By carrying out a qualified merger with a wholly-owned (100%) subsidiary that holds net operating loss carryforwards, the surviving company can succeed to those carryforward losses (Article 57, Paragraph 2 of the Corporation Tax Act). However, because it is conceivable that a company could acquire a dormant company with large carryforward losses and then carry out a qualified merger in order to inherit those losses and reduce its corporation tax—an act of tax avoidance—certain restrictions have been put in place. Specifically, unless either one of the following requirements is not met, the carryforward losses cannot be succeeded to (Article 57, Paragraph 3 of the Corporation Tax Act):

 

1. The qualified merger satisfies the “Joint Business requirements” (such as the business relatedness requirement, business scale requirement, and specified officer succession requirement) (Article 112, Paragraph 3 of the Order for Enforcement of the Corporation Tax Act).
2. A control relationship has existed continuously between the merged corporation and the surviving corporation from the date five years prior to the first day of the fiscal year of the surviving corporation in which the date of the qualified merger occurs (Article 112, Paragraph 4, Item 1 of the Order for Enforcement of the Corporation Tax Act).
3. Where either the merged corporation or the surviving corporation was established after that date five years prior, a control relationship has existed continuously between the merged corporation and the surviving corporation from whichever is later of the date of establishment of the merged corporation or the date of establishment of the surviving corporation (Article 112, Paragraph 4, Item 2 of the Order for Enforcement of the Corporation Tax Act).

 

In addition, losses arising from the transfer of assets that the merged corporation held prior to the formation of the control relationship are subject to restrictions on deductibility (Article 62-7, Paragraph 2 of the Corporation Tax Act).

https://www.zeiken.co.jp/hourei/HHHOU000000/62-7.html

 

The following is an account of a court case involving a well-known golf course management company (hereinafter “PGP”) that operates a business acquiring and turning around failed golf courses. PGP merged a substantially dormant, wholly-owned subsidiary holding carryforward losses—first passing it through a merger with a company that satisfied the joint business requirements—and then merged it with a subsidiary in which it did not hold a full (100%) controlling interest but rather a 99.999% stake, in order to succeed to the carryforward losses. This arrangement was subsequently denied by the tax authorities.

 

2009
PGP purchased shares in a golf course management company, PGPAH6, from a trading company, making it a wholly-owned subsidiary. Because this golf course company was suspected of having hidden liabilities—including suspicions that its manager had embezzled funds—PGP carved out the golf course business through a spin-off-type company split and established a subsidiary (PGP Chiba) to house it.

Subsequently, PGPAH6 transferred its shares in PGP Chiba to PGMP1, generating a loss of ¥5.7 billion. After transferring its shares in PGP Chiba, PGPAH6 conducted essentially no further activity and fell into a dormant state.
https://omikawa-tax.jp/pgm_precedent/

 

February 2017
PGPAH6 Co., Ltd. was absorbed through merger by PGMP4 Co., Ltd., another wholly-owned subsidiary of PGP Co., Ltd., and PGMP4 succeeded to ¥5.7 billion in carryforward losses. PGMP4 Co., Ltd. operates a golf course business.

On the same day, conditional on the completion of the foregoing merger, PGMP4 Co., Ltd. merged with PGP Property Co., a 99.999% subsidiary of PGP Co., Ltd. While PGP Property is not a wholly-owned (100%) subsidiary, both PGMP4 Co., Ltd. and PGP Property operate the same golf course business, so if the joint business requirement and the employee succession requirement were satisfied, the merger would meet the qualification requirements.

During the tax audit, the question of whether the carryforward losses could be succeeded to by PGP Property became an issue. In other words, in 2017 PGPAH6 was absorbed by merger into PGMP4 Co., Ltd., and was then subsequently absorbed by merger into PGP Property. Because PGP Property was not a wholly-owned (100%) subsidiary of PGP, if PGPAH6 had been merged directly into PGP Property, the joint business requirement and employee succession requirement would not have been satisfied, and the carryforward losses could not have been succeeded to. However, by inserting an intermediate merger with PGMP4 Co., Ltd.—which likewise operates a golf course business—in between, the carryforward losses were, on their face, lawfully succeeded to.

The tax authorities denied this arrangement, holding that it fell under the category of “cases found to result in an unjust reduction of the tax burden for corporation tax purposes” as set out in Article 132-2 of the Corporation Tax Act.
https://laws.e-gov.go.jp/law/340AC0000000034#Mp-Pa_2-Ch_5-At_132_2

 

This is a notable case in which, although the taxpayer lost before the National Tax Tribunal, the taxpayer prevailed at both the district court and the high court level—an unusual outcome.

 

I’m writing this because it can make a potentially significant difference to your company’s finances. There are two calculation methods for Consumption Tax: the Standard Method, which is the default, and the Simplified Method, which is optional.

If your sales two years ago were ¥50 million or less, you can choose between the Standard (actual) tax method and the Simplified tax method. You must make this choice before the start of the fiscal year — once it has begun, you can no longer switch. However, if you decide in advance, you can choose whichever method is more advantageous.

The amount of consumption tax you owe at year-end can differ significantly — easily by hundreds of thousands or even millions of yen — so this is not a decision to take lightly.

The typical decision criteria are as follows:

• Main revenue comes from exports → Standard (actual) tax method, since you will be entitled to a refund.
• High labor costs → Simplified tax method, since it allows you to claim a higher deemed input consumption tax rate (e.g., 90%, 80%, 70%, 60%, or 50%).
• Planning to purchase fixed assets such as buildings → Standard (actual) tax method, since you will likely receive a refund of the consumption tax charged on the construction cost.

The Standard Method simply compares Input Consumption Tax (課税仕入れに係る消費税) and Output Consumption Tax (課税売上に係る消費税). The difference is the amount you will owe to the government.

The Simplified Method allows only a certain percentage of your taxable sales to be counted as deductible input tax. As a result, only a fixed percentage of your sales will determine the consumption tax to be paid.

We will be happy to provide you consultation if you would like. Please contact us through Contact page (https://minatoacc.com/contact/)

 

 

 

Japanese Consumption Tax is tricky, especially when you want to choose between the tax filer status to get a refund, and the default, non-filer status.

Here are the 5 most important rules that you should know.

 

• For SMEs and individuals with capital under 10 million yen, for the first 2 years can be exempt from Japanese consumption tax.

 

• If sales are more than 10 million yen in the year before last, you will automatically be a consumption tax filer. In other words, you cannot have a choice.

 

• Once you choose to be a consumption tax filer, you will have to stay as one for at least 2 years. If you buy a fixed asset of more than 1 million yen, you will have to stay as a filer If you purchase a fixed asset for the next 2 years from the end of the year when the fixed asset was bought. That means you will have to stay as a consumption tax filer for at least 3 years if you purchase one in the first year. of more than 10 million yen while you are a tax filer and using Standard Method (I will explain that later), you will stay as a consumption tax filer for 3 years include the year that the asset was bought.

 

• If both salary and taxable sales (domestic sales and exports) in the first 6 months of a fiscal year are more than 10 million yen, you will automatically be consumption taxpayer. Similarly, if your capital is increased over 10 million by the start of the second year, you will also automatically be a consumption tax payer.

 

• Simplified Method. You can choose Simplified Method (explanation for Simplified Method coming in a post soon) if the sales in the year before last were under 50 million yen. Once you choose it, you will have to use the Simplified Method for the next 2 years. (Does this follow the extension rules for fixed assets?)

 

This list in not conclusive, and there are a few exceptions. So please contact us if you would like to explore more options regarding your consumption tax filer choices! Send us a message, email us at info@minatoacc.com, or head on over to our website www.minatoacc.com

 

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