing a fiscal stamp on the documents and sealing it with a certified stamp. Seller and purchaser are both legally subject to stamp tax and the party bearing the cost is often decided by agreement between the parties.
Last modified 22 Mar 2024
Transfer (including a lease) of assets undertaken in Japan for business purposes is subject to Japanese consumption tax (JCT), which is the equivalent of VAT in other jurisdictions. However, transfer of land which also includes the rights attached to the land is non-taxable, while a transfer of a building or corresponding TBI is subject to JCT. Therefore, when a building and land are transferred concurrently, the purchase price must allocate the consideration for the building and the land in order to determine the JCT obligation. The allocation is to be agreed between the parties, and typically the parties agree upon the allocation by taking into account the assessed value for purposes of the fixed assets tax (as discussed below).
The tax rate is currently 10%. JCT included in the transaction price is paid by the purchaser to the seller and the seller must then pay the corresponding JCT amount to the tax authority.
The amount of any paid input JCT in taxable transactions is creditable against the amount of output JCT. The creditable input JCT amount is generally calculated based on the aggregated input JCT actually paid with the taxable transaction, while small businesses whose taxable sales are JPY50 million or less may utilize a simple method whereby the creditable input JCT amount is calculated by taking the output JCT amount and multiplying it by a certain percentage as determined by industry (eg 40% for real estate industry).
Last modified 22 Mar 2024
Last modified 22 Mar 2024
The fixed assets tax (kotei shisan zei) and the city planning tax (toshi keikaku zei) are imposed on the person or entity that is registered as the owner of the property as of 1 January of each year (city planning tax is imposed only on real property in certain urban districts). The tax rate for fixed assets tax is 1.4%, and the city planning tax is 0.3%. The tax base is generally the value of the real estate listed on the official ledger, while adjustment measures to reduce the original tax base in case a rapid value increases are applicable to land located in the Tokyo, Osaka or Nagoya metropolitan areas.
Last modified 22 Mar 2024
Last modified 22 Mar 2024
In a direct acquisition, income is predominantly received from rental income or TBI funded by rental income. In other structures, income is distributed to offshore investors as dividends.
Last modified 22 Mar 2024
When an offshore acquisition entity or investor receives rental income (except when the lessee is an individual and the property is used by the lessee or his/her relatives) or income from TBI, the income will be subject to withholding tax on payments in accordance with the applicable tax treaty between the offshore acquirer’s home jurisdiction and Japan.
Separately, the acquisition of property or TBI in property located in Japan by an offshore operator creates a potential risk of creating a permanent establishment (PE). If the offshore investor creates a PE in Japan, it will be subject to ordinary corporate tax at an effective tax rate (ETR) of 30.62% on its net income. While acquisition of real estate in and of itself does not necessarily create a PE since it is common to hire asset managers and the investor may be receiving ongoing payments from its holdings in Japan, the risk of creating a PE may be heightened.
The income of a GK is subject to corporate tax at an ETR of 30.62%. A GK does not enjoy preferential tax treatment on real estate investments available to GK-TKs and TMKs.
A GK is subject to corporate tax for taxable income. However, under the GK-TK structure when a GK makes distributions to investors pursuant to a TK agreement, such distributions can be treated as deductions against the GK's income (as defined by the National Tax Agency’s published regulations) and could reduce taxable income (‘Pay-Through’). To qualify for this treatment, the TK agreement should specify that the TK Partners’ role is limited to passive investment. In practice, it is common for the management of the GK operator to be outsourced or handled by an affiliate of the TK Partners.
A TMK is also subject to corporate tax. If a TMK is ‘tax qualifying’ it may take a deduction against taxable income for any dividends paid to its members (‘Pay-Through’). This means that, in theory, if the TMK distributes all of its taxable income it will not have any income that would be subject to corporate tax. A TMK must satisfy certain criteria to be considered a tax-qualifying TMK.
Last modified 22 Mar 2024
Even though GK-TKs and TMKs may enjoy the pay-through treatment relating to corporate taxes, a distribution to foreign investors by a GK or a TMK is subject to withholding tax at a rate of 20.42%, however it is also subject to an exemption or reduced tax rates available under applicable tax treaties.
Last modified 22 Mar 2024
Please see Other costs of ownership.
Last modified 22 Mar 2024
Not applicable.
Last modified 22 Mar 2024
Capital gains on the sale of real property or TBI in Japan will be subject to withholding tax at a rate of 10.21% to the extent a purchaser has a withholding obligation (for example, a Japanese entity).
Capital gains tax is also applicable and the current rate is 23.2% or higher for an offshore entity, including those without a PE. Most tax treaties between Japan and other jurisdictions do not provide an exemption for capital gains from real estate in Japan, and capital gains tax is generally not subject to exemptions under the applicable tax treaty with the seller's home jurisdiction.
Capital gains attributable to a GK are subject to corporate tax. Dividends distributed to its members are not deductible.
For an offshore investor, capital gains on the sale of GK equity are not subject to withholding tax, but are subject to corporate tax even if the offshore entity has no PE in Japan.
A GK under the GK-TK structure is subject to corporate tax on capital gains. However, distributions to investors can be treated as deductions against the GK's income as described above.
A tax-qualifying TMK can also enjoy a deduction against income arising from sale of assets, as described above.
Last modified 22 Mar 2024
Last modified 22 Mar 2024
What costs/charges (other than tax and VAT) are payable on completion of the purchase of real estate and who is responsible for paying these costs and to whom are they payable?
Last modified 22 Mar 2024