Income of a foreign company can be included in Japan even without holding a single share. This is caused bythe circumstances of the de facto control relationship,It is.the rule that captures substantive control rather than ownership interests.
The statutory provision is short
Article 66-6(2)(v) of the Act on Special Measures Concerning Taxation.
the circumstances of the de facto control relationship, resident Where a resident or domestic corporation foreign corporation of whichhas a right to claim substantially all residual assets,the relationship between that resident or domestic corporation and the foreign corporation,or another relationship prescribed by Cabinet Orderis what the term means.
The provision ends with “or another relationship prescribed by Cabinet Order.”Rights to residual assets are an example. The substance is in the Cabinet Order.
Two facts specified by Cabinet Order
Article 39-16(1) of the Order for Enforcement of the Act on Special Measures Concerning Taxation.
(i) A resident or similar person has, in relation to a foreign corporation,a right to claim distribution of substantially all residual assets.That is the first fact.
(ii) A resident or similar person has, in relation to a foreign corporation,A contract or other arrangement exists allowing the person to determine substantially all policies on disposal of the corporation's assets,excluding cases where, for that foreign corporation,the fact in the preceding item exists.。）。
Item (ii) is the substantive rule.If a contract or other arrangement permits determination of asset disposal policies, a de facto control relationship exists even without shares.Trusts, silent partnerships, shareholders' agreements, agreements with local nominees:the form is not specified.
Moreover, the opening text refers to “the following factsor other similar facts”being present.The two items are not a closed list.
However, there are two exclusions
Overlooking them makes the scope too broad.The opening text of the Cabinet Order contains two parenthetical exclusions.
Exclusion 1: profits flow to outsiders
(Where, of the profits arising from the foreign corporation's business,substantially allare to be distributed as dividends of surplus or other economic benefitsto persons other than the resident or similar person, including persons specially related to them,in the form ofmoney or other assets, that case is excluded.)。）
If profits do not remain with the resident or similar person, the relationship is not treated as de facto control.The idea is not to make someone subject to inclusion merely for control if they do not receive the returns. Because specially related persons are included, flows to relatives or related corporations are not counted as going to outsiders.
Exclusion 2: already captured by ownership exceeding 50%
(Where, applying paragraph (2)(i) of the Article as if the relationship did not exist,limited to subitem (a),residents, domestic corporations, and the persons specified in that subitem asspecially related Non-residenthave with the foreign corporation any of the percentages listed in (a)(1) through (3)exceeding fifty percent,the relationship between the resident or similar person and the foreign corporation is excluded.)are excluded.。）
If the percentage exceeds 50% even without counting de facto control, the relationship is not classified as de facto control.foreign related companies Subitem (a), the over-50% test, suffices for the foreign related company determination, so subitem (b) is not layered on top.
Both exclusions appear in parentheses in the opening text of the Cabinet Order.Reading only the numbered items misses them.
Four effects
A de facto control relationship affects four areas.
| Situation | Effect | Provision |
|---|---|---|
| Person subject to inclusion | A domestic corporation with a de facto control relationship is subject to inclusion on that basis alone(even with no ownership interest; there is no need to calculate a 10% holding) | Article 66-6 of the Special Measures Act,paragraph (1)(ii) |
| Foreign related company determination | A foreign corporation under de facto control qualifies on that basis aloneforeign related companiesas a controlled foreign corporation. | Article 66-6(2)(i)(b) of the Special Measures Act |
| The 10% test | Where a de facto control relationship exists,the percentages of shares and similar interests, voting rights, and distribution rights are all treated as zero. | Article 66-6(1)(i)(a), (b), and (c) of the Special Measures Act |
| Calculation of the inclusion amount | For a controlled foreign corporation, the inclusion ratio taking account of distribution rights and similar rights isone hundred percent. | Article 39-14(2)(i)(b) of the Special Measures Order |
The first row is the core of the system.
(ii) With the foreign related company,a domestic corporation having a de facto control relationship
is subject to inclusion, with no reference to ownership interests.De facto control alone makes it subject to inclusion.
The fourth row then has an impact.
(b) ... Where the foreign related company, in relation to the domestic corporation,is a controlled foreign corporation, one hundred percent.
even if the ownership interest is zero, the amount subject to application. the entire relevant amount is included.The structure treats all of it as yours if you control it.
Read the third row together with those two. Even where shares are held, de facto control causes the ownership percentage to be treated as zero; the taxpayer determination shifts to item (ii), and the inclusion ratio becomes 100%.The structure channels the case into either the ownership route or the control route.The same zero treatment also appears in the indirect ownership calculation, in the parenthesis concerning ownership percentage in Article 39-14(3)(i) of the Special Measures Order.
De facto control is also incorporated into paragraph (1)(iii) and (iv).Item (iii) concerns the 10% test through a foreign related company under de facto control; item (iv) includes persons with de facto control within the family shareholder group.
Scope of “special relationships”
Article 39-16(2) of the Special Measures Order defines this.It covers both individuals and corporations.
For individuals under item (i): (a)relatives;(b)a person in a relationship equivalent in substance to marriage;(c)employees or employers;(d)a person other than those in (a) through (c)who maintains their livelihood through money or other assets received from that person;a financially dependent person;(e)relatives of persons in (b) through (d) who share a livelihood with themIt is.
Subitems (d) and (e) contain limitations.Subitem (d) excludes persons listed in (a) through (c),Persons other than those individualswhile (e) coverspersons listed in (b) through (d)and relatives sharing a livelihood with them,namely those persons'relatives. Subitem (e) does not refer back to (a), relatives, nor does it cover any relative whatsoever.
The corporate side has three categories.
| Item | Relationship |
|---|---|
| No. 2 | Where one personcontrols another corporation,that other corporation,including chains of control.The opening text excludesrelationships covered by the following item and item (iv),so there is no overlap with items (iii) and (iv). “One person” also includespersons having the relationship in the preceding item with that person,so control is assessed together with the individual's specially related persons. |
| Number 3 | Where either of two corporations directly or indirectly holds the other'smore than 50% of that domestic corporation's issued shares or similar interests:specified ownership percentage,a parent-subsidiary relationship） |
| Item (iv) | Where two corporations have their issued shares and similar interests held bythe same person,（which, for an individual, includes that individual and individuals specially related under the Cabinet Order under Article 2(x) of the Corporation Tax Act,in each case to the extent ofmore than 50%,directly or indirectly,a sister-company relationship,excluding cases under item (iii) |
These cannot all be described simply as a chain of control.Items (iii) and (iv) useShare ownershipan ownership percentage test rather than a control test.
The meaning of “control” in item (ii) follows Article 4(3) of the Order for Enforcement of the Corporation Tax Act, applied under Article 39-16(3) of the Special Measures Order. The method for counting “direct or indirect” holdings in items (iii) and (iv) followsthe application mutatis mutandis of Article 39-12(2) and (3) of the Special Measures Orderunder paragraph (4), replacing “fifty percent or more” withexceeding fifty percent,the specified “more than fifty percent” wording.
“Special relationships” matter for exclusion 1.If profits are distributed to relatives or related corporations, this is not a distribution to “other persons.”
Points that require care in practice
- We operate a local company without owning shares.Check whether item (ii) applies: a contract or other arrangement allowing determination of substantially all asset disposal policies.
- We use nominee shareholding.The determination depends on the arrangement's substance, not its form.
- We give most profits to a local partner.Consider exclusion 1, but the requirement is “substantially all.”
- We already hold 60%.Under exclusion 2, the test is under (a), not (b).
- We use a trust.Article 66-6(16) contains provisions concerning trustees of foreign trusts.
- What about individuals?Article 40-4 of the Special Measures Act contains individual rules, which also include de facto control relationships.
De facto control does not appear merely from an ownership chart.This category cannot be determined without reviewing contracts, arrangements, and the actual decision-making process. If you have an overseas entity or trust in which you hold no equity, or use local nominees, consult us with the complete contracts.
Legal basis
- Article 66-6(2)(v) of the Act on Special Measures Concerning Taxation (De Facto Control Relationships), and paragraph (2)(i)(b)
- Article 66-6(1)(i)(a), (b), and (c) of the Act on Special Measures Concerning Taxation,paragraph (1)(ii)and paragraph (1)(iii) and (iv)
- Article 66-6(16) of the Act on Special Measures Concerning Taxation (Foreign Trusts)
- Article 39-16(1) and (2) of the Order for Enforcement of the Act on Special Measures Concerning Taxation (Determination of De Facto Control Relationships)
- Article 39-14(2)(i)(a) and (b) of the Order for Enforcement of the Act on Special Measures Concerning Taxation (Calculation of Taxable Amounts: Inclusion Ratio Taking Account of Distribution Rights and Similar Rights, and Controlled Foreign Corporations), and paragraph (3)(i)
- Article 4(3) of the Order for Enforcement of the Corporation Tax Act, applied under Article 39-16(3) of the Special Measures Order
- Article 39-12(2) and (3) of the Order for Enforcement of the Act on Special Measures Concerning Taxation, applied under Article 39-16(4)
The individual rules Controlled Foreign Company (CFC) rules under Article 40-4 of the Special Measures Act and detailed treatment of foreign trusts are outside this article. Individual determinations require review of contracts and other arrangements.
This article is a general explanation based on laws and regulations as of September 6, 2026. Please consult us about your individual circumstances before taking action.
We take care in preparing this information. If you notice an error, please let us know through our contact page.
If You Would Like Advice on Your Own Circumstances
We advise on international tax, including overseas relocation, foreign corporations, cross-border inheritance, and foreign tax credits.
International Tax ConsultationSee consultation topics, fees, and how to book.