For dividends received from a foreign subsidiary meeting specified requirements,95% is excluded from gross income(Article 23-2, paragraph (1), of the Corporation Tax Act). The remaining 5% is deducted from the exclusion as an expense-equivalent amount and therefore remains taxable.

This Is the First Provision to Check When Planning to Repatriate an Overseas Subsidiary's Profits.

Statutory definition

Article 23-2, paragraph (1), of the Corporation Tax Act.

Where a domestic corporation receives an amount listed in paragraph (1), item (i), of the preceding Article (referred to as dividends and similar distributions) from a foreign subsidiary, meaning a foreign corporation in which its shares or interests representat least twenty-five percent,of the total issued shares or interests (excluding treasury shares or interests), and which satisfies other requirements prescribed by Cabinet Order, foreign corporation… the amount of those dividends and similar distributions, less the relatedthe amount calculated as prescribed by Cabinet Order as equivalent to expenses,shall, in calculating the domestic corporation's income for each fiscal year,is excluded from gross income.

Article 22-4, paragraph (2), of the Order for Enforcement of the Corporation Tax Act defines the expense amount deducted as5%of the dividends and similar distributions.The 95% Exclusionis so called for this reason.

Requirements for a Foreign Subsidiary

These Are Set Out in Article 22-4, Paragraph (1), of the Enforcement Order.

Holding 25% Only When the Dividend Is Received Is Not Enough.The statute requires continuous ownership for at least six months.

However, paragraph (6) provides that, where shares or interests representing at least 25% are received through a qualified merger, qualified company split, or qualified contribution in kind,the period during which the merged corporation or other transferor held them is deemed to be the domestic corporation's holding period. Paragraph (7) provides tax treaty for substitution where a treaty's double taxation relief provision specifies a percentage below 25%.

Cases in Which the Exclusion Does Not Apply

Article 23-2, paragraph (2), of the Corporation Tax Act provides that, for certain dividends and similar distributions,paragraph (1) does not apply. Item (i) covers cases where all or part of the distributionis deductible in calculating the foreign subsidiary's income under the laws of its country of location.

The so-called deductible dividends It is.combination of a deductible dividend overseas and an excluded dividend in Japanis blocked by the statute.

The Point to Note Is Thatif even part is deductible overseas, the entire distribution is generally excluded from relief(paragraph (2), item (i), refers to cases where all or part falls within the specified category, and applies tothe amount of that dividend of surplus or similar distribution.). Restricting the exclusion from relief to the deductible portion alone is an.optionalchoiceunder paragraph (3), subject to separate requirements in paragraph (7).

An Easily Overlooked Issue: Foreign Withholding Tax

Article 39-2 of the Corporation Tax Act provides that, for dividends and similar distributions benefiting from Article 23-2, paragraph (1), excluding portions subject to paragraph (2),foreign withholding taxes and similar amounts are not deductibleThat is the consequence.

That Is Not All. Article 142-2 of the Enforcement Order (foreign tax credit Foreign Corporation Tax Ineligible for Foreign Tax Credits)paragraph (7), item (iii),also excludes foreign corporate tax relating to dividends and similar distributions from such a foreign subsidiaryfrom creditable foreign corporate taxes.

Neither a Deduction Nor a Foreign Tax Credit Is Available.Tax withheld locally therefore remains a cost. This is why checking treaty withholding rates is critical to structuring the transaction.

Filing requirements

Article 23-2, paragraph (5), requires that the final return, amended return, or correction claim have attached a document detailing the dividends and similar distributions excluded from gross income and their calculation,and that documents prescribed by Ministry of Finance Order be retained, as conditions of application. The exclusion is limited to the stated amount. Paragraph (6) addresses cases where the tax office director recognizes unavoidable circumstances for failure to retain the documents.

Points that require care in practice

• Can a Tax Treaty Reduce the 25% Requirement?Article 22-4, paragraph (7), of the Enforcement Order provides for substitution. Each treaty must be checked to determine whether it qualifies.
• How Do You Prove That the Ownership Percentage Was Maintained for at Least Six Months?Document retention is important.
• Are Deemed Dividends Covered?Article 24, paragraph (1), and the exclusion in Article 23-2, paragraph (2), item (ii), must be examined.
• Can the Local Withholding Rate Be Reduced?The treaty's dividend article must be checked.
• Under the tax haven countermeasure rules, What Happens to Dividends from a Subsidiary Whose Income Has Been Attributed UnderSeparate statutory adjustment provisions apply.
• What If Funds Are Repatriated Through Loan Repayment or a Share Transfer Instead of Dividends?The tax consequences change entirely.

The Tax Burden on Repatriating Funds from an Overseas Subsidiary Varies Depending on Whether You Use Dividends, Interest, Royalties, or a Transfer.Consult us before designing the structure.

Legal basis

• Article 23-2 of the Corporation Tax Act (exclusion from gross income of dividends and similar distributions received from foreign subsidiaries)
• Article 22-4 of the Order for Enforcement of the Corporation Tax Act (Requirements for Foreign Subsidiaries, etc.)
• Article 39-2 of the Corporation Tax Act (Non-Deductibility of Foreign Withholding Tax on Dividends and Similar Distributions from Foreign Subsidiaries)
• Article 69 of the Corporation Tax Act (Foreign Tax Credit)
• Article 142-2 of the Order for Enforcement of the Corporation Tax Act (Foreign Corporate Taxes Ineligible for the Foreign Tax Credit)
• Dividend provisions of the relevant tax treaties

An individual determination requires verification of the facts.