Under the tax haven countermeasure rules, The category receiving the strictest treatment under the rules is thespecified foreign related companiesforeign related company. Often described as a “paper company,” the statutory category is broader and comprisesfour types.Those types are listed in the provision.

First, the exemption threshold differs

This is what makes treatment of specified foreign related companies stricter. Article 66-6(7) of the Act on Special Measures Concerning Taxation provides:

(i) For a specified foreign related company, its tax burden ratio for each fiscal yearIf the tax burden ratio(...)is at least twenty-seven percent.That is the exemption condition.

(ii) For a covered foreign related company, its tax burden ratio for each fiscal year must reach the applicable threshold.at least twenty percent.That is the exemption condition.

It is 27%.Even among developed countries, corporation tax rates below this level are not uncommon.「A tax haven:“It is not a tax haven, so there is no problem” does not work for specified foreign related companies. That is the risk of this category.

Four types under Article 66-6(2)(ii) of the Special Measures Act

(a) Paper companies

Companies meeting neither of the followingforeign related companies

The wording is “meeting none of the following.”Of (1) through (5),meeting even onemeans the company does not fall under (a).

Items (1) and (2) are the general rules; (3) through (5) are specific exceptions.Both (1) and (2) have a parenthesis stating:“Including foreign related companies prescribed by Cabinet Order as being in circumstances equivalent to those having such facilities or conducting such activities themselves.”The Cabinet Order therefore broadens the scope.

(b) Cash boxes

The company'sTotal assets:the ratio to that amount of the total amounts corresponding to paragraph (8)(i) through (vii) and (viii) through (x)exceeds thirty percent,excluding a foreign related companylimited to foreign related companies whose ratio of securities, loans, and other assets prescribed by Cabinet Order to total assets, calculated as prescribed by Cabinet Order, exceeds fifty percent.。）

The two figures are linked by “and.”

1. Relative to total assets,passive incomemust representmore than 30%,

2. andand, relative to total assets,securities, loans, and similar assets must meet the other threshold.must representmore than 50%,

Meeting only one condition is insufficient.Omitting the parenthetical “limited to” leads to an incorrect determination.

The numerator also does not include all of paragraph (8).The statute refers to paragraph (8),items (i) through (vii) and (viii) through (x).Paragraph (8) also containsitem (vii-2),andItem (xi)and another item, but these two do not enter the numerator. Referring indiscriminately to “the items of paragraph (8)” erases a distinction the statute deliberately makes.

The parenthesis also provides a separate test for foreign related companies that would qualify as foreign financial subsidiaries or similar entities, replacing the numerator withparagraph (10)(i)'samount andthe total under paragraph (10)(ii) through (iv),using the specified comparisonThe larger amountas the alternative numerator.The 30% test is applied differently to this category.

(c) Insurance companies with limited unrelated-party transactions

(1) The ratio of premium income from unrelated and similar parties isless than 10%,andand(2) Total reinsurance premiums paid to unrelated and similar parties as a proportion of premium income from related and similar parties isless than 50%.This satisfies the first exemption.Both conditions must be met.

(d) Blacklisted jurisdictions

A country or region whose cooperation with international efforts to exchange tax information is seriously inadequate,asdesignated by the Minister of Finance,where the foreign related company's head office or principal office is located

Once designated, the company is a specified foreign related company regardless of actual business activities.The Minister of Finance publicly announces designations under paragraph (18).

The evidentiary burden leans toward the taxpayer

Article 66-6(3) of the Special Measures Act.

... Documents and other materials establishing that the foreign related company meets (a)(1) through (5) of that item may be requested.for presentation or submission.If those documents or other materialsare not presented or submitted,If not provided, the foreign related company is presumed not to meet (a)(1) through (5).not to meet the requirements in paragraph (2)(iii)(a) through (c).。

Without the materials, it is presumed to be a paper company.Even if you later say it had substance, the presumption applies at that point. Office leases, evidence of local directors' actual duties, and records of board meetings matter.They should be maintained in the ordinary course.

Presumption provisions with the same structure also appear inParagraph (4)paragraph (4), concerning the economic activity tests for covered foreign related companies, The economic activity tests:）、paragraph (5),concerning liquidating partially covered foreign related companies and similar entities,and paragraph (6),concerning special liquidation fiscal years.

Pay attention to the direction of the effect in paragraph (4).The presumption is that the company“does not meet the economic activity tests in paragraph (2)(iii)(a) through (c).”Paragraph (2)(iii) defines a covered foreign related company as one failing the listed requirements,Fails at least one requirementwhile paragraph (2)(vi) defines a partially covered foreign related company as one meeting all the requirements in (a) through (c).Meets all requirementsThose definitions determine the effect.

Thus, if materials are not provided,

• it becomes a covered foreign related company.(item (iii))
• it does not qualify as a partially covered foreign related company.item (vi) does not apply.

This is why the provision says “for purposes of that paragraph,limited to the portions relating to that item or item (vi).”That is the meaning of the qualification.What should have been only partial inclusion becomes company-wide inclusion.

Return attachment obligation

Article 66-6(14)(iii) of the Special Measures Act requires,for specified foreign related companies with a tax burden ratio below 27%,attachment of balance sheets, income statements, and other documents prescribed by Ministry of Finance Order to the final return.

The attachment threshold is also 27%.Items (i), partially covered foreign related companies, and (ii), covered foreign related companies, use below 20%, so the thresholds differ here too.

Item (i) has a parenthetical exclusion.A partially covered foreign related company qualifying under paragraph (12)(ii), ¥20 million or less, or (iii), 5% or less, is called“partially covered foreign related company exempt from attachment.”a company exempt from attachment. However, that is not the end:paragraph (15) imposes a retention obligation.Records must still be retained.

Points that require care in practice

• Does merely renting a local office meet the substance test?Check whether it is a fixed facility considered necessary for the principal business.
• We hold board meetings in Japan.The management and control test in (2) requires the company to act “itself ... in its head-office jurisdiction.”
• Can a holding company qualify for relief under (3)?There are Cabinet Order requirements, including ownership of at least 25%, and a dividend revenue ratio requirement.
• Are both the 30% and 50% cash-box conditions necessary?Yes. The parenthetical “limited to” narrows the category.
• Is a country with a 25% tax rate safe?For a specified foreign related company, that is below 27%.
• What documents should be kept?The “documents and other materials establishing that the requirements are met” under paragraph (3).

A foreign subsidiary's substance cannot be created retroactively.If it is a specified foreign related company, all income is subject to inclusion and the exemption threshold is a high 27%. If you have overseas holding, real estate holding, or asset management companies, consult us starting with a review of documentation for the substance and management and control tests.

Legal basis

• Article 66-6(2)(ii)(a), (b), (c), and (d) of the Act on Special Measures Concerning Taxation (Specified Foreign Related Companies)
• Article 66-6(3) of the Act on Special Measures Concerning Taxation (Presumption Concerning (a)(1) through (5)), and paragraph (4) (Presumption Concerning Item (iii)(a) through (c))
• Article 66-6(7)(i) and (ii) of the Act on Special Measures Concerning Taxation (Exemptions)
• Article 66-6(14) of the Act on Special Measures Concerning Taxation (Attachments to Final Returns), paragraph (15) (Retention Obligation), and paragraph (18) (Public Notice by the Minister of Finance)
• Article 66-6(8) and (10) of the Act on Special Measures Concerning Taxation (Specified Income Amounts Subject to Partial Inclusion)
• Article 39-14-3 of the Order for Enforcement of the Act on Special Measures Concerning Taxation (Scope of Specified and Covered Foreign Related Companies)
• Article 39-17-2 of the Order for Enforcement of the Act on Special Measures Concerning Taxation (Calculation of Foreign Related Companies' Tax Burden Ratios)

This article does not cover detailed requirements under Article 39-14-3 of the Order, including insurance exceptions. Individual determinations require confirmation of actual business activities and supporting materials.