Four systems described as partnership agreements

Japan has more than one type of contract called a “partnership.” Civil Code partnerships, Commercial Code silent partnerships, limited liability partnerships (LLPs), and investment limited partnerships (LPSs) each have distinct governing laws and formation requirements. The central Civil Code provision states:

“A partnership agreement takes effect when each party promises to contribute and conduct a joint business.” (Civil Code, Article 667)

Silent partnerships, LLPs and LPSs have their own formation requirements in Commercial Code Article 535, Limited Liability Partnership Act Article 3, and Investment Limited Partnership Act Article 3. Although all are called partnerships, their governing law, ownership of contributions, liability and taxation differ.

Framework: comparing the four types

The statutory and circular provisions by issue are as follows.

Who owns silent partnership contributions?

Of the four types, only silent partnerships vest contributions in the operator's sole ownership. Commercial Code Article 536 states: “A silent partner's contribution belongs to the business operator.” Civil Code partnerships provide for joint ownership by all partners under Article 668, which also applies mutatis mutandis to LLPs and LPSs under Article 56 of the Limited Liability Partnership Act and Article 16 of the Investment Limited Partnership Act. Only silent partnership contributions are outside joint ownership.

Commercial Code Article 536 also provides: “A silent partner may not manage or represent the business operator,” and “A silent partner has no rights or obligations toward third parties in respect of the operator's acts.” Article 537 creates an exception where a silent partner permits use of the partner's surname, full name or trade name in the operator's trade name: the partner is jointly and severally liable with the operator for debts arising after such use. For details, see Taxation of Silent Partnerships.

Do “Civil Code partnerships, etc.” in the circulars include silent partnerships?

The income and corporation tax basic circulars collectively call Civil Code partnerships, LPSs and LLPs “Civil Code partnerships, etc.,” excluding silent partnerships. Note 1 to Income Tax Basic Circular 36/37 Common-19 states:

“Civil Code partnerships, etc. means partnerships formed under partnership agreements prescribed in Civil Code Article 667(1) (Partnership agreements), investment limited partnership agreements prescribed in Article 3(1) of the Investment Limited Partnership Act, and limited liability partnership agreements prescribed in Article 3(1) of the Limited Liability Partnership Act, and similar arrangements overseas.”

The note to Corporation Tax Basic Circular 14-1-1 defines “Civil Code partnerships, etc.” in almost identical terms.

“Civil Code partnerships, etc. means partnerships formed under partnership agreements prescribed in Civil Code Article 667(1), investment limited partnership agreements prescribed in Article 3(1) of the Investment Limited Partnership Act, and limited liability partnership agreements prescribed in Article 3(1) of the Limited Liability Partnership Act, and similar arrangements overseas.”

Neither note lists silent partnership agreements. Distributions received by silent partners are separately governed by Income Tax Basic Circular 36/37 Common-21, which generally classifies “profit distributions received from an operator under a silent partnership agreement” as miscellaneous income. The boundary dividing the four types into two groups is the circulars' scope of “Civil Code partnerships, etc.” For taxation of Civil Code partnerships, see Taxation of Civil Code Partnerships.

Which loss-limitation provisions apply, and how far?

Several provisions of the Act on Special Measures Concerning Taxation restrict investors' recognition of partnership business losses according to whether they are individuals or corporations and the partnership type.

For individual LLP partners, Article 27-2 provides that, where real estate, business or timber income losses include amounts prescribed by Cabinet Order, the portion exceeding an amount calculated under Cabinet Order based on contribution value is not included in necessary expenses. Article 41-4-2 separately restricts real estate losses of individual specified partners, but its “partnership agreement” means Civil Code agreements, investment limited partnership agreements and similar foreign agreements, including those prescribed by Cabinet Order. Silent partnership agreements are not listed.

For corporations, Article 67-12 restricts deduction of partnership and similar losses for specified partners or beneficiaries where:

“Liability for debts of the partnership business under the agreement or the trust is substantively limited to the value of partnership property (for silent partnership agreements, etc., property relating to the partnership business) or trust property, or in other cases prescribed by Cabinet Order.” (Act on Special Measures Concerning Taxation, Article 67-12)

Generally, the nondeductible amount is the portion exceeding an amount calculated under Cabinet Order based on contribution value. In the following case, however, the entire partnership or similar loss is covered rather than only the excess:

“(Where the case falls within those prescribed by Cabinet Order as expected not to result in a substantive loss attributable to the partnership business or trust property, the partnership or similar loss amount).” (Act on Special Measures Concerning Taxation, Article 67-12)

The Article's definition of “partnership agreement” is discussed next. Article 67-13 separately governs corporate LLP partners. For examples of partnership investments, see Taxation of Aircraft Leasing and Taxation of SPCs.

How does the partner's identity change the applicable provisions?

Parties generally fall within one of four categories under Income Tax Act Article 2 and Corporation Tax Act Article 2: residents, nonresidents, domestic corporations and foreign corporations. The former defines a resident as an individual domiciled in Japan or continuously resident there for at least one year to date, and a nonresident as any other individual. The latter defines a domestic corporation as one having its head office or principal office in Japan, and a foreign corporation as any other corporation. It also separately defines associations without legal personality, etc.; this article focuses on the four categories.

For nonresidents and foreign corporations, permanent establishment status further distinguishes the relevant domestic-source income. Income Tax Act Article 164 states:

“Income tax imposed on a nonresident shall be calculated by applying Subsection 1 of the following Section (Aggregate taxation of nonresidents' income) to the domestic-source income specified for the category of nonresident listed in each of the following items.” (Income Tax Act, Article 164)

“Where a nonresident listed in any of the following items has domestic-source income specified in that item, income tax imposed on that nonresident shall, in addition to the preceding paragraph, be calculated by applying Section 3 (Separate taxation of nonresidents' income) to the domestic-source income specified in that item.” (Income Tax Act, Article 164)

The scope of domestic-source income subject to aggregate or separate taxation differs between nonresidents with and without a permanent establishment. Corporation Tax Act Article 141 similarly distinguishes the domestic-source income included in the tax base for foreign corporations with and without a permanent establishment.

“The tax base for corporation tax on a foreign corporation's income for each business year shall be the income amount relating to domestic-source income specified for the category of foreign corporation listed in each of the following items.” (Corporation Tax Act, Article 141)

Where a partner is a nonresident or foreign corporation, consideration is given to whether income under the partnership agreement is taxable as a category of domestic-source income listed in Income Tax Act Article 161. For Civil Code partnerships, it provides:

“Profits arising from business conducted through a permanent establishment under a partnership agreement prescribed in Civil Code Article 667(1) (Partnership agreements) (including similar agreements prescribed by Cabinet Order; hereinafter the same in this item), allocated under that agreement, as prescribed by Cabinet Order.” (Income Tax Act, Article 161)

The domestic-source income classification and withholding structure by partnership type are as follows.

Civil Code partnerships, LLPs and LPSs arise under separate laws: Civil Code Article 667, Limited Liability Partnership Act Article 3, and Investment Limited Partnership Act Article 3. Article 161's phrase “including similar agreements prescribed by Cabinet Order” brings in agreements other than Civil Code Article 667 agreements to the extent specified by the Order; the Act itself does not set out the Order's content. For LPSs, however, Article 41-21 defines “investment partnership agreement” as follows and presupposes that receipts under it are the same Article 161 domestic-source income.

“Investment limited partnership agreements prescribed in Article 3(1) of the Investment Limited Partnership Act and foreign partnership agreements.” (Act on Special Measures Concerning Taxation, Article 41-21)

Article 41-21 exempts from income tax qualifying nonresidents and foreign corporations conducting business through a permanent establishment under such investment partnership agreements. It further states:

“...A general partner of the investment partnership under the agreement who handles allocations prescribed in Article 161(1)(iv) of the Income Tax Act of the domestic-source income listed in that item...” (Act on Special Measures Concerning Taxation, Article 41-21)

“...The date domestic-source income listed in Article 161(1)(iv) of the Income Tax Act received under the investment partnership agreement is deemed paid under Article 212(5) of that Act...” (Act on Special Measures Concerning Taxation, Article 41-21)

For foreign corporations, Article 67-16 provides a corporation tax exemption based on the same investment partnership agreements.

“Domestic-source income under Article 138(1)(i) of the Corporation Tax Act (excluding income falling within items (ii) through (vi) of that paragraph or Article 161(1)(viii) through (xi) and (xiii) through (xvi) of the Income Tax Act) attributable to the permanent establishment of a foreign corporation that is a partner under an investment partnership agreement (meaning an agreement prescribed in Article 41-21(4)(i); hereinafter the same in this Article), conducts business through that permanent establishment under the agreement, and meets the requirements in the items of Article 41-21(1), shall be exempt from corporation tax (referred to in the following paragraph as ‘covered domestic-source income’).” (Act on Special Measures Concerning Taxation, Article 67-16)

Corporation Tax Act Article 138 and its Enforcement Order contain the same parenthetical exclusion:

“Income arising from the operation or holding of assets in Japan (excluding income falling within Article 161(1)(viii) through (xi) and (xiii) through (xvi) of the Income Tax Act (Domestic-source income)).” (Corporation Tax Act, Article 138)

“Income arising from the operation or holding of the following assets (excluding income falling within Article 161(1)(viii) through (xi) and (xiii) through (xvi) of the Income Tax Act (Domestic-source income)) shall be included in domestic-source income listed in Article 138(1)(ii) of the Act.” (Corporation tax Order, Article 177)

Both exclusions use identical wording. How they relate to partnership profits is beyond this article's scope. Income Tax Act Article 161 separately lists profits under Civil Code Article 667 agreements and distributions under silent partnership agreements; Corporation Tax Act Article 138 contains no partnership-agreement provision.

Article 67-12 separately defines “partnership agreement” for corporate partners.

“Partnership agreement: partnership agreements prescribed in Civil Code Article 667(1), investment limited partnership agreements prescribed in Article 3(1) of the Investment Limited Partnership Act, similar foreign agreements (including those prescribed by Cabinet Order), and silent partnership agreements, etc.” (Act on Special Measures Concerning Taxation, Article 67-12)

This definition lists Civil Code agreements, investment limited partnership agreements, similar foreign agreements including those prescribed by Cabinet Order, and silent partnership agreements, etc. Agreements under Article 3 of the Limited Liability Partnership Act do not appear in the wording. Like Article 161's parentheses, this provision delegates to Cabinet Order. Each provision expresses differently what the Act itself establishes and what is delegated.

How are foreign partnerships treated?

The notes quoted above include “similar arrangements overseas” within Civil Code partnerships, etc. However, the position changes if an entity formed under foreign law is itself a foreign corporation. The published summary of the Supreme Court's Second Petty Bench judgment of July 17, 2015 states:

“Whether an entity established under foreign law constitutes a foreign corporation under Income Tax Act Article 2(1)(vii) and Corporation Tax Act Article 2(iv) should first be determined by examining (i) whether the wording of its governing law and the legal system make it clear beyond doubt that foreign law grants, or does not grant, legal status equivalent to a corporation under Japanese law. If that cannot be determined, examine (ii) whether the entity can be recognized as a bearer of rights and obligations by considering, from the content and purpose of its governing law, whether it can itself be a party to legal acts and whether their legal effects are attributable to it.”

In that case, a Delaware limited partnership was held to be a foreign corporation, and losses from its rental business could not be deducted from investors' income. Whether a foreign partnership is a Civil Code partnership equivalent or a separate entity constituting a foreign corporation requires examining its governing law individually. This article does not generalize the ruling to all foreign partnerships.

Points that require care in practice

• Excluded from “specified partners” under Article 41-4-2 are partners who participate in decisions on disposal or acquisition of important property or substantial borrowing and personally conduct contract negotiations or other important parts of that business. Article 67-12 additionally excludes “other partners prescribed by Cabinet Order.”
• Whether an agreement is a “silent partnership agreement (including equivalent agreements prescribed by Cabinet Order)” requires checking the income tax Order.
• Whether a foreign entity is a foreign corporation requires examining its governing law under the two-stage framework of the Supreme Court judgment of July 17, 2015.

Legal basis

• Civil Code, Article 667(1) (Partnership agreements) / Quoted wording: “A partnership agreement takes effect when each party promises to contribute and conduct a joint business.”
• Civil Code, Article 668(1) (Joint ownership of partnership property) / Quoted wording: “Each partner's contribution and other partnership property are jointly owned by all partners.”
• Civil Code, Article 674(1) (Partners' profit and loss allocation ratios) / Quoted wording: “Where the parties have not specified profit and loss allocation ratios, they shall be determined according to each partner's contribution value.”
• Civil Code, Article 675(2) (Exercise of rights by partnership creditors) / Quoted wording: “Partnership creditors may, at their option, enforce their rights against each partner according to the loss-sharing ratio or in equal proportions. However, where the creditor knew each partner's loss-sharing ratio when the claim arose, that ratio applies.”
• Commercial Code, Article 535(1) (Silent partnership agreements) / Quoted wording: “A silent partnership agreement takes effect when one party promises to contribute to the other party's business and the parties promise to distribute profits arising from that business.”
• Commercial Code, Article 536(1) (Silent partners' contributions, rights and obligations) / Quoted wording: “A silent partner's contribution belongs to the business operator.”
• Commercial Code, Article 536(3) (Silent partners' contributions, rights and obligations) / Quoted wording: “A silent partner may not manage or represent the business operator.”
• Commercial Code, Article 536(4) (Silent partners' contributions, rights and obligations) / Quoted wording: “A silent partner has no rights or obligations toward third parties in respect of the operator's acts.”
• Limited Liability Partnership Act, Article 3(1) (Limited liability partnership agreements) / Quoted wording: “A limited liability partnership agreement (hereinafter ‘partnership agreement’) takes effect when individuals or corporations promise to contribute and jointly conduct a profit-seeking business with liability limited to their respective contribution values, and each party fully performs the payment or delivery of its contribution.”
• Limited Liability Partnership Act, Article 15(1) (Partners' liability) / Quoted wording: “Partners are liable for partnership debts up to the value of their contributions.”
• Limited Liability Partnership Act, Article 33(1) (Partners' profit and loss allocation ratios) / Quoted wording: “Unless all partners unanimously agree otherwise as prescribed by Ministry of Economy, Trade and Industry Order, profit and loss allocation ratios shall be determined according to the value of each partner's performed contribution recorded in the accounting books.”
• Investment Limited Partnership Act, Article 3(1) (Investment limited partnership agreements) / Quoted wording: “An investment limited partnership agreement (hereinafter ‘partnership agreement’) takes effect through each party's promise to contribute and jointly conduct all or part of the businesses listed below.”
• Investment Limited Partnership Act, Article 7(1) (Decision-making and management methods, etc.) / Quoted wording: “General partners decide and conduct partnership business.”
• Investment Limited Partnership Act, Article 9(1) (Partners' liability) / Quoted wording: “Where there are multiple general partners, each is jointly and severally liable for partnership debts.”
• Investment Limited Partnership Act, Article 9(2) (Partners' liability) / Quoted wording: “Limited partners are liable for partnership debts up to the value of their contributions.”
• Investment Limited Partnership Act, Article 16(1) (Application of the Civil Code mutatis mutandis) / Quoted wording: “Civil Code (Act No. 89 of 1896) Articles 667-2 through 669 (Default by other partners, invalidity, etc. of a partner's manifestation of intent, joint ownership of partnership property, and liability for failure to make monetary contributions), Articles 671 through 674 (Application of mandate provisions, resignation and dismissal of managing partners, partners' inspection of partnership business and financial condition, and profit and loss allocation ratios) ... shall apply mutatis mutandis to partnerships.”
• Act on Special Measures Concerning Taxation, Article 27-2(1) (Special income calculation rules for partners' business income, etc. from LLP business) / Quoted wording: “Where an individual partner under a limited liability partnership agreement prescribed in Article 3(1) of the Limited Liability Partnership Act (Act No. 40 of 2005) (hereinafter ‘partnership agreement’ in this Article) has real estate, business or timber income in a year arising from business conducted under that agreement (hereinafter ‘partnership business’), and has losses from such income prescribed by Cabinet Order, the portion exceeding an amount calculated under Cabinet Order based on the individual's contribution value in that business shall not be included in necessary expenses when calculating real estate, business or timber income for that year.”
• Act on Special Measures Concerning Taxation, Article 41-4-2(1) (Special rules on loss offsetting, etc. for real estate income of specified partners, etc.) / Quoted wording: “Where an individual who is a specified partner (a partner under a partnership agreement, including similar persons prescribed by Cabinet Order, other than a partner who participates in decisions on disposal or acquisition of important property or substantial borrowing for partnership business and personally conducts contract negotiations or other important parts of that business) or a specified beneficiary (a trust beneficiary under Income Tax Act Article 13(1), including persons deemed beneficiaries under paragraph (2)) has real estate income from partnership business or a trust in any year from 2006 onward, and an amount prescribed by Cabinet Order as a loss from that partnership business or trust in calculating the year's real estate income, an amount equal to that loss shall be deemed not to have arisen for purposes of Articles 26(2) and 69(1) of that Act and other income tax laws and regulations.”
• Act on Special Measures Concerning Taxation, Article 41-4-2(2)(i) / Quoted wording: “Partnership agreement: partnership agreements prescribed in Civil Code Article 667(1), investment limited partnership agreements prescribed in Article 3(1) of the Investment Limited Partnership Act, and similar foreign agreements (including those prescribed by Cabinet Order).”
• Act on Special Measures Concerning Taxation, Article 67-12(1) (Special taxation where partnership business, etc. incurs losses) / Quoted wording: “Where a corporation is a specified partner (a partner under a partnership agreement, including similar persons prescribed by Cabinet Order and, for silent partnership agreements, etc., contributors and successors to their contractual positions, excluding partners who participate in decisions on disposal or acquisition of important property or substantial borrowing and personally conduct contract negotiations or other important parts of that business, and other partners prescribed by Cabinet Order; the same applies in paragraph (4)) or a specified beneficiary ... and liability for partnership business or trust debts is substantively limited to the value of partnership property (for silent partnership agreements, etc., property relating to the partnership business) or trust property, or another case prescribed by Cabinet Order applies, the portion of the corporation's partnership or similar loss for the business year ... exceeding an amount calculated under Cabinet Order based on its contribution value or the trust property's book value (or, in cases prescribed by Cabinet Order where no substantive loss attributable to the partnership business or trust property is expected, the entire partnership or similar loss) ... shall not be included in deductible expenses in calculating income for that business year.”
• Act on Special Measures Concerning Taxation, Article 67-12(3)(i) / Quoted wording: “Partnership agreement: partnership agreements prescribed in Civil Code Article 667(1), investment limited partnership agreements prescribed in Article 3(1) of the Investment Limited Partnership Act, similar foreign agreements (including those prescribed by Cabinet Order), and silent partnership agreements, etc.”
• Act on Special Measures Concerning Taxation, Article 67-12(3)(ii) / Quoted wording: “Silent partnership agreements, etc.: silent partnership agreements (including equivalent agreements prescribed by Cabinet Order) and similar foreign agreements.”
• Act on Special Measures Concerning Taxation, Article 67-13(1) / Quoted wording: “Where the amount prescribed by Cabinet Order as a corporate partner's loss for the business year from business under a limited liability partnership agreement prescribed in Article 3(1) of the Limited Liability Partnership Act (hereinafter ‘partnership business’ in this Article) exceeds an amount calculated under Cabinet Order based on the corporation's contribution value in that business, an amount equal to the excess (referred to in paragraph (3) as ‘excess partnership loss’) shall not be included in deductible expenses in calculating income for that business year.”
• Income Tax Act, Article 2(1)(iii) (Definitions) / Quoted wording: “An individual domiciled in Japan or continuously resident there for at least one year to date.”
• Income Tax Act, Article 2(1)(v) (Definitions) / Quoted wording: “An individual other than a resident.”
• Corporation Tax Act, Article 2(iii) (Definitions) / Quoted wording: “A corporation having its head office or principal office in Japan.”
• Corporation Tax Act, Article 2(iv) (Definitions) / Quoted wording: “A corporation other than a domestic corporation.”
• Income Tax Act, Article 161(1)(iv) (Domestic-source income) / Quoted wording: “Profits arising from business conducted through a permanent establishment under a partnership agreement prescribed in Civil Code Article 667(1) (Partnership agreements) (including similar agreements prescribed by Cabinet Order; hereinafter the same in this item), allocated under that agreement, as prescribed by Cabinet Order.”
• Income Tax Act, Article 164(1) (Taxation methods for nonresidents) / Quoted wording: “Income tax imposed on a nonresident shall be calculated by applying Subsection 1 of the following Section (Aggregate taxation of nonresidents' income) to the domestic-source income specified for the category of nonresident listed in each of the following items.”
• Income Tax Act, Article 212(1) (Withholding obligation) / Quoted wording: “A person making payment in Japan to a nonresident of domestic-source income listed in Article 161(1)(iv) through (xvi) (Domestic-source income), excluding income prescribed by Cabinet Order, or to a foreign corporation of domestic-source income listed in items (iv) through (xi) or (xiii) through (xvi), excluding income covered by Article 180(1) (Special taxation of domestic-source income of foreign corporations with permanent establishments), Article 180-2(1) or (2) (Special taxation of interest, etc. relating to trust property), or prescribed by Cabinet Order, must withhold income tax upon payment and remit it to the national government by the tenth day of the month following the month of withholding.”
• Corporation Tax Act, Article 138(1)(i) (Domestic-source income) / Quoted wording: “Where a foreign corporation conducts business through a permanent establishment, income that should be attributable to that establishment if it were an enterprise conducting business independently of the foreign corporation, considering its functions, assets used, internal dealings with the corporation's head office, etc. (its head office, branches, factories and equivalent facilities prescribed by Cabinet Order other than that establishment; the same applies in the following paragraph and Article 139(2)), and other circumstances, including income from transfer of the permanent establishment.”
• Corporation Tax Act, Article 141 (No heading) / Quoted wording: “The tax base for corporation tax on a foreign corporation's income for each business year shall be the income amount relating to domestic-source income specified for the category of foreign corporation listed in each of the following items.”
• Income Tax Act, Article 164(2) (Taxation methods for nonresidents) / Quoted wording: “Where a nonresident listed in any of the following items has domestic-source income specified in that item, income tax imposed on that nonresident shall, in addition to the preceding paragraph, be calculated by applying Section 3 (Separate taxation of nonresidents' income) to the domestic-source income specified in that item.”
• Income Tax Act, Article 212(5) (Withholding obligation) / Quoted wording: “For domestic-source income listed in Article 161(1)(iv) allocated as prescribed there, where a nonresident or foreign corporation that is a partner under the partnership agreement in that item (including similar persons prescribed by Cabinet Order) receives money or other assets (hereinafter ‘money, etc.’ in this paragraph) for that income arising during an accounting period under the agreement or similar period (...), the person making the allocation shall be deemed the payer and payment shall be deemed made on the delivery date (or, if no money, etc. is delivered by the date two months after the day following the accounting period's end, on that date), and this Act shall apply accordingly.”
• Income Tax Act, Article 161(1)(xvi) (Domestic-source income) / Quoted wording: “Profit distributions received under a silent partnership agreement (including equivalent agreements prescribed by Cabinet Order) in respect of contributions to a person conducting business in Japan.”
• Corporation Tax Act, Article 138(1)(ii) (Domestic-source income) / Quoted wording: “Income arising from the operation or holding of assets in Japan (excluding income falling within Article 161(1)(viii) through (xi) and (xiii) through (xvi) of the Income Tax Act (Domestic-source income)).”
• Order for Enforcement of the Corporation Tax Act, Article 177(1) (Income from operation or holding of assets in Japan) / Quoted wording: “Income arising from the operation or holding of the following assets (excluding income falling within Article 161(1)(viii) through (xi) and (xiii) through (xvi) of the Income Tax Act (Domestic-source income)) shall be included in domestic-source income listed in Article 138(1)(ii) of the Act.”
• Act on Special Measures Concerning Taxation, Article 41-21(4)(i) (Special taxation of foreign partners) / Quoted wording: “Investment limited partnership agreements prescribed in Article 3(1) of the Investment Limited Partnership Act and foreign partnership agreements.”
• Act on Special Measures Concerning Taxation, Article 41-21(5) (Special taxation of foreign partners) / Quoted wording: “...A general partner of the investment partnership under the agreement who handles allocations prescribed in Article 161(1)(iv) of the Income Tax Act of the domestic-source income listed in that item...”
• Act on Special Measures Concerning Taxation, Article 41-21(9) (Special taxation of foreign partners) / Quoted wording: “...The date domestic-source income listed in Article 161(1)(iv) of the Income Tax Act received under the investment partnership agreement is deemed paid under Article 212(5) of that Act...”
• Act on Special Measures Concerning Taxation, Article 67-16(1) (Special taxation of foreign partners) / Quoted wording: “Domestic-source income under Article 138(1)(i) of the Corporation Tax Act (excluding income falling within items (ii) through (vi) of that paragraph or Article 161(1)(viii) through (xi) and (xiii) through (xvi) of the Income Tax Act) attributable to the permanent establishment of a foreign corporation that is a partner under an investment partnership agreement (meaning an agreement prescribed in Article 41-21(4)(i); hereinafter the same in this Article), conducts business through that permanent establishment under the agreement, and meets the requirements in the items of Article 41-21(1), shall be exempt from corporation tax (referred to in the following paragraph as ‘covered domestic-source income’).”
• Civil Code, Article 670(1) (Decision-making and management methods) / Quoted wording: “Partnership business shall be decided by a majority of partners and conducted by each partner.”
• Civil Code, Article 670(3) (Decision-making and management methods) / Quoted wording: “Persons delegated under the preceding paragraph (hereinafter ‘managers’) shall decide and conduct partnership business. ...”
• Civil Code, Article 670(5) (Decision-making and management methods) / Quoted wording: “Notwithstanding the preceding paragraphs, each partner or manager may independently conduct the partnership's ordinary business. ...”
• Commercial Code, Article 537(1) / Quoted wording: “Where a silent partner permits use of the partner's surname or full name in the operator's trade name, or use of the partner's trade name as the operator's trade name, the partner is jointly and severally liable with the operator for debts arising after such use.”
• Limited Liability Partnership Act, Article 12(1) / Quoted wording: “Decisions on partnership management require unanimous consent of all partners. However, the partnership agreement may provide that unanimity is not required for decisions on matters other than those listed below.”
• Limited Liability Partnership Act, Article 12(1)(i) / Quoted wording: “Disposal and acquisition of important property.”
• Limited Liability Partnership Act, Article 12(1)(ii) / Quoted wording: “Substantial borrowing.”
• Limited Liability Partnership Act, Article 13(1) / Quoted wording: “Partners have the right and obligation to conduct partnership business based on decisions under the preceding Article.”
• Limited Liability Partnership Act, Article 56(1) / Quoted wording: “Civil Code Articles 667-2 through 669, 671, 673, 674(2), 675(1), 676, 677, 680-2, 681, 683, 684 and 688 shall apply mutatis mutandis to partnerships.”

Supporting circulars and court decisions

• Income Tax Basic Circular 36/37 Common-19 (Attribution of partnership business profits, etc. to partners of Civil Code partnerships, etc.), Note 1 / Quoted wording: “Civil Code partnerships, etc. means partnerships formed under partnership agreements prescribed in Civil Code Article 667(1) (Partnership agreements), investment limited partnership agreements prescribed in Article 3(1) of the Investment Limited Partnership Act, and limited liability partnership agreements prescribed in Article 3(1) of the Limited Liability Partnership Act, and similar arrangements overseas.”
• Income Tax Basic Circular 36/37 Common-19 (Attribution of partnership business profits, etc. to partners of Civil Code partnerships, etc.) / Quoted wording: “A partner's profit or loss from business conducted by a Civil Code partnership, etc. (hereinafter ‘partnership business’ through 36/37 Common-20) shall be the portion of that partnership's profit or loss that the partner is entitled to receive or obliged to bear according to the allocation ratio.”
• Income Tax Basic Circular 36/37 Common-19-2 (Timing of attribution of partnership business profits, etc.) / Quoted wording: “A partner's profit or loss from partnership business shall be included in gross revenue or necessary expenses in calculating each category of income for that year.”
• Income Tax Basic Circular 36/37 Common-21 (Partners' income under silent partnership agreements) / Quoted wording: “Profit distributions received from an operator under a silent partnership agreement shall be miscellaneous income.”
• Corporation Tax Basic Circular 14-1-1 (Attribution of profits, etc. from Civil Code partnership business), Note / Quoted wording: “Civil Code partnerships, etc. means partnerships formed under partnership agreements prescribed in Civil Code Article 667(1), investment limited partnership agreements prescribed in Article 3(1) of the Investment Limited Partnership Act, and limited liability partnership agreements prescribed in Article 3(1) of the Limited Liability Partnership Act, and similar arrangements overseas.”
• Corporation Tax Basic Circular 14-1-1 (Attribution of profits, etc. from Civil Code partnership business) / Quoted wording: “Note that profits or losses arising from business conducted by Civil Code partnerships, etc. (hereinafter ‘partnership business’ through 14-1-2) are directly attributable to each partner.”
• Corporation Tax Basic Circular 14-1-3 (Profits and losses under silent partnership agreements) / Quoted wording: “Where a corporation is a silent partner, the portion of business profits or losses it is entitled to receive or obliged to bear under the agreement shall be included in gross income or deductible expenses for the business year containing the accounting period's final day, even if no distribution or loss burden has actually occurred. Where a corporation is the operator, profits distributable or losses chargeable to silent partners under the agreement shall be included in deductible expenses or gross income when calculating its income for that business year.”
• Supreme Court, Second Petty Bench, judgment of July 17, 2015; case 2013 (Gyo-Hi) No. 166 / Quoted summary: “Whether an entity established under foreign law constitutes a foreign corporation under Income Tax Act Article 2(1)(vii) and Corporation Tax Act Article 2(iv) should first be determined by examining (i) whether the wording of its governing law and the legal system make it clear beyond doubt that foreign law grants, or does not grant, legal status equivalent to a corporation under Japanese law. If that cannot be determined, examine (ii) whether the entity can be recognized as a bearer of rights and obligations by considering, from the content and purpose of its governing law, whether it can itself be a party to legal acts and whether their legal effects are attributable to it.”
• Supreme Court, Second Petty Bench, judgment of July 17, 2015; case 2013 (Gyo-Hi) No. 166 / Quoted summary: “Under the circumstances stated in the judgment, where a limited partnership established under the Delaware Revised Uniform Limited Partnership Act constitutes a foreign corporation under Income Tax Act Article 2(1)(vii) and Corporation Tax Act Article 2(iv), and income from its real estate rental business is attributable to that partnership, an investor in the investment business relating to that rental business may not deduct losses arising in calculation of the rental business's income from the investor's own income when calculating total income.”