Relevant Period:This article presents illustrative calculations based on the system in place when it was published in 2016. Public interest certification and the tax treatment of donations each have their own requirements.

In the recent blog post “Tax Planning Using Public Interest Corporations,” we explained the effects on corporation tax, income tax, and inheritance tax. Below, we simulate them using a simplified example, omitting detailed special calculations.

　

Case Study: President A

President A is an owner-manager.
His family consists of his wife and two children, an eldest daughter and eldest son.
His assets comprise JPY100 million in cash and deposits, JPY200 million in real estate (his home and a vacation home), and JPY2.4 billion in Company A shares (shares in his own company). He has no liabilities or life insurance.
He makes approximately JPY1 million in income-deductible donations each year.

Company A is an unlisted company.
The shareholding structure is 96% held by A (worth JPY2.4 billion) and 4% by his wife (worth JPY100 million).
Annual after-tax profit is approximately JPY100 million, and total dividends of JPY20 million are paid.
A's director remuneration is JPY24 million.

Assume also that his wife holds JPY200 million in cash and deposits in addition to Company A shares.

　

Suppose A dies in these circumstances and an inheritance occurs.

The basic inheritance tax deduction is JPY30 million plus JPY6 million multiplied by the number of statutory heirs, making it JPY48 million in this case.
The net estate is JPY100 million in cash and deposits plus JPY200 million in real estate plus JPY2.4 billion in Company A shares, totaling JPY2.7 billion. Subtracting the JPY48 million basic deduction produces a total taxable estate of JPY2.652 billion.
Allocating this by statutory inheritance shares gives JPY1.326 billion to the wife and JPY663 million to each child. Total inheritance tax is calculated as follows.

Wife: JPY1.326 billion × 55% − JPY72 million = JPY657.3 million
Eldest daughter: JPY663 million × 55% − JPY72 million = JPY292.65 million
Eldest son: JPY663 million × 55% − JPY72 million = JPY292.65 million
Total: JPY1.2426 billion

If the estate is actually divided according to statutory shares, each person's inheritance tax burden is as follows.

Wife: JPY1.2426 billion × 1/2 = JPY621.3 million, reduced to zero by spousal tax relief
Eldest daughter: JPY1.2426 billion × 1/4 = JPY310.65 million
Eldest son: JPY1.2426 billion × 1/4 = JPY310.65 million
Total: JPY621.3 million

Each person's net amount received should therefore be as follows.

Wife: JPY1.35 billion − JPY0 = JPY1.35 billion
Eldest daughter: JPY675 million − JPY310.65 million = JPY364.35 million
Eldest son: JPY675 million − JPY310.65 million = JPY364.35 million
Total: JPY2.0787 billion

For those wishing to review how inheritance tax is calculated, The Tokyo Certified Public Tax Accountants' Association website and similar resources may be helpful.

The inherited assets consist of JPY100 million in cash and deposits, JPY200 million in real estate, and JPY2.4 billion in Company A shares. Even if the real estate (the home and vacation home) could be sold at its assessed value, this would produce only JPY300 million in cash. Adding the wife's JPY200 million would bring available cash to JPY500 million, insufficient to pay inheritance tax exceeding JPY600 million.
In such cases, if wealth is concentrated in President A's hands and the surviving family has little wealth of its own, they ultimately have no choice but to sell shares in the family company or take similar steps to fund the inheritance tax.

　

What if President A had established a public interest incorporated foundation during his lifetime and donated some of his company shares?

Suppose he donated Company A shares representing a 20% interest to the foundation.
Company A's shareholding structure would then be 76% held by A (worth JPY1.9 billion), 20% by the public interest incorporated foundation (worth JPY500 million), and 4% by his wife (worth JPY100 million).

If approval under Article 40 of the Act on Special Measures Concerning Taxation is obtained for the share donation, the capital gains are exempt from income tax.

　

Overview of the Special Exemption for Capital Gains and Other Income on Donations of Property to Public Interest Corporations and Similar Entities

When an individual donates land, buildings, or other assets to a corporation, the assets are deemed transferred at their market value at the time of donation, and income tax is imposed on the appreciation from acquisition to donation (Income Tax Act, Article 59, Paragraph 1, Item (i)).

However, where these assets are donated to a public interest corporation or similar entity,a system exempts this income tax if the Commissioner of the National Tax Agency approves the donation as satisfying certain requirements, including making a significant contribution to education or science, cultural advancement, social welfare, or other public interests(Article 40 of the Act on Special Measures Concerning Taxation).

Notes
1. Eligible public interest corporations and similar entities include public interest incorporated associations, public interest incorporated foundations, specified general corporations (those satisfying certain requirements under the Corporation Tax Act), and other corporations conducting activities for public benefit, such as social welfare corporations, incorporated educational institutions, offenders rehabilitation corporations, religious corporations, and specified nonprofit corporations.
2. Donations include gifts and bequests to existing public interest corporations and similar entities, as well as contributions of property to establish new ones.

Source: National Tax Agency Website: Overview of the Special Exemption for Capital Gains and Other Income on Donations of Property to Public Interest Corporations and Similar Entities

Further reference:
National Tax Agency Website: Application for Approval Under Article 40 of the Act on Special Measures Concerning Taxation

　

Next, consider dividends.

This requires a short detour. As discussed in the previous blog post, “Accounting and Taxation for Public Interest Corporations,” the public interest corporation accounting guidelines state that where donated assets are subject to donor-imposed restrictions on their use, the amount received is to be recorded in the restricted net assets category of the balance sheet.
Thus, where the donor restricts the assets to use in the foundation's non-profit-making business activities or public interest activities, corporation tax should not apply.

In other words, if the JPY500 million in shares donated by A is restricted to use in non-profit-making business activities or public interest activities, the annual JPY4 million in dividends should be exempt from corporation tax as investment income from assets used for those activities. It seems that the legislative framework provides the earlier-described income tax exemption upon NTA Commissioner approval—based on requirements including a significant contribution to education, science, culture, social welfare, or other public interests—to clarify this at the donation stage.

Under Article 11 of the Income Tax Act and related provisions below, dividends paid to this public interest corporation are not subject to income tax withholding.

　

Income Tax Act, Article 11 (Exemption for Public Corporations and Similar Entities and Public Interest Trusts), Excerpt

Income tax shall not be imposed on interest, dividends, benefit compensation payments, interest payments, profits, gains, and distributions of profits listed in the items of Article 174 (Income Tax Base for Domestic Corporations) received by domestic corporations listed in Appended Table 1. For distributions from beneficial interests in loan trusts, the exemption is limited to the portion corresponding to the period during which the domestic corporation continuously held the beneficial interest, calculated as prescribed by Cabinet Order.

　

Income Tax Act, Appended Table 1: Table of Public Corporations and Similar Entities (Articles 4 and 11), Excerpt

Name	Governing law
Public interest foundation	Act on General Incorporated Associations and General Incorporated Foundations (Act No. 48 of 2006) and Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations (Act No. 49 of 2006)
Public Interest Incorporated Association	Act on General Incorporated Associations and General Incorporated Foundations (Act No. 48 of 2006) and Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations (Act No. 49 of 2006)

　

Next, what if A directed his annual JPY1 million donation to the public interest corporation he established?

Under Article 78 of the Income Tax Act and related provisions below, this also qualifies as a specified donation deductible from income. JPY998,000—the JPY1 million donation less JPY2,000—is deducted.
(Where requirements are met, such as certification by the competent administrative authority that the recipient qualifies for donation tax credits, a tax credit may be elected instead of an income deduction. Corporate donations are subject to separate deduction rules under the Corporation Tax Act.)

　

Income Tax Act, Article 78 (Donation Deduction), Excerpt

Where a resident makes specified donations during a year and the amount in Item (i) exceeds the amount in Item (ii), the excess shall be deducted from that person's total income, retirement income, or forestry income for that year.
(i) The total amount of specified donations made during the year, capped at 40% of the aggregate of the person's total income, retirement income, and forestry income for that year.
(ii) JPY2,000
2. Specified donations under the preceding paragraph mean the following donations, excluding those made in connection with admission to a school.
(ii) Donations to public interest incorporated associations, public interest incorporated foundations, and other corporations or organizations conducting public interest activities, including donations to establish such corporations and other pre-establishment donations prescribed by Cabinet Order, that the Minister of Finance designates, as prescribed by Cabinet Order, as satisfying the following requirements:
(a) They are solicited broadly from the public.
(b) It is certain that they will be used for urgent expenditures contributing to education or science, cultural advancement, social welfare, or other public interests.
(iii) Donations relating to the principal activities of corporations listed in Appended Table 1 and other corporations established under special legislation that are prescribed by Cabinet Order as making a significant contribution to education or science, cultural advancement, social welfare, or other public interests, excluding donations covered by the preceding two items.

　

Order for Enforcement of the Income Tax Act, Article 216 (Matters Examined When Designating Specified Donations)

The Minister of Finance's designation under Article 78, Paragraph 2, Item (ii) of the Act (Donation Deduction) shall follow examination of the following matters:
(i) The activities of the corporation or organization soliciting donations and the intended use of the donations
(ii) The purpose and target amount of fundraising, and its geographic scope and intended donors
(iii) The fundraising period
(iv) How the donations collected will be managed
(v) The expenses required for fundraising
(vi) Other matters necessary for the designation
2. When the Minister of Finance makes the designation under the preceding paragraph, it shall be publicly announced.

　

Order for Enforcement of the Income Tax Act, Article 217 (Scope of Corporations Making a Significant Contribution to Public Interests), Excerpt

The corporations prescribed by Cabinet Order under Article 78, Paragraph 2, Item (iii) of the Act (Donations to Corporations Making a Significant Contribution to Public Interests) shall be the following:
(iii) Public interest incorporated associations and public interest incorporated foundations

　

Let us review the position.

Without a Public Interest Corporation:
A's assets comprise JPY100 million in cash and deposits, JPY200 million in real estate (his home and vacation home), and JPY2.4 billion in Company A shares.

After Establishing a Public Interest Corporation:
A's assets comprise JPY100 million in cash and deposits, JPY200 million in real estate (his home and vacation home), and JPY1.9 billion in Company A shares.

　

Again, suppose A dies and an inheritance occurs.

Calculating inheritance tax as at the beginning, the total taxable estate is JPY2.152 billion, after subtracting the JPY48 million basic deduction from the JPY2.2 billion net estate.
Allocating this by statutory shares gives JPY1.076 billion to the wife and JPY538 million to each child. Total inheritance tax is as follows.

Wife: JPY1.076 billion × 55% − JPY72 million = JPY519.8 million
Eldest daughter: JPY538 million × 50% − JPY42 million = JPY227 million
Eldest son: JPY538 million × 50% − JPY42 million = JPY227 million
Total: JPY973.8 million
(The earlier donation of JPY500 million in shares to the public interest corporation reduces the taxable estate, so the children are no longer in the highest tax bracket.)

If the estate is actually divided according to statutory shares, each person's inheritance tax burden is as follows.

Wife: JPY973.8 million × 1/2 = JPY486.9 million, reduced to zero by spousal tax relief
Eldest daughter: JPY973.8 million × 1/4 = JPY243.45 million
Eldest son: JPY973.8 million × 1/4 = JPY243.45 million
Total: JPY486.9 million

Each person's net amount received should therefore be as follows.

Wife: JPY1.1 billion − JPY0 = JPY1.1 billion
Eldest daughter: JPY550 million − JPY243.45 million = JPY306.55 million
Eldest son: JPY550 million − JPY243.45 million = JPY306.55 million
Total: JPY1.7131 billion

The inherited assets comprise JPY100 million in cash and deposits, JPY200 million in real estate, and JPY1.9 billion in Company A shares. If the real estate (the home and vacation home) could be sold at its assessed value, this would generate JPY300 million in cash. Adding the wife's JPY200 million would produce JPY500 million, just enough to pay inheritance tax totaling slightly less than JPY500 million. However, although the company shares remain, all cash and real estate would be gone.

　

What would happen if JPY700 million of the inherited JPY1.9 billion in Company A shares, representing a 28% interest, were donated to the public interest corporation?

In that case, as explained below, the JPY700 million would not be subject to inheritance tax.

　

Donating Inherited Property to Public Interest Corporations and Similar Entities

A special rule excludes from inheritance tax property acquired by inheritance or bequest and donated to the national government, a local government, or certain corporations conducting specified public interest activities, as well as money contributed as trust property to certain public interest trusts.

Source: National Tax Agency Website: Donating Inherited Property to Public Interest Corporations and Similar Entities

　

Let us calculate inheritance tax again.

The total taxable estate is JPY1.452 billion: the JPY2.2 billion net estate less the JPY700 million share donation gives JPY1.5 billion, from which the JPY48 million basic deduction is subtracted.
Allocating this by statutory shares gives JPY726 million to the wife and JPY363 million to each child. Total inheritance tax is as follows.

Wife: JPY726 million × 55% − JPY72 million = JPY327.3 million
Eldest daughter: JPY363 million × 50% − JPY42 million = JPY139.5 million
Eldest son: JPY363 million × 50% − JPY42 million = JPY139.5 million
Total: JPY606.3 million

If the estate is actually divided according to statutory shares, each person's inheritance tax burden is as follows.

Wife: JPY606.3 million × 1/2 = JPY303.15 million, reduced to zero by spousal tax relief
Eldest daughter: JPY606.3 million × 1/4 = JPY151.575 million
Eldest son: JPY606.3 million × 1/4 = JPY151.575 million
Total: JPY303.15 million

Each person's net amount received should therefore be as follows.

Wife: JPY750 million − JPY0 = JPY750 million
Eldest daughter: JPY375 million − JPY151.575 million = JPY223.425 million
Eldest son: JPY375 million − JPY151.575 million = JPY223.425 million
Total: JPY1.19685 billion

After the donation to the public interest corporation, the inherited assets comprise JPY100 million in cash and deposits, JPY200 million in real estate, and JPY1.2 billion in Company A shares. If the real estate (the home and vacation home) can be sold at its assessed value, this would almost cover the inheritance tax totaling slightly over JPY300 million.
The wife's JPY200 million would remain. If the family strongly wished to retain the real estate, borrowing against it to fund the tax payment might also be an option.

The inheritance tax has therefore been reduced from the original JPY621.3 million to JPY303.15 million—by slightly more than half.

　

This raises the question: why not transfer even more company shares to the public interest corporation? Public interest certification, however, is subject to the following requirement under the Public Interest Corporation Authorization Act.

　

Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations
Article 5 (Standards for Public Interest Certification), Excerpt

Where the administrative authority finds that a general incorporated association or general incorporated foundation applying for certification under the preceding Article (hereinafter “public interest certification”) meets the following standards, it shall grant public interest certification to that corporation.
(xv) It does not hold shares or other property prescribed by Cabinet Office Ordinance that allows participation in another organization's decision-making. This does not apply, however, in cases prescribed by Cabinet Order where holding that property poses no risk of substantially controlling the other organization's business activities.

　

Regulations for Enforcement of the Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations
Article 4 (Property Allowing Participation in Another Organization's Decision-Making), Excerpt

The property prescribed by Cabinet Office Ordinance under Article 5, Item (xv) of the Act shall be the following:
(i) Shares

　

Order for Enforcement of the Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations
Article 7 (Cases Permitting Holdings of Shares and Other Property Allowing Participation in Another Organization's Decision-Making), Excerpt

The cases prescribed by Cabinet Order under the proviso to Article 5, Item (xv) of the Act are those where the corporation does not hold a majority of voting rights at a shareholders' meeting or other body that determines an organization's financial, operating, or business policies.

　

Appropriate use of preferred shares may avoid revocation of public interest certification, but as a general rule, a public interest corporation's holding of company shares that gives it a majority of voting rights creates a risk of revocation. In this case, assuming shareholding percentages and voting rights percentages are identical, 20% plus 28% equals 48%, below a majority.

The Public Interest Corporation Authorization Act also imposes the following certification requirements, among others, making careful consideration with specialists advisable.

　

Act on Authorization of Public Interest Incorporated Associations and Public Interest Incorporated Foundations
Article 5 (Standards for Public Interest Certification), Excerpt

Where the administrative authority finds that a general incorporated association or general incorporated foundation applying for certification under the preceding Article (hereinafter “public interest certification”) meets the following standards, it shall grant public interest certification to that corporation.
(x) For each director, the combined number of directors comprising that director, their spouse, and relatives within the third degree, including persons with a special relationship prescribed by Cabinet Order equivalent to such relatives, must not exceed one-third of all directors. The same applies to auditors.
(xiii) Standards for remuneration and similar payments to directors, auditors, and councilors—including remuneration, bonuses, other economic benefits received as compensation for duties, and retirement allowances—must be established as prescribed by Cabinet Office Ordinance to prevent unreasonably high payments, taking into account remuneration of private-sector officers, employee salaries, the corporation's financial position, and other circumstances.

　

Our office works with judicial scriveners and administrative scriveners specializing in registration and public interest certification, with experience in hundreds of public interest corporation matters. We offer individual consultations to owner-managers considering public interest corporations as part of planning for shares in their own companies. Direct consultations are charged from the first session.

Please feel free to use our services if you need professional support.

　

Consultations and Engagements

Individual, case-specific consultations are charged from the first session. For current consultation scope, fees, and application procedures, see Our Services. Fees for ongoing support and individual engagements are quoted separately according to the work involved.

　

Related Articles:
Tax Planning Using Public Interest Corporations
Accounting and Taxation for Public Interest Corporations

Materials Consulted for the Correction

• Cabinet Office: 2013 FAQ on Donation Tax Credits

If You Would Like Advice on Your Own Circumstances

We provide tax advice suited to your circumstances, including returns, inheritance, and company taxation.

Japanese Tax Consultations →

See consultation topics, fees, and how to book.