A tax haven: The rules attribute income of foreign subsidiaries and similar entities to their Japanese shareholders. The test is not simply the subsidiary's country, butwhether it has substance, the nature of its income, and its actual If the tax burden ratio level. Even outside low-tax jurisdictions, preferential regimes producing a low effective burden can bring a company within scope. Article 66-6 governs corporate shareholders and Article 40-4 individual shareholders. The system is commonly called foreign subsidiary income attribution or CFC rules; “tax haven” does not appear in the statute.

Who Is Covered?

Article 66-6, Paragraph (1), Defines Four Categories of Covered Domestic Corporations.

• foreign related companies A domestic corporation holding, directly and indirectly in aggregate, at least 10% of shares, voting rights, or distribution claims in such a company (item (i))
• With the foreign related company, the circumstances of the de facto control relationship, A domestic corporation with such a relationship (item (ii))
• Through a foreign related company under de facto control,foreign related companiesa domestic corporation holding at least 10% of another foreign related company on the basis described in 1 above (item (iii))
• A domestic corporation in a closely held shareholder group holding at least 10% on the basis described in 1 above (item (iv))

What Is Taxed?

specified foreign subsidiary company Where a foreign related company classified as specified or subject foreign related company has the amount subject to application., an amount calculated with regard to direct and indirect holdings, distribution rights, and de facto control—the taxable attributable amount—is deemed revenue and included in gross income (paragraph (1)). Inclusion is in the domestic corporation's fiscal year containing the date four months after the day following the foreign company's year-end. The applicable income amount starts from financial-statement income, is computed under prescribed standards based on the Corporation Tax Act, and is adjusted for losses from fiscal years beginning within the preceding seven years and other items (paragraph (2), item (iv)).

Foreign-company category

A Foreign Related Company Means resident one whose issued shares, voting rights, or similar interests are more than 50% held by residents, domestic corporations, and other relevant persons, foreign corporation or a foreign corporation under their de facto control (paragraph (2), item (i)).

Among those foreign related companies,specified foreign subsidiary companycomprises four types (item (ii)).

• (a) Companies meeting none of conditions (1)–(5), including having fixed facilities necessary for the principal business and independently managing, controlling, and operating it in the head-office country,none of which are met(so-called paper companies)
• (b) Companies whose ratio of passive income and similar amounts to total assets exceeds the prescribed level (cash boxes)
• (c) Companies meeting all the specified insurance requirements concerning premiums from unrelated and similar persons
• (d) Companies headquartered in countries or regions designated by the Minister of Finance as providing markedly inadequate cooperation in tax information exchange

applicable foreign affiliated companymust, The economic activity tests: The requirements under item (iii)(a)–(c)Fails at least one requirementare not all met by these foreign related companies, excluding specified foreign related companies. Failing any one of the four tests is sufficient. See “What Are the Economic Activity Tests?” for details.

Both specified and subject foreign related companies are categories that trigger attribution. A company with substance meeting every economic activity test falls into neither category and is not subject tocompany-levelincome attribution (partial CFC inclusion. may still apply).

Exemptions

Attribution under paragraph (1) does not apply where the tax burden ratio reaches the specified level (paragraph (7)). For specified foreign related companies it is27% or more(item (i)); for subject foreign related companies it is20% or more(item (ii)).

Other foreign related companies, called partially subject foreign related companies, can still be subject to separate partial attribution of passive income such as dividends, interest, and royalties (specified income), under paragraph (8) onward.

There Is Also an Individual Version: Article 40-4

Article 40-4 provides a similar system for residents. The four taxpayer categories and exemption ratios of 27% and 20% match the corporate version. The nature of attribution differs: the taxable attributable amount is treated asrevenue from miscellaneous incomeand included in gross receipts for the year.

Practical Points

Failure to Provide Evidence Pushes the Presumption Toward Attribution. National Tax Agency or local tax office staff may request documents within a specified period concerning paper-company status (paragraph (3)) and compliance with economic activity tests (paragraph (4)). If documents are not provided in time, the company ispresumedto be a specified foreign related company or to fail the economic activity tests and thus be a subject foreign related company. Keep supporting evidence ready for prompt submission.

Another Point: Even Where Attribution Is Exempted,tax return attachment requirements remain. Subject and partially subject foreign related companies with a tax burden ratio below 20%, and specified foreign related companies below 27%, require attachment of balance sheets, profit and loss statements, and other prescribed documents to the final return (paragraph (14)).

Legal basis

• Article 66-6(1) of the Act on Special Measures Concerning Taxation (main text and items (i)–(iv))
• Paragraph (2): item (i), Foreign Related Companies; item (ii)(a)–(d), Specified Foreign Related Companies; item (iii), Subject Foreign Related Companies; item (iv), Applicable Income Amount
• Paragraphs (3) and (4): Document Requests and Presumptions
• Paragraph (7), Items (i) and (ii): Exemption Ratios of 27% and 20%
• Paragraph (8): Partial Attribution (Overview Only)
• Paragraph (14), Items (i)–(iii): Documents Attached to Final Tax Returns
• Article 40-4(1) of the same Act (main text and items (i)–(iv)) and paragraph (7), items (i) and (ii)