Statutory definition

“In this Act, ‘special purpose company’ means an association established under Section 2 of Chapter 2 of the following Part.”

A special purpose company (SPC) is an association established under the Act on Securitization of Assets. The Act calls “asset securitization” the series of acts in which an SPC acquires assets using funds raised through asset-backed securities or specified borrowings, and uses proceeds from managing and disposing of those assets to discharge obligations relating to specified bonds, specified promissory notes, specified borrowings or beneficiary certificates, or to pay dividends, acquire preferred equity for cancellation, or distribute residual assets.

Overview

What are an SPC and an asset securitization plan?

“In this Act, ‘asset securitization plan’ means a plan specifying basic matters concerning asset securitization by a special purpose company.”

The statute provides the following regarding required contents:

“An asset securitization plan must state or record the following matters.”

The required matters are:

• Matters concerning the plan period
• Matters concerning asset-backed securities and specified borrowings, including preferred equity, specified bonds and specified borrowings
• Details of specified assets, acquisition timing and transferors
• Methods for managing and disposing of specified assets
• Borrowing of funds other than specified borrowings
• Other matters prescribed by Cabinet Office Order

What requirements allow deduction of profit dividends?

Article 67-14 of the Act on Special Measures Concerning Taxation provides as follows for profit dividends paid by qualifying SPCs:

“...Shall be included in deductible expenses in calculating income for the applicable business year. However, where the profit dividend exceeds the amount prescribed by Cabinet Order as income for that year, the deductible amount shall be limited to that prescribed amount.”

Deductibility requires both the SPC itself and the business year for which treatment is sought to meet the relevant requirements.

Requirements for the SPC

The statute requires that it “...be entered in the register of special purpose companies.” It also requires meeting “one of the following conditions,” although their details are outside the provisions referenced in this article. Issued preferred equity and specified equity must fall within the Cabinet Order's category of offerings conducted mainly in Japan, and other requirements are also prescribed by Cabinet Order.

Requirements for the business year

The company must conduct asset securitization and incidental business in accordance with its plan and must not have conducted other business. Thus, business outside the plan is excluded. Specified assets must be placed in trust or their management and disposal entrusted to another person. At year-end, the company must not be a closely held company of the type prescribed by Cabinet Order, except in specified cases, and must not be an unlimited-liability member. Profit dividend payments for the year must exceed a specified proportion of distributable profits calculated under Cabinet Order, with a prescribed deduction where specified bonds are issued; consult the underlying provision for the percentage. Other Cabinet Order requirements also apply.

The special treatment applies only where the final return or other prescribed return states the deduction, includes a calculation schedule, and the company retains documents establishing compliance with the issuance and domestic-offering requirements.

How is withholding adjusted where foreign corporation tax is involved?

The withholding obligation itself is in the Income Tax Act. Article 9-6 of the Act on Special Measures Concerning Taxation (Special withholding and other rules for SPC profit dividends) provides an exception:

“Foreign corporation tax paid by a special purpose company ... shall, as prescribed by Cabinet Order, be credited against income tax on its profit dividends ..., up to the amount of that income tax.”

Where an SPC receiving this treatment pays dividends to a resident, Non-resident, a domestic corporation or foreign corporation, the dividend amount and domestic source income amount are, notwithstanding the Income Tax Act, increased by the foreign corporation tax credited under this Article.

Further substitution rules apply to residents and nonresidents with permanent establishments, limited for the latter to receipts qualifying as the specified domestic-source income, and to domestic corporations and foreign corporations with permanent establishments, likewise limited for the latter to specified domestic-source income. For withholding on payments to nonresidents and foreign corporations, see Payment to non-residents and foreign corporations and withholding of taxes (20.42%) will handle.

Points that require care in practice

• The distribution percentage relative to distributable profits and criteria for exclusion from closely held company status require checking the Cabinet Order.
• The scope of business conducted under the securitization plan must be checked against the SPC's actual plan.
• Withholding amounts and treaty treatment for dividends paid to nonresidents and foreign corporations require checking Article 9-6 together with the Income Tax Act's relevant definitions.

Legal basis

• Act on Securitization of Assets, Article 2(3) (Definitions) / Quoted wording: “In this Act, ‘special purpose company’ means an association established under Section 2 of Chapter 2 of the following Part.”
• Act on Securitization of Assets, Article 2(2) (Definitions) / Quoted wording: “In this Act, ‘asset securitization’ means a series of acts in which an SPC acquires assets using funds raised through issuance of asset-backed securities or specified borrowings, or a trust company ... bank conducting trust business ... or other financial institution accepts assets in trust and issues beneficiary certificates, and uses proceeds from management and disposal of those assets to perform the acts specified in the following items for obligations or equity relating to the asset-backed securities, specified borrowings and beneficiary certificates listed therein.”
• Act on Securitization of Assets, Article 2(4) (Definitions) / Quoted wording: “In this Act, ‘asset securitization plan’ means a plan specifying basic matters concerning asset securitization by a special purpose company.”
• Act on Securitization of Assets, Article 5(1), introductory wording (Asset securitization plans) / Quoted wording: “An asset securitization plan must state or record the following matters.”
• Act on Securitization of Assets, Article 5(1)(i) (Asset securitization plans) / Quoted wording: “The plan period and matters concerning that period prescribed by Cabinet Office Order.”
• Act on Securitization of Assets, Article 5(1)(ii), introductory wording (Asset securitization plans) / Quoted wording: “The following matters concerning asset-backed securities and specified borrowings.”
• Act on Securitization of Assets, Article 5(1)(iii) (Asset securitization plans) / Quoted wording: “Details of specified assets, acquisition timing, transferors and other matters concerning specified assets prescribed by Cabinet Office Order.”
• Act on Securitization of Assets, Article 5(1)(iv) (Asset securitization plans) / Quoted wording: “Methods of managing and disposing of specified assets, trustees of trusts established to conduct such management and disposal, and other matters concerning management and disposal prescribed by Cabinet Office Order.”
• Act on Securitization of Assets, Article 5(1)(v) (Asset securitization plans) / Quoted wording: “Matters concerning borrowing of funds, excluding specified borrowings, prescribed by Cabinet Office Order.”
• Act on Securitization of Assets, Article 5(1)(vi) (Asset securitization plans) / Quoted wording: “Other matters prescribed by Cabinet Office Order.”
• Act on Special Measures Concerning Taxation, Article 67-14(1), introductory wording (Special taxation of SPCs) / Quoted wording: “Profit dividends (including cash distributions under Article 115(1) of the Act on Securitization of Assets; hereinafter the same in this paragraph) paid by an SPC under Article 2(3) of that Act (hereinafter ‘SPC’ in this Article) meeting the requirements in item (i), including the excess where cash delivered to investors upon events listed in Corporation Tax Act Article 24(1)(iv) through (vi) exceeds the amount prescribed by Cabinet Order as the portion of the SPC's capital amount under Article 2(xvi) corresponding to the equity giving rise to delivery, relating to a business year meeting item (ii)'s requirements (hereinafter ‘applicable business year’), shall be included in deductible expenses for that year. However, if the dividend amount exceeds the amount prescribed by Cabinet Order as income for that year, the deduction is limited to that amount.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(i)(a) (Special taxation of SPCs) / Quoted wording: “It is entered in the SPC register under Article 8(1) of the Act on Securitization of Assets.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(i)(b) (Special taxation of SPCs) / Quoted wording: “It satisfies any of the following.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(i)(c) (Special taxation of SPCs) / Quoted wording: “Its offerings of issued preferred equity and qualifying specified equity (specified equity under Article 2(6) of the Act on Securitization of Assets relating to a plan under Article 2(4) that omits matters prescribed by Ministry of Finance Order concerning rights listed in Article 27(2) of specified members under Article 2(5); hereinafter the same in this item) (for qualifying specified equity, allotments or offerings under Article 17(1)(i) or Article 36(1)) qualify as conducted mainly in Japan as prescribed by Cabinet Order.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(i)(d) (Special taxation of SPCs) / Quoted wording: “Other requirements prescribed by Cabinet Order.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(ii)(a) (Special taxation of SPCs) / Quoted wording: “It conducts asset securitization business and incidental business under Article 195(1) of the Act on Securitization of Assets in accordance with its asset securitization plan.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(ii)(b) (Special taxation of SPCs) / Quoted wording: “It has not conducted other business prescribed in Article 195(1) of the Act on Securitization of Assets.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(ii)(c) (Special taxation of SPCs) / Quoted wording: “Specified assets under Article 200(1) of the Act on Securitization of Assets are placed in trust, or management and disposal of specified assets limited to those listed in paragraph (2) of that Article are entrusted to another person.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(ii)(d) (Special taxation of SPCs) / Quoted wording: “At the business year's end, it is not a closely held company under Corporation Tax Act Article 2(x) of the kind prescribed by Cabinet Order, excluding those meeting (b)(1) or (2) of the preceding item.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(ii)(e) (Special taxation of SPCs) / Quoted wording: “Profit dividends paid for the business year exceed 90% of the amount prescribed by Cabinet Order as distributable profits for that year (where the SPC has issued specified bonds, that amount less an amount prescribed by Cabinet Order).”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(ii)(f) (Special taxation of SPCs) / Quoted wording: “It is not an unlimited-liability member prescribed in Article 195(2) of the Act on Securitization of Assets.”
• Act on Special Measures Concerning Taxation, Article 67-14(1)(ii)(g) (Special taxation of SPCs) / Quoted wording: “Other requirements prescribed by Cabinet Order.”
• Act on Special Measures Concerning Taxation, Article 67-14(4) (Special taxation of SPCs) / Quoted wording: “Corporation Tax Act Article 23(1) shall not apply to profit dividends received by a corporation from an SPC.”
• Act on Special Measures Concerning Taxation, Article 67-14(6) (Special taxation of SPCs) / Quoted wording: “Paragraph (1) applies only where the final return or other prescribed return for the business year for which application is sought states the deduction under that paragraph, includes a schedule calculating the deductible amount, and documents demonstrating satisfaction of paragraph (1)(i)(b) and (c) are retained.”
• Act on Special Measures Concerning Taxation, Article 9-6(1) (Special withholding and other rules for SPC profit dividends) / Quoted wording: “Foreign corporation tax paid by an SPC (meaning an SPC prescribed in Article 2(3) of the Act on Securitization of Assets; hereinafter the same in this Article) (meaning creditable foreign corporation tax under Corporation Tax Act Article 69(1); hereinafter the same through Article 9-6-4) shall, as prescribed by Cabinet Order, be credited against income tax on its profit dividends (meaning dividends under Income Tax Act Article 24(1); hereinafter the same in this Article), up to the amount of that income tax.”
• Act on Special Measures Concerning Taxation, Article 9-6(2) (Special withholding and other rules for SPC profit dividends) / Quoted wording: “Where an SPC receiving treatment under the preceding paragraph pays profit dividends to a resident, nonresident, domestic corporation or foreign corporation, the dividend amounts under Income Tax Act Article 182(ii), domestic-source income under Article 213(1)(i), or dividend amounts under Article 213(2)(ii) shall, notwithstanding those provisions, equal those amounts plus the credit under the preceding paragraph.”
• Act on Special Measures Concerning Taxation, Article 9-6(3) (Special withholding and other rules for SPC profit dividends) / Quoted wording: “Where a resident or nonresident with a permanent establishment receives an SPC profit dividend (for the nonresident, limited to domestic-source income under Income Tax Act Article 164(1)(i)(a)) and there is an SPC distribution-adjusted foreign tax equivalent amount (the amount prescribed by Cabinet Order corresponding to the recipient's dividend portion of foreign corporation tax paid by the SPC and credited under paragraph (1)), in applying the Income Tax Act, in Articles 93(1) and 165-5-3(1), ‘distribution of proceeds’ shall be read as ‘distribution of proceeds or profit dividends under Article 9-6(1) of the Act on Special Measures Concerning Taxation (Special withholding and other rules for SPC profit dividends) from an SPC under that paragraph’; ‘that paragraph’ as ‘Article 176(3)’; and ‘amount (‘ as ‘amount and the SPC distribution-adjusted foreign tax equivalent amount under Article 9-6(3) of that Act (‘.”
• Act on Special Measures Concerning Taxation, Article 9-6(4) (Special withholding and other rules for SPC profit dividends) / Quoted wording: “Where a domestic corporation or foreign corporation with a permanent establishment receives an SPC profit dividend (for the foreign corporation, limited to domestic-source income under Corporation Tax Act Article 141(i)(a)) and there is an SPC distribution-adjusted foreign tax equivalent amount (the amount prescribed by Cabinet Order corresponding to the recipient's dividend portion of foreign corporation tax paid by the SPC and credited under paragraph (1)), in applying the Corporation Tax Act and Local Corporation Tax Act, in Corporation Tax Act Articles 69-2(1) and 144-2-2(1), ‘distribution of proceeds’ shall be read as ‘distribution of proceeds or an SPC's profit dividends under Article 9-6(1) of the Act on Special Measures Concerning Taxation (Special withholding and other rules for SPC profit dividends)’; ‘that paragraph or that Act’ as ‘Income Tax Act Article 176(3) or’; and ‘amount (‘ as ‘amount and the SPC distribution-adjusted foreign tax equivalent amount under Article 9-6(4) of the Act on Special Measures Concerning Taxation (‘.”