The previous blog post, “Tax Planning Using Public Interest Corporations,” is continued here.

For public interest corporations, activities certified as public interest activities under the Authorization Act are exempt from corporation tax even if they would otherwise constitute profit-making business activities.
How does this exemption work?

Let us examine the corporation tax provisions.
First, the definitions.

　

Corporation Tax Act, Article 2 (Definitions), Excerpt
(vi) Public interest corporations and similar entities: Corporations listed in Appended Table 2.

　

Corporation Tax Act, Appended Table 2: Table of Public Interest Corporations and Similar Entities (Articles 2, 3, 37, and 66), Excerpt

Name	Governing law
Public interest foundation	Act on General Incorporated Associations and General Incorporated Foundations and Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations
Public Interest Incorporated Association	Act on General Incorporated Associations and General Incorporated Foundations and Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations

　

As shown above, the Corporation Tax Act defines public interest corporations and similar entities as those listed in Appended Table 2. That table includes public interest incorporated foundations and associations based on the General Incorporated Associations and Foundations Act and the Public Interest Corporation Authorization Act. It also lists more than approximately 100 other special types of corporations, including incorporated educational institutions, national pension funds, religious corporations, and societies of commerce and industry, grouped under this definition.

Public interest incorporated foundations and associations therefore qualify as public interest corporations and similar entities under the Corporation Tax Act.

Next is tax liability.

　

Corporation Tax Act, Article 4 (Taxpayers), Excerpt
Domestic corporations are liable for corporation tax under this Act. However,public interest corporations and similar entitiesor unincorporated associations and similar bodiesare liable only where they conduct profit-making business activities, accept corporate taxable trusts, or conduct retirement pension operations or similar activities prescribed in Article 84, Paragraph 1 (Calculation of Retirement Pension Reserves).

　

In principle, public interest corporations and similar entities are therefore taxed only where they conduct profit-making business activities or the other specified activities.

The definition of profit-making business activities takes us back to Article 2 of the Corporation Tax Act.

　

Corporation Tax Act, Article 2 (Definitions), Excerpt
(xiii) Profit-making business activities: Sales, manufacturing, and other businesses prescribed by Cabinet Order conducted continuously at a place of business.

　

The other businesses prescribed by Cabinet Order are set out as follows.

　

Order for Enforcement of the Corporation Tax Act, Article 5 (Scope of Profit-Making Business Activities), Excerpt
The businesses prescribed by Cabinet Order under Article 2, Item (xiii) of the Act (Definitions) are the following, including activities incidental to them by their nature.
(Omitted)
2. The following activities shall not be included in the businesses prescribed in the preceding paragraph.
(i) Of the businesses listed in the preceding paragraph conducted by a public interest incorporated association or foundation, those qualifying as public interest activities under Article 2, Item (iv) of the Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations.

　

Consequently, for public interest corporations, activities certified as public interest activities under the Authorization Act are exempt from corporation tax even if they would otherwise constitute profit-making business activities.

When an exemption applies, what happens in practice to the filing obligation?
This is provided for in the Act on Special Measures Concerning Taxation.

　

Act on Special Measures Concerning Taxation, Article 68-6 (Submission of Income Statements and Similar Documents by Public Interest Corporations and Similar Entities)
Public interest corporations and similar entities defined in Article 2, Item (vi) of the Corporation Tax Act, excluding corporations deemed to fall within that category under other legislation and prescribed by Cabinet Order, and small corporations prescribed by Cabinet Order, must submit an income statement or statement of receipts and payments for each fiscal year to the district director of the tax office with jurisdiction over their principal office at fiscal year-end. Submission must be made as prescribed by Ministry of Finance Ordinance within four months from the day following fiscal year-end, or within a period prescribed by Cabinet Order for specified corporations, unless a return is required under Article 74, Paragraph 1 of the Corporation Tax Act for that fiscal year.

　

Order for Enforcement of the Act on Special Measures Concerning Taxation, Article 39-37 (Scope of Public Interest Corporations and Similar Entities Not Required to Submit Income Statements and Similar Documents), Excerpt
2. Small corporations prescribed by Cabinet Order under Article 68-6 of the Act are those whose total revenue for the fiscal year, excluding temporary revenue from asset sales, is JPY80 million or less. For fiscal years shorter than 12 months, this threshold is JPY80 million multiplied by the number of months in the fiscal year and divided by 12.
3. The number of months in the preceding paragraph is calculated according to the calendar, with any fraction of a month counted as one month.

　

Thus, public interest corporations and similar entities must file returns if they conduct non-exempt profit-making business activities—those not certified as public interest activities under the Authorization Act—where a return is required under Article 74, Paragraph 1 of the Corporation Tax Act. Otherwise, they have no tax return filing obligation.

They must also submit an income statement or statement of receipts and payments if annual revenue exceeds JPY80 million. Conversely, if annual revenue is JPY80 million or less, there is no obligation to submit those statements either.

The required format of the income statement or statement of receipts and payments is prescribed in the Regulations for Enforcement of the Act on Special Measures Concerning Taxation.

　

Regulations for Enforcement of the Act on Special Measures Concerning Taxation, Article 22-22 (Items to Be Included in Income Statements and Similar Documents of Public Interest Corporations and Similar Entities)
The income statement or statement of receipts and payments that a public interest corporation or similar entity must submit under Article 68-6 of the Act shall be prepared broadly using the accounts in Appended Table 10 according to its activities. Revenue or receipts from activities conducted for consideration, referred to below as business revenue and similar receipts, must use appropriately named accounts indicating the nature of each type of business. The statements must contain the following information.
(i) The entity's name, principal office address, and corporate number, or its name and principal office address if it has no corporate number
(ii) The representative's name
(iii) The fiscal year's beginning and ending dates
(iv) Other relevant information
2. Public interest corporations and similar entities may substitute income statements or similar documents prepared under other legislation, provided business revenue and similar receipts are classified by type of business or a detailed schedule of them is attached.

　

Regulations for Enforcement of the Act on Special Measures Concerning Taxation, Appended Table 10: Accounts Included in Income Statements and Similar Documents of Public Interest Corporations and Similar Entities
(1) Accounts Included in the Income Statement

Revenue

Investment income from basic assets; investment income from specified assets; admission fees received; membership fees received; business revenue; subsidies and grants received; contributions received; donations received; miscellaneous revenue; valuation and disposal gains on basic assets; valuation and disposal gains on specified assets; valuation and disposal gains on investment securities; gains on disposal of fixed assets; gains from donated fixed assets; current-year deficit; and similar items.

Expenses

Officer remuneration; salaries and allowances; retirement benefit expenses; employee welfare expenses; meeting expenses; travel and transportation; communications and freight; depreciation; expendable furniture and fixtures; supplies; repairs; printing and binding; utilities; rent; insurance; honoraria; taxes and public charges; contributions paid; donations paid; interest paid; securities investment losses; miscellaneous expenses; valuation and disposal losses on basic assets; valuation and disposal losses on specified assets; valuation and disposal losses on investment securities; losses on disposal of fixed assets; fixed asset impairment losses; disaster losses; current-year profit; and similar items.

(2) Accounts Included in the Statement of Receipts and Payments

Receipts

Investment receipts from basic assets; admission fees; membership fees; union dues; business receipts; subsidies and grants; contributions; donations; miscellaneous receipts; receipts from basic assets; fixed asset sale proceeds; refunds of security and guarantee deposits; borrowing proceeds; prior-year surplus carried forward; and similar items.

Payments

Officer remuneration; salaries and allowances; retirement payments; employee welfare; meetings; travel and transportation; communications and freight; expendable furniture and fixtures; supplies; repairs; printing and binding; utilities; rent; insurance; honoraria; taxes and public charges; contributions; donations; interest; miscellaneous expenses; fixed asset acquisitions; security and guarantee deposits; loan repayments; current-year surplus or deficit; surplus or deficit carried forward; and similar items.

　

The expense section resembles ordinary corporate accounting, with items such as officer remuneration and salaries and allowances. The revenue section, however, includes less familiar accounts such as investment income from basic assets and investment income from specified assets.

This relates to Article 22-22, Paragraph 2 of the Regulations for Enforcement of the Act on Special Measures Concerning Taxation, which permits public interest corporations and similar entities to substitute income statements and similar documents prepared under other legislation.
In other words, other legislation prescribes the accounting reports these entities must prepare.

　

This has been a long explanation, but we now move from taxation to accounting.

A public interest corporation is established first as a general incorporated association or foundation under the General Incorporated Associations and Foundations Act, and becomes a public interest incorporated association or foundation only after obtaining public interest certification under the Authorization Act.

Let us begin with the General Incorporated Associations and Foundations Act.

　

Act on General Incorporated Associations and General Incorporated Foundations, Article 123 (Preparation and Retention of Financial Statements and Related Documents), Excerpt
2. A general incorporated association must prepare financial statements for each fiscal year, meaning a balance sheet and income statement, together with a business report and supplementary schedules, as prescribed by Ministry of Justice Ordinance.

　

Act on General Incorporated Associations and General Incorporated Foundations, Article 199 (Preparation and Retention of Financial Statements and Related Documents), Excerpt
The provisions of Section 4 of the preceding Chapter, excluding the second sentence of Article 121, Paragraph 1, Paragraph 2 of that Article, and Article 126, Paragraph 1, Items (i), (ii), and (iv), apply mutatis mutandis to the accounts of general incorporated foundations.

　

This reflects the structure of the General Incorporated Associations and Foundations Act, which is organized as follows.

　

Chapter 1: General Provisions
Chapter 2: General Incorporated Associations
Chapter 3: General Incorporated Foundations
Chapter 4: Liquidation
Chapter 5: Mergers
Chapter 6: Miscellaneous Provisions
Chapter 7: Penal Provisions

　

General incorporated associations and foundations are different organizational forms, so some matters require separate provisions and chapters. Their accounting is similar, however, so provisions applying the same rules mutatis mutandis are used.

The matters prescribed by Ministry of Justice Ordinance in this provision are as follows.

　

Regulations for Enforcement of the Act on General Incorporated Associations and General Incorporated Foundations, Article 26 (Accounting Documents), Excerpt
The accounting documents required under Article 123, Paragraphs 1 and 2 of the Act, meaning the documents listed below, shall be governed by this Subsection, except where other legislation provides otherwise.

　

Regulations for Enforcement of the Act on General Incorporated Associations and General Incorporated Foundations, Article 30 (Balance Sheet Categories)
The balance sheet must be presented in the following categories. The category in Item (iii) may bear an appropriate name indicating net assets.
(i) Assets
(ii) Liabilities
(iii) Net assets
2. The categories listed in the preceding paragraph may be subdivided into appropriate items. Each item must bear an appropriate name indicating assets, liabilities, or net assets.

　

Regulations for Enforcement of the Act on General Incorporated Associations and General Incorporated Foundations, Article 32 (Income Statement Categories)
The income statement must present revenue, expenses, profits, or losses in appropriate categories or items.

　

These provisions show little difference from ordinary corporate accounting.
One somewhat unusual feature is the fund system.

　

Act on General Incorporated Associations and General Incorporated Foundations, Article 131 (Articles of Incorporation Provisions on Soliciting Fund Contributors), Excerpt
A general incorporated association, or its founding members before establishment (the same applies in the following Article through Article 134, excluding Article 133, Paragraph 1, Item (i), and in Article 136, Item (i)), mayprovide in its articles of incorporation for soliciting contributions to a fund, meaning money or other property contributed under this Subsection that the association is obliged to return to the contributor under this Act and their agreement. For noncash property, the obligation is to return money equal to its value at the time of contribution.The same definition of fund applies hereafter.

　

Regulations for Enforcement of the Act on General Incorporated Associations and General Incorporated Foundations, Article 31 (Funds and Related Matters)
The total amount of funds defined in Article 131 of the Act and replacement funds recorded under Article 144, Paragraph 1 must be recorded in the net assets section of the balance sheet, including a section bearing an alternative appropriate name under the second sentence of Article 30, Paragraph 1.
2. Obligations to return fund contributions may not be recorded in the liabilities section of the balance sheet.

　

Thus, a general incorporated association may solicit fund contributions if its articles provide for this, and must record them in its books when received. The Act does not provide a fund system for general incorporated foundations, so this is legally specific to general incorporated associations.

　

Next, let us examine public interest corporation accounting under the Authorization Act.
This is somewhat different.

　

Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations, Article 19 (Separate Accounting for Revenue-Generating and Other Activities)
Accounts for revenue-generating and other activities must be separated from accounts for public interest activities, with separate accounting for each revenue-generating or other activity.

　

The provisions beginning with Article 19 are special rules for public interest corporations' accounts and related matters. They do not prescribe specific financial statements, but separately provide for an inventory of property as follows.

　

Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations, Article 21 (Keeping and Inspection of Inventories of Property), Excerpt
2. Within three months after each fiscal year-end, or without delay after public interest certification for the fiscal year in which certification is granted, a public interest corporation must prepare the following documents as prescribed by Cabinet Office Ordinance, retain them at its principal office for five years, and retain copies at its secondary offices for three years.
(i) An inventory of property
(ii) A list of officers and councilors, containing the names and addresses of directors, auditors, and councilors
(iii) A document setting out the standards for remuneration and similar payments prescribed in Article 5, Item (xiii)
(iv) Other documents prescribed by Cabinet Office Ordinance

　

Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations, Article 22 (Submission and Public Disclosure of Inventories of Property and Related Documents), Excerpt
A public interest corporation must submit its inventory of property and related documents, excluding its articles of incorporation, to the administrative authority as prescribed by Cabinet Office Ordinance within three months after each fiscal year-end. Documents prescribed in Paragraph 1 of the preceding Article must be submitted by the day before the beginning of each fiscal year.

　

Public Interest Corporation Accounting Standards had existed for some time. During the 2008 reform of the public interest corporation system, the Cabinet Office's Public Interest Commission revised them, producing what are sometimes called the newest accounting standards.

The guidelines titled “Public Interest Corporation Accounting Standards” contain the following statement.

　

Public Interest Corporation Accounting Standards, Excerpt
1. Background to Establishing the Accounting Standards
(2) Policy and Principal Changes
(a) Definition of Financial Statements
The standards revised in 2004 defined financial statements as the documents governed by the accounting standards and included the balance sheet, statement of changes in net assets, inventory of property, and cash flow statement. After examining consistency with the accounting document requirements under the three Acts relating to public interest corporation reform, the inventory of property was excluded from the scope of financial statements.

　

This may be somewhat confusing. Although the Authorization Act provides special accounting rules for public interest corporations that differ from those for general incorporated associations and foundations, it does not prescribe specific financial statements. In practice, the guidelines titled “Public Interest Corporation Accounting Standards” are therefore used.

The largest difference is probably that the income statement in ordinary corporate accounting becomes a statement of changes in net assets for public interest corporations.
The guidelines describe this statement as follows.

　

Public Interest Corporation Accounting Standards, Excerpt
Appendix: Public Interest Corporation Accounting Standards
Part 3: Statement of Changes in Net Assets
1. Contents of the Statement of Changes in Net Assets
The statement of changes in net assets must clearly present all changes in net assets during the fiscal year.

2. Categories in the Statement of Changes in Net Assets
The statement must be divided into changes in unrestricted net assets and changes in restricted net assets. The unrestricted section must be further divided into ordinary and non-ordinary changes. (Notes 6, 12, 13, 14, and 15)

3. Structure of the Statement of Changes in Net Assets
The unrestricted net assets section must show ordinary revenue and expenses to present the current-year ordinary increase or decrease, add or subtract non-ordinary items to present the current-year change in unrestricted net assets, and add the opening unrestricted net assets balance to present the closing balance.
The restricted net assets section must show changes by cause and add the opening restricted net assets balance to present the closing balance. (Notes 3, 12, 15, and 16)

(Note 3) Gross Presentation
Assets, liabilities, and net assets must generally be presented at gross amounts in the balance sheet. Assets must not be offset against liabilities or net assets to omit all or part of those amounts from the balance sheet.
The gross presentation principle also applies to the statement of changes in net assets.

(Note 6) Classification of Restricted Net Assets
Where donated assets are subject to donor-imposed restrictions on use, the amount received must be recorded as restricted net assets in the balance sheet. Donations received during the current year must also be recorded in the restricted net assets changes section of the statement of changes in net assets.

(Note 12) Fund Changes Section
Where a fund has been established, the statement of changes in net assets must be divided into changes in unrestricted net assets, changes in restricted net assets, and changes in funds.
The fund changes section must show changes by cause and add the opening fund balance to present the closing fund balance.

(Note 13) Subsidies and Grants
Where a corporation receives subsidies or grants from the national government, local governments, or similar bodies, the amount is generally recorded as subsidies and grants received in the restricted net assets changes section. As expenditures for the designated purpose occur, the corresponding amount is transferred from restricted to unrestricted net assets. Where the designated expenditure is scheduled to occur by the end of the current fiscal year, the amount received may instead be recorded as subsidies and grants received in the unrestricted net assets changes section.
However, where the corporation is obliged to distribute the subsidy or grant to a third party—for example, where it is temporarily paid to the corporation so that it effectively administers the government's grant distribution—the amount is treated as subsidies or grants held on behalf of others, and the year-end balance is recorded as a liability.

(Note 14) Non-Ordinary Items in the Unrestricted Net Assets Changes Section
Non-ordinary items in the unrestricted net assets changes section include extraordinary items and prior-period adjustments.
Non-ordinary items may nevertheless be included in ordinary changes if their amounts are immaterial or they recur regularly each year.

(Note 15) Transfers from Restricted to Unrestricted Net Assets
The following amounts must be transferred from restricted to unrestricted net assets, with current-year transfers recorded in both corresponding sections of the statement of changes in net assets.
(1) The carrying amount of donated assets classified as restricted net assets when the restriction is released
(2) Depreciation expense on donated assets classified as restricted net assets
(3) The carrying amount of donated assets classified as restricted net assets that are lost through a disaster or similar event
In the unrestricted net assets changes section, transfers from restricted net assets must be presented as ordinary or non-ordinary revenue according to their nature.

(Note 16) Presentation of Valuation Gains and Losses on Investment Securities and Similar Items
Valuation and disposal gains and losses on investment securities included in ordinary revenue or expenses, including securities classified as basic or specified assets, must be presented separately from other ordinary revenue and expenses. Other ordinary expenses are deducted from other ordinary revenue to present the current-year ordinary increase or decrease before valuation and related adjustments. Investment securities valuation gains and losses and similar items are then applied to present the current-year ordinary increase or decrease.

　

As Note 6 states, donated assets subject to donor-imposed restrictions on use are classified as restricted net assets. Other donations, and assets obtained through ordinary revenue and expenses described in the guidelines, form unrestricted net assets.

This also relates to the terminology used for the net assets section of the balance sheet: corporate accounting uses “junshisan,” while public interest corporation accounting uses “shomi zaisan.” To avoid further length, the explanation is omitted here. For details, see “Public Interest Corporation Accounting Standards,” the revised accounting standards guidelines.

　

This has been a lengthy explanation, but public interest corporation taxation and accounting can seem very unusual to those accustomed to ordinary corporate accounting and corporation tax treatment.

Our office provides advice on and preparation of required documents for public interest corporations, including financial statements, inventories of property, business plans, and budgets of receipts and payments.

Please feel free to contact us for an initial discussion.

　

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Related Articles:
Tax Planning Using Public Interest Corporations
Public Interest Corporation Tax Impact Simulation

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