Yes.
Last modified 22 Mar 2024
The term ‘permanent establishment’ is not a generically used term in Japan, other than for tax purposes where the concept is relevant to the tax rights of the country in which a permanent establishment has been created. Generally, for tax reasons, investors who are not resident in Japan would seek to avoid creating a permanent establishment in Japan. A Japanese limited liability partnership (yugensekinin-jigyokumiai, LLP) is not popular for non-Japanese real estate investors since at least one partner needs to be a Japanese resident, and all the partners, in general, need to participate in the business of the LLP.
The basic cost of setting up an LLP is often minimal. There are, however, additional costs such as taking legal and tax advice on whether this is an appropriate vehicle and structure and substantial cost will be incurred in drafting and negotiating (where necessary) a suitable constitution for the investment vehicle which regulates the rights and obligations of the investors and as between the investors and the sponsor or investment manager.
An LLP can be established by execution of an LLP agreement, payment of capital and registration of the LLP. The establishment of an investment vehicle with negotiated terms which will be suited to investors and the raising of funding from investors for that investment vehicle may take considerable time and the relationship and rights and obligations between the partners are usually governed by an LLP agreement.
Where a Japanese incorporated company is used, the Companies Act applies. This provides a comprehensive code governing the rights and obligations of a company itself, its directors and shareholders. Where a Japanese branch of a foreign company is used, the Companies Act applies to some extent.
Last modified 22 Mar 2024
As mentioned above, an LLP is not popular for non-Japanese real estate investors.
Other than direct investment by a foreign investor, (i) TMK (tokutei-mokuteki-kaisha), (ii) TK-GK (tokumei-kumiai - godo-kaisha), (iii) real estate specified joint enterprise and (iv) real estate investment trust (‘J-REIT’) are popular for foreign investors' real estate investment in Japan.
For all the structures above, if certain requirements are met, distributions to investors from the vehicle may be deducted from the vehicle's taxable income.
Last modified 22 Mar 2024
A TMK is a statutory vehicle under the Act on Securitization of Assets. A TMK needs to file with the relevant local finance bureau a business commencement report, including without limitation, an asset liquidation plan (ALP). An amendment to an ALP requires strict procedures, eg obtaining consent from all the interested parties, and for such amendment (other than a minor amendment) filing with the local finance bureau is again required. ATMK acquires real property itself or trust beneficial interest (TBI) representing real property raising funds as specified equity, preferred equity, specified bond, specified loan, and the like, manage them and repay debts and distribute to equity holders from cash flows derived from the real property or TBI.
Godo kaisha (GK) is a company under the Companies Act in which members (equity holders) and managements are not separated unlike a joint stock corporation (kabushiki-kaisha) . A GK is a vehicle to acquire TBI representing real property with silent partnership (tokumei-kumiai, TK) investment from TK investor(s) and loan(s) from lenders. If a GK acquires real property itself instead of TBI representing real property, a license or notification with the authority under the Real Estate Specified Joint Enterprise Act is generally required, which will be discussed in ‘Real Estate Specified Joint Enterprise using TK-GK’ below.
Under a TK-GK structure, if a GK acquires real property itself (not TBI representing real property) in order to distribute profits from the real property to TK investor(s), a GK generally needs to obtain a real estate specified joint enterprise operator license, requirements for which is strict and difficult to be met by a special purpose company.
As an exemption, if a GK entrusts certain business activities relating to real estate transactions and solicitation of TK investment to licensed real estate specified joint enterprise operators (and in the case where the GK performs the land development or certain types of construction work exceeding a certain amount, TK investor(s) need to be the Special Investors (as defined in the Real Estate Specified Joint Enterprise Act) who are deemed to have knowledge about investment), the license is not required subject to a filing of a Special Enterprise (tokurei-jigyo) with the authority.
In addition, in the 2017 amendments, two more exemptions where the license is not required (a filing is required) were added which are:
(1) Small Real Estate Specified Joint Enterprise (shokibo-fudosantokutei-kyodo-jigyo) - where (i) the investment amount of each investor does not exceed JPY1 million and (ii) the total amount invested by all the investors does not exceed JPY100 million; and
(2) Enterprise for Qualified Special Investors (tekikaku-tokureitoshika-gentei-jigyo) - where all the investors involved are those specified in the ministerial ordinance as persons who “especially” have professional knowledge and experience in relation to real estate investment. The Qualified Special Investors (as defined in the Real Estate Specified Joint Enterprise Act) are different from the Special Investors.
J-REIT is a statutory vehicle in a form of an investment trust or investment corporation under the Act on Investment Trusts and Investment Corporations, the latter of which is usually used in Japan. Investment equity of an investment corporation may be listed. An investment corporation acquires real property itself or TBI representing real property.
Last modified 22 Mar 2024
There is no minimum capital amount required.
There is no minimum capital amount required.
To obtain the real estate specified joint enterprise operator license, the minimum capital amount is JPY100 million.
There is no minimum capital amount for the filing of a Special Enterprise. (To be an Item 3 operator, the minimum capital amount is JPY50 million , and to be an Item 4 operator, it is JPY10 million.)
The minimum capital amount is JPY100 million. For an investment corporation to be listed, the minimum net asset amount is JPY1,000 million.
Last modified 22 Mar 2024
The incorporation cost for each vehicle is nominal (hundreds of thousands of Japanese yen). The total costs depend on complexity of a transaction, eg if the structure involves trust arrangement, negotiations with counter-parties, such as a trustee, asset manager, property manager or solicitor of securities.
Last modified 22 Mar 2024
For incorporation of each vehicle, it takes several weeks. For each vehicle to become operative, it usually takes two to three months depending on how soon necessary agreements can be executed.
If we compare GK (for TK-GK) with TMK or investment corporation (for J-REIT), the lead time for GK (for TK-GK) is a bit shorter since it does not require a filing with the relevant local finance bureau.
Last modified 22 Mar 2024
A TMK may have two types of shareholders which are specified equity members and preferred equity members. Specified equity members have voting rights for all matters, whereas preferred equity members have voting rights only for matters set forth in the Act on Liquidation of Assets or in the articles of incorporation. In order to make a TMK bankruptcy remote, an ippan-shadan-hojin (ISH) whose director and member are certified public accountants or other independent persons is often used for a TMK's specified equity member.
Certain important matters, eg certain important amendments to the ALP may not be resolved by a members' meeting but need to be agreed by all the interested parties, including without limitation, a specified bond holder (if any). Relationship between multiple preferred equity members are governed by a joint venture agreement in addition to the provisions of the Act on Liquidation of Assets.
Different from a joint stock company, equity members of a GK, in principle, manage the business of the GK, ie there is no separation of ownership and management. In order to make a GK bankruptcy remote, an ISH whose director and member are certified public accountants or other independent persons is often used for a GK's member. A GK as the TK operator and TK investor(s) execute silent partnership agreement(s) for investment in TBI representing real property. The TBI belongs to the GK as the TK operator and the GK distributes profits to TK investor(s) pursuant to the silent partnership agreement(s) between the GK and the TK investor(s).
Different from a joint stock company, equity members of a GK, in principle, manage the business of the GK, ie there is no separation of ownership and management. In order to make a GK bankruptcy remote, an ISH whose director and member are certified public accountants or other independent persons is often used for a GK's member. A GK as the TK operator and TK investor(s) execute silent partnership agreement(s) for investment in real property itself. The real property belongs to the GK as the TK operator and the GK distributes profits to TK investor(s) pursuant to the silent partnership agreement(s) between the GK and the TK investor(s). In order to avoid the difficult license requirement, (i) the GK needs to entrust business relating to real estate transactions and solicitation of TK investment to licensed real estate specified joint enterprise operators (Item 3 operator for business relating to real estate transactions and Item 4 operator for solicitation of TK investment) and TK investor(s) need to be Special Investor(s) or (ii) the GK needs to meet the requirements of any of the other exemptions.
A J-REIT has investors' (investment equity holders) meetings, corporate officers, supervisory officers, board of officers and accounting auditors.
A J-REIT needs to entrust asset management, asset custody and other administrative matters to an asset manager, and the like. A J-REIT may procure equity as investment equity (toshi-guchi) and debts as investment corporation bonds (toshi-hojin-sai) and/or borrowings. A J-REIT may be invested in securities, rights pertaining to derivative transactions, real estate, leasehold of real estate, superficies, promissory notes, monetary claims, TK investment, and the like.
Last modified 22 Mar 2024
Corporate and accounting compliance costs for a TMK vary depending on the extent and number of the properties held and the complexity of the structure (for example, if it involves trust arrangement). It is therefore not possible to give a single figure. Audited accounts are statutorily required.
Corporate and accounting compliance costs for a GK (for TK-GK) vary depending on the extent and number of the properties held and the complexity of the structure (for example, in relation to profit sharing and expenses). It is therefore not possible to give a single figure. Audited accounts are not statutorily required but are often required to satisfy the information requirements of investors.
Corporate and accounting compliance costs for a GK (for Real Estate Specified Joint Enterprise using TK-GK) vary depending on the extent and number of the properties held and the complexity of the structure (for example, in relation to profit sharing and expenses). It is therefore not possible to give a single figure. Audited accounts are not statutorily required if (i) a GK entrusts business relating to real estate transactions and solicitation of TK investment to licensed real estate specified joint enterprise operators and TK investor(s) are Special Investor(s) or (ii) a GK meets the requirements of any of the other exemptions from the license requirement, but are often required to satisfy the information requirements of investors.
Corporate and accounting compliance costs for an investment corporation (for J-REIT) vary depending on the extent and number of the properties held and the complexity of the structure (for example, if it involves trust arrangement). It is therefore not possible to give a single figure. Audited accounts are statutorily required.
Last modified 22 Mar 2024
Normal corporation tax rate applies to a TMK. However, in the case of a tax-qualified TMK, dividends to equity holders may be deducted from the TMK's taxable income. So, in theory no corporation tax liability is possible by distributing all the profits as dividends. Withholding tax applies to dividend distributions.
The requirements for a tax-qualified TMK include, without limitation:
Normal corporation tax rate applies to a GK, a TK operator. However, as far as proper TK arrangement is recognised, any share of the TK business profits allocated to TK investor(s), together with other TK business expenses, may be deducted from the GK's taxable income. So, in theory no corporation tax liability is possible by distributing all the profits to TK investor(s). Withholding tax applies to profit distributions to TK investor(s).
Normal corporation tax rate applies to a GK, a TK operator. However, as far as proper TK arrangement is recognised, any share of the TK business profits allocated to TK investor(s), together with other TK business expenses, may be deducted from the GK's taxable income. So, in theory no corporation tax liability is possible by distributing all the profits to TK investor(s). Withholding tax applies to profit distributions to TK investor(s).
Normal corporation tax rate applies to an investment corporation. However, in the case of a tax-qualified investment corporation, dividends to equity holders may be deducted from the investment corporation's taxable income. So, in theory no corporation tax liability is possible by distributing all the profits as dividends.
The requirements for a tax-qualified investment corporation include, without limitation:
Last modified 22 Mar 2024
Are foreigners allowed to invest by directly purchasing a commercial real estate asset?
Yes.
Last modified 22 Mar 2024