Statutory definition

Some tax provisions say “country or territory,” rather than “foreign country” or “country.” The first question is whether the term itself is defined anywhere.

Searching the original texts of the Corporation Tax Act, Income Tax Act, Act on Special Measures Concerning Taxation, and Act on Special Provisions for the Implementation of Tax Treaties for this phrase, and reading every provision returned, revealed no provision defining the term itself in the form “country or territory means...” Instead, the phrase is used as a component in definitions of other terms.

Article 82 of the Corporation Tax Act is a typical example. It defines “country of location” as follows:

The country or territory specified below for each of the following categories (or, where there are two or more such countries or territories, the country or territory prescribed by Cabinet Order).

The term being defined is “country of location,” not “country or territory.” The latter serves as a component of the defined term.

Overview

“Country or Territory” as a Component of “Country of Location”

Article 82 of the Corporation Tax Act brings together definitions relating to corporation tax on the international minimum tax amount for each fiscal year covered. Both “country of location” and “country of incorporation” are defined using “country or territory.” One category of corporate group, etc. is described as follows:

A company, etc. (excluding one belonging to a corporate group listed in (a)) whose permanent establishment, etc. is located in a country or territory other than the country of location of that company, etc.

The comparison is between the country of location of the company, etc. and that of its permanent establishment, etc.; both are considered in units of “countries or territories.”The unit for calculating the effective tax rate is a “country or territory,” rather than simply a “country,”as the statutory wording itself shows.

“Country of Head Office Location” in the CFC Rules

Article 66-6 of the Act on Special Measures Concerning Taxation (What Are the Controlled Foreign Company (CFC) Rules?) repeatedly uses “country of head office location” in relation to foreign related companies. Its definition appears in parentheses and reads:“the country or territory in which its head office or principal office is located.”Here, too, the defined term is “country of head office location,” not “country or territory.”

One category of specified foreign subsidiary company provided for in that article is described as follows:

A foreign related company with its head office or principal office in a country or territory designated by the Minister of Finance as providing markedly insufficient cooperation with international initiatives for the exchange of tax information.

This sentence confirms that the designation can cover territories as well as countries.

Exclusion of Dividends from Foreign Subsidiaries from Gross Income

Article 23-2 of the Corporation Tax Act (What Is the Foreign Subsidiary Dividend Exemption?) defines amounts excluded from the gross-income exclusion (What Are Deductible Dividends?) as follows:

The amount of a dividend of surplus, etc. where all or part of that dividend is treated, under the laws of the country or territory in which the foreign subsidiary has its head office or principal office, as deductible in calculating that subsidiary’s income.

The determining factor is the treatment under the “laws” of that country or territory. The wording is not limited to national laws.

“Country or Territory” in Individual Taxation

In the Income Tax Act, the phrase appears in Article 95-2. The foreign income taxes covered by that provision are limited as follows:

Limited to taxes imposed in a country or territory because the individual has a domicile there, has maintained a residence there for longer than a specified period, or has nationality or an equivalent status there.

“Country or territory” describes the taxing jurisdiction, alongside the individual’s connecting factors: domicile, residence, or nationality.

Points that require care in practice

Reading across these provisions shows that similar terms—“foreign country,” “outside Japan,” “country or territory,” “contracting state or contracting party,” and “treaty partner, etc.”—are used differently from article to article. Even in provisions concerning the same foreign tax credit, Article 69 of the Corporation Tax Act uses “foreign country” and “outside Japan,” but not “country or territory,” whereas Article 95-2 of the Income Tax Act uses “country or territory.” The terminology differs by provision. Relying on memory or analogy risks confusing the terms; the only reliable approach is to consult the provision in question and read the exact words it uses.

Legal basis

• Corporation Tax Act, Article 82, paragraph 1, item 2(b) and item 7 (Definitions)
• Corporation Tax Act, Article 23-2, paragraph 2, item 1 (Exclusion of Dividends from Foreign Subsidiaries from Gross Income)
• Corporation Tax Act, Article 69, paragraph 4, item 15 (Foreign Tax Credit)
• Act on Special Measures Concerning Taxation, Article 66-6, paragraph 2, item 2(a) and item 2(d)
• Income Tax Act, Article 95-2, paragraph 1 (Special Provisions for Foreign Tax Credits Relating to the Special Treatment of Capital Gains, etc. upon Departure from Japan)
• Act on Special Provisions of the Income Tax Act, Corporation Tax Act and Local Tax Act Incidental to the Implementation of Tax Treaties, etc., Article 2, paragraph 1, item 3 (Definitions)