One of the things that overseas companies must pay attention to when doing business in Japan is the thin capitalization rule.
What is the Thin Capitalization Rule in Japan?
When a subsidiary of an overseas company in Japan raises funds, it can reduce its tax burden by borrowing more from its overseas affiliate instead of equity investment. For this reason, a system known as the "thin capitalization rule" was introduced to prevent tax avoidance.
For example, if the amount of equity is small and the amount of borrowing from the foreign controlling shareholder (e.g., the foreign parent company) is large, the Japanese subsidiary records more interest payments on the loan to the parent company instead of dividends, resulting in less profit for the Japanese subsidiary and also less corporate tax, etc., to pay in Japan.
Therefore, to prevent tax avoidance, the Japanese tax system permits borrowing from the foreign controlling shareholder (e.g., the foreign parent company) only up to three times its equity. Suppose the average balance of interest-bearing debt exceeds three times the amount of the equity owned by the foreign controlling shareholder (e.g., the foreign parent company). In this case, the interest corresponding to the excess portion is not deductible as expenses.
Reference : website of the Ministry of Finance （https://www.mof.go.jp/tax_policy/summary/international/179.htm）
If you have any questions, please feel free to contact us.
Kommentare