Placing a company that owns Japanese real estate under an overseas holding company, and then having an overseas corporation sell the shares of that holding company: because what was sold are "foreign shares," is it unrelated to Japanese taxes?

This question cannot be answered by the location of the issuing company alone. It is necessary to check who is selling, whose shares are being sold, whether the real estate is held directly or through a subsidiary, and what the tax treaty between Japan and the seller's country of residence stipulates.

This time, we will compare the scenario where a foreign corporation sells stocks related to Japanese real estate, using the Japan-Singapore Tax Treaty and the Japan-Hong Kong Tax Agreement.

Selling shares, not the building. Even so, the relationship with real estate remains an issue.

The legal subject of the sale differs between selling land or buildings and selling the shares of the company that owns that real estate. However, if the majority of the share value derives from the real estate, it economically involves transferring the value of the real estate.

There are provisions in tax treaties that allow the country where the real estate is located to tax capital gains on such shares. In practice, these are called "real estate-rich shares" or similar terms. While related to the concept of shares in "real estate-related corporations" under domestic law, the requirements for the two do not always match.

It is not determined simply by the industry name of a real estate company, and operating companies also need to consider it depending on the composition of their held assets.

First, separate direct ownership from indirect ownership.

Below, the seller is either Singaporean or Hong Kongcorporation that is a resident under the tax treatyLet's assume. We will compare which of the following two forms Japanese real estate is held in.

A: Selling shares in a company that directly holds Japanese real estate.

The target company for sale owns the land and buildings itself.

B: Sell the shares of an overseas holding company that has a Japanese real estate holding company as a subsidiary.

The assets directly held by the holding company to be sold are shares in subsidiaries. The real estate is owned by the company beneath it.

The structure of B isSeller → Target holding company for sale → Japanese real estate holding company → Japanese real estateThis is how it works. It is important not to confuse scenario A, where the seller sells shares in a Japanese real estate holding company, with scenario B, where the seller sells shares in a holding company.

Generalized explanatory diagram. The company with the green border is the target for sale. This is not an organizational chart for a specific project.

There is a difference in the wording regarding "indirect holding" between the Japan-Singapore Tax Treaty and the Japan-Hong Kong Tax Agreement.

Article 13(4)(a) of the Japan-Singapore Tax Treaty covers shares, etc., of corporations whose primary assets are real estate. Article 13(2) of the Japan-Hong Kong Tax Treaty covers shares and interests in corporations and other entities where 50% or more of the asset value consists directly or indirectly of real estate.

The table is a comparison with Japan as the country where the real estate is located. We will separately confirm that the treaty allows taxation by Japan and that taxation is actually levied based on Japanese domestic law. Article 13 of the US-Japan Treaty／Article 13 of the Japan-Hong Kong Agreement

This difference in wording is important when considering the structure of B. However, it cannot be generalized that "since the word 'indirect' does not appear in the Japan-Singapore Tax Treaty, inserting a holding company in Singapore will always result in tax exemption." A conclusion will be reached by examining the interpretation of the treaty's terms, other provisions, and the actual holding structure.

The applicable treaty is not determined solely by the location of the target company.

It is not determined that the Singapore-Japan Tax Treaty applies simply because shares of a Singapore corporation are sold, nor that the Japan-Hong Kong Tax Agreement applies simply because shares of a Hong Kong corporation are sold. First, it must be confirmed which tax treaty's residency requirements the seller satisfies. Regarding corporations established in Hong Kong, judgment should not be based solely on the place of incorporation; it is necessary to verify factors such as the place of effective management as stipulated in Article 4 of the Japan-Hong Kong Tax Agreement. Consolidated Reference Document for the Japan-Hong Kong Agreement - Article 4

Note that the starting point of this article is different when an individual resident of Japan sells shares they own. Except for non-permanent residents, if someone is a resident of Japan under tax treaties, capital gains from the transfer of foreign shares are also taxed in Japan in principle. In addition, for transactions involving real estate located in Singapore or Hong Kong, the taxing rights of the jurisdictions where the properties are located must be considered separately. National Tax Agency: When selling stocks or other assets overseas

Reading Japanese domestic law and treaties in two stages

When a foreign corporation is the seller, we first check whether it falls under the taxable scope of Japanese domestic law, and then verify whether the tax treaty restricts Japan's taxation.

Article 178 of the Corporation Tax Act Enforcement Order contains a mechanism for determining inclusion of shares of corporations holding Japanese real estate, as well as shares of corporations holding those corporations. The determination of real estate-related corporations involves the asset composition for the 365 days prior to the transfer, and there are separate requirements regarding the transferor's holding ratio. The fact that the shares are issued by a foreign corporation does not mean that an examination of domestic law becomes unnecessary. Article 178 of the Cabinet Order on Corporate Tax

On the other hand, it cannot be read that, because domestic law includes indirect holding, Japan is naturally entitled to tax to the same extent under the treaty as well. The key is to distinguish between the requirements of domestic law and the requirements of the treaty one by one.

Do not limit your evaluation to real estate clauses alone.

In addition to real estate-related shares, the Japan-Singapore Tax Treaty contains provisions that make the holding and transfer of shares in a corporation resident in the other country subject to certain ownership thresholds and conditions. Even if a transfer does not fall under the real estate article—such as the transfer of property related to a permanent establishment in Japan—it cannot be concluded that it is exempt from taxation in Japan simply on that basis. Article 13 of the US-Japan Treaty

Also, if a contribution in kind or a corporate split is executed before the sale, the taxation of the reorganization itself will be considered separately. We will look only at the final stock sale while making sure not to overlook any asset transfers prior to it.

That does not mean both treaties had the exact same provisions under the MLI.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) is a mechanism for modifying existing tax treaties. However, not all provisions apply uniformly to every bilateral treaty.

According to the Ministry of Finance's application list, Article 9 of the MLI regarding real estate-rich companies is not included as an applicable provision for either Japan-Singapore or Japan-Hong Kong tax treaties. It cannot be treated as if the 365-day test under the MLI has been automatically added to both treaties. This is a separate issue from the 365-day test under Japanese domestic law.

Meanwhile, the Principal Purpose Test (PPT) under Article 7, paragraph 1 of the MLI applies to both. If it is reasonable to conclude that obtaining a treaty benefit was one of the principal purposes of any arrangement or transaction, the benefit may be denied, unless it is established that granting the benefit is in accordance with the object and purpose of the relevant provisions. It is neither a provision where benefits are automatically denied simply because there is a tax purpose, nor is it a provision where the application is invariably avoided simply because there is a business purpose. Ministry of Finance: Application of MLI between Japan and Singapore／Application of the MLI between Japan and Hong Kong

What to prepare before selling

In addition to the organization chart, the following information is useful for examining this issue.

• the treaty residence of the seller and the identification of the shares to be sold
• Trends in the composition and valuation of assets held directly by companies versus those held through subsidiaries
• Stock listing status, shareholder composition, and changes in shareholding ratio
• Relationship between Japan business base and target shares
• Background of pre-sale reorganization, business purpose, and timing of decision-making

The point of comparing the treaty provisions of Singapore and Hong Kong is to clarify the requirements that need to be examined. Which shares, by whom, when, and under what circumstances are being sold? By identifying these points, we apply domestic law and the treaties respectively.

This is a general explanation of key issues and does not guarantee tax exemption for specific reorganizations or sales. Taxation in the seller's jurisdiction of residence requires separate consideration. Document review date: September 21, 2026. For past transactions, it is also necessary to verify the laws in effect at the time and the effective start date of the MLI.