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Group Seeks Guidance on U.S. Tax Consequences of Japan's Corporate Law Changes

OCT. 25, 2005

Group Seeks Guidance on U.S. Tax Consequences of Japan's Corporate Law Changes

DATED OCT. 25, 2005
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October 25, 2005

 

 

Harry J. Hicks, III, Esq.

 

Associate Chief Counsel (International)

 

Internal Revenue Service CC:INTL (Room 4619)

 

1111 Constitution Avenue, N.W.

 

Washington, DC 20224

 

U.S.A.

 

 

Dear Mr. Hicks,

On behalf of our members, the Taxation Committee of the American Chamber of Commerce in Japan (ACCJ Tax Committee) would like to bring to your attention the recent revisions made to the corporation laws in Japan and request official guidance from the Internal Revenue Service (IRS) by December of this year regarding how the revisions may impact the U.S. federal income tax treatment of activities conducted in Japan by U.S. businesses and investors. Under the revisions, the Yugen Kaisha Law, (YK Law) will be abolished and all Yugen Kaishas (YKs) incorporated under the YK Law will continue their existence as a type of Kabushiki Kaisha (KK) called Tokurei Yugen Kaisha (Special YK). After the effective date of the revisions, investors and shareholders cannot establish new YK/Special YKs.

As is discussed in further detail below, a YK is currently treated as a business entity eligible to elect its entity classification for U.S. federal income tax purposes under the U.S. "check-the-box" regulations (CTB Regulations). A KK is a per se corporation.

In light of the revisions to the corporation laws in Japan and in consideration of the potential adverse consequences to U.S. taxpayers, we request confirmation that Special YKs will be "grandfathered" and continue to be treated as foreign eligible entities under the CTB Regulations.

Current Japan Corporation Laws

There are two forms of corporate entities commonly used by U.S. businesses and investors in Japan: The KK and the YK. The significant difference between the two forms is that only KKs can be listed/publicly traded. In addition, the YK does not have the attributes of continuity of life or free transferability of interest as those concepts are defined under U.S. tax law.

The governance provisions for KKs are contained in the Japanese Commercial Code. The governance provisions for YKs are contained in a separate law (the YK Law).

New Japan Corporation Laws

The "Corporation Law"1 was passed on May 17, 2005 by the House of Representatives and on June 29, 2005 by the House of Councilors. The Corporation Law is expected to become effective sometime between April and June 2006.

The Corporation Law is a comprehensive revision intended to modernize current corporation laws in Japan. The Corporation Law consolidates the laws concerning corporate entities under a single law and abolishes the YK Law. The Corporation Law provides that previously established YKs can continue legal existence as a type of KK referred to as Special YK. Special YKs are required to have the words "Yugen Kaisha" in their company name. Special YKs cannot be listed/publicly traded. Special YKs will continue to lack the attributes of continuity of life and free transferability of interest as those concepts are defined under U.S. tax law.

CTB Regulations -- Current Japan Corporation Laws

The CTB Regulations provide a list of foreign entities that are treated as corporations for U.S. federal income tax purposes (per se corporations). Under the current regulation, the KK entity is a per se corporation.

The YK is a business entity and is not listed as a per se corporation under the current CTB Regulations. Accordingly, it is a foreign eligible entity. The default classification of a YK is a corporation because all its members have limited liability. A timely and properly filed election can be made to treat a YK as a disregarded entity (if a single owner) or partnership.

Many U.S. businesses and investors have selected the YK entity because of its flexibility and have elected to treat the YK as a partnership for U.S. federal income tax purposes.

CTB Regulations -- New Japan Corporation Laws

As noted above, the Special YK will have the words Yugen Kaisha in its name. In addition, it cannot be listed/publicly traded. Further, the Special YK will lack the attributes of continuity of life and free transferability of interest. Accordingly, we believe that all Special YKs that elected treatment as a disregarded entity prior to becoming a Special YK should continue to be treated as foreign eligible entities for CTB Regulation purposes.

From a practical perspective, because Special YKs cannot be incorporated after the effective date of the Japan law change, consideration should be given to "grandfathering" Special YKs. This treatment would be fair and consistent with the treatment of the European Societas Europaea and the grandfathering treatment of the Estonian Aktsiaselts, the Latvian Akciju Sabiedriba, the Lithuanian Akcine Bendroves, the Slovenian Delniska Druzba and the Liechtenstein Aktiengesellschaft (see Notice 2004-68 and T.D. 9197).

If Special YKs are treated as a per se corporations without "grandfathering," then under U.S. Treasury Regulations, treatment could result in the U.S. partners of the YK being unfairly subjected to U.S. federal income taxation even though there is no change in name, corporate organization, corporate attributes or inability to be listed/publicly traded.

Now that the Corporation Law has become law in Japan, U.S. investors and companies currently owning YKs that elected disregarded entity status request confirmation from the IRS by December 2005 that Special YKs will be grandfathered under the CTB Regulations on and after the date the Corporation Law becomes effective (currently expected no later than June 2006). We very much appreciate your attention to this matter and will respond to any questions that you may have.

Sincerely,

 

 

Bruce W. Miller

 

Co-Chair

 

Taxation Committee

 

American Chamber of Commerce in

 

Japan

 

CC: Eric Solomon, Deputy Assistant Secretary for Tax Policy (Acting), Department of the Treasury, Nasir Majid (ACCJ Taxation Committee Co- Chair), Ray Kahn (ACCJ Taxation Committee member), Kemy Monahan (U.S. Embassy, Tokyo)

 

FOOTNOTE

 

 

1 The Law Concerning Coordination, etc. of Related Laws in Connection with the Enforcement of the Corporation Law (the "Coordination Law") was enacted together with the Corporation Law to coordinate the effect on other laws from the enforcement of the Corporation Law. Reference to Corporation Law includes the Coordination Law.

 

END OF FOOTNOTE
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