We have answered a number of commonly asked questions below

We get quite a few questions about trusts in Japan and our services.
Read on to understand in more detail about what we do.

Compared with a direct investment in Japanese real estate, an investment made through CastGlobalTrust’s specified beneficial interest security-issuing trust (SIST) scheme can, by virtue of some countries’ double tax agreements with Japan, dramatically reduce the Japanese tax burden to between 10% (e.g., Hong Kong and Taiwan) and 15% (e.g., Singapore) withholding tax on net income and/or capital gains, depending on the country where an investor resides.

When investors invest in Japanese real estate through our SIST scheme, the income arising from rent (real estate income) and capital gains (the transfer of that income) from that real estate is converted into dividend income for Japanese tax purposes. No other tax is imposed on income and/or capital gains.

Regarding dividend income

  • Income distribution from a SIST qualifies as a dividend for Japanese tax purposes (under articles 24(1) and 161(1)(ix)(b) of the Income Tax Law), while the trust itself is not a taxable entity for Japanese corporate tax purposes (according to articles 12(1) and (3) of the Corporate Tax Law)
  • The withholding tax rate imposed on any dividend income is 20.42%, in accordance with Japan’s statutory tax law, but it could be reduced to a lower rate under a double tax agreement between Japan and the country or region an investor is investing from (e.g., 15% for Singapore, 10% for Hong Kong and Taiwan). Please note that although Taiwan is not a treaty country, a Japanese law was enacted in 2016 to implement an agreement between the Association of East Asian Relations of Taiwan and the organisation now called the Japan–Taiwan Exchange Association to avoid double taxation and prevent fiscal evasion

For the sake of comparison, if an overseas investor invests in Japanese real estate without using a SIST, this would ordinarily lead to the following tax result. Assuming that an investor is a company, 20.42% withholding tax would be levied on gross rental income, as well as approximately 31% tax on net income from real estate leasing activities and capital gains, by way of self-assessment. Also, the debt cap rule would limit the tax deductibility of interest expenses to 20% of earnings before interest, taxes, depreciation, and amortisation (EBITDA), which further increases the tax costs.

The following is a general comparison of Japanese tax consequences for non-resident individuals or overseas companies investing in Japanese real estate through the GK/TK scheme, direct investment, or CastGlobalTrust’s specified beneficial interest security-issuing trust (SIST) scheme.

1. Initial purchase

GK/TK scheme

On the appraised value of the property purchased, investors must pay
  • a real estate acquisition tax of 3% for land and either 3% or 4%1 for building acquisition
  • a registration tax of 1.5% for land and 2% for the building

Direct investment

The same as GK/TK

SIST scheme

The same as GK/TK. However, an additional registration tax applies for the entrustment of land (0.3%) and the entrustment of the building2 (0.4%)

2. Property leases to tenants

GK/TK scheme

  • Rent income is generally subject to a 34% corporate tax, but the tax burden could be reduced to almost nothing due to the tax deduction of profits allocated to TK investors
  • Withholding tax does not apply to rent income

Direct investment

  • Rent income is subject to 20.42% withholding tax
  • A non-resident individual investor is subject to income tax by way of self-assessment, and their real estate income is taxed at progressive rates of up to 45%, where prepaid withholding tax is creditable3
  • The same broadly applies to foreign companies investing in Japanese real estate, though the applicable flat rate is 23.2%3
Please note that individual investors are generally not permitted to offset rent income against other categories of expenses/losses

SIST scheme

  • Investors do not need to pay corporate tax because SIST-qualified trusts, such as CastGlobalTrust, are not considered taxable entities for Japanese tax purposes, under certain conditions
  • For a SIST to keep its non-taxable status, almost all6 annual profits must be distributed to SIST beneficial interest holders

3. Profit distribution

GK/TK scheme

A withholding tax of 20.42% applies to TK profit distribution. Even under the Hong Kong–Japan tax treaty, for example, this rate could not be reduced.

Direct investment

Withholding tax does not apply, assuming that the property itself does not qualify as a permanent establishment4. However, if it does, 20.42% withholding tax generally applies.

SIST scheme

Annual profit distribution is subject to a withholding tax of 20.42%. However, under the Hong Kong–Japan tax treaty, for example, this rate could be reduced to 10%.

4. Disposition of property

GK/TK scheme

  • Disposition of property under GK will not give rise to any withholding tax on the proceeds from a sale
  • The distribution of capital gains through TK is subject to 20.42% withholding tax

Direct investment

  • Disposition of property will, in principle, give rise to 10.21% withholding tax on gross sales proceeds
  • Individual overseas investors are subject to capital gains tax, by self-assessment, either at a long-term rate of 15.315% or a short-term rate of 30.63%3, 5
  • Overseas corporate investors are subject to a corporate tax on their capital gains of 23.2%3

SIST scheme

  • Disposition of property will not give rise to any withholding tax or corporate tax on the proceeds from a sale
  • Under the Hong Kong–Japan tax treaty, for example, the distribution of capital gains is subject to 10% withholding tax

1 In principle, a 4% rate is the applicable rate, but a 3% rate applies to the acquisition of land and the residential building until 31 March 2024. Additionally, the tax base for certain qualifying land has been cut in half until that date.

2 Please note that the laws of Japan are unique in that it distinguishes between the ownership of land and the ownership of the buildings that have been built on it, so some taxes, such as consumption tax, are levied only on buildings.

3 These rates exclude local taxes that are applicable when a permanent establishment (PE) is determined to exist in Japan. For an individual investor that has a PE in Japan, an extra 10% flat local tax is due on leasing income, and an extra 9% or 5% flat local tax is due on short-term capital gains or long-term capital gains, respectively. For an overseas company that has a PE in Japan, the overall effective tax rate would be approximately 35%, which includes national and local taxes.

4 It would be necessary to conduct a detailed analysis to determine if a PE exists. This would need to take into account all the investor’s activities in Japan, as well as those of any related parties.

5 If the disposition of real property takes place within five years from the acquisition (measured from 1 January of the year of the disposition), the disposition is considered short-term and a higher tax rate of 30.63% applies. However, if the disposition takes place after five years (measured from 1 January of the year of the disposition), the disposition is considered long-term and a lower rate of 15.315% applies.

6 For a specified beneficial interest security-issuing trust (SIST) to maintain its non-taxable status, almost all its annual profits must be distributed to beneficial interest holders. This means that a profit–retention ratio — the amount of retained earnings divided by the trust principal amount, calculated as of the date on each balance sheet — will continue to be kept at or below 2.5%.

An investor’s ability to obtain a lower tax rate depends on whether there is a tax treaty between Japan and the country where the investor lives, and if this treaty can successfully be applied.

To obtain a treaty rate, an investor needs to file a designated treaty form with the Japanese tax authorities through the trustee prior to the date of receiving the dividend. In addition, they need to ensure that the principal purpose test (PPT) under the applicable treaty (e.g. Article 26 of the Hong Kong–Japan tax treaty) will not be triggered.

For instance, it is generally interpreted that if the overseas investor is a company of substance (with physical premises, directors, and staff) and is actively engaged in its resident country in business activities — which may include using real assets and assuming real business risks — the treaty benefit cannot be denied solely on the basis of the possibility of receiving tax benefits under the treaty.

Once a trust has qualified as a specified beneficial interest security-issuing trust (SIST) — as stipulated under Article 2(29)(c) of the Corporate Tax Law of Japan — Japanese real estate income and capital gains can be reclassified into dividend income. For a trust to qualify as a SIST, all the following requirements need to be met:

  1. The trustee must obtain approval from a competent tax office
  2. The trust agreement with a beneficiary must include a provision that stipulates the ratio of non-distributed profits held by the trustee will be equal to or lower than 2.5% of the amount of the trust principal
  3. The profit distribution of the trust will be made every year in accordance with the requirement set under b. above
  4. The length of the calculation period will be set at one year or less
  5. The trust will never have qualified as a “trust having no beneficiaries” at any time in the past

CastGlobalTrust has met all these requirements and is qualified as a SIST.

If an overseas investor is a resident in a country that has a tax treaty with Japan, it is likely that their investment through a specified beneficial interest security-issuing trust (SIST) should not lead to the Japanese tax authorities determining that they have a permanent establishment in Japan simply because of their investment.

A permanent establishment is defined under Japanese tax law (Article 2(12-19) of the Corporate Tax Law) in the same way as that stipulated under the applicable tax treaties, and these tax treaties ordinarily provide an independent agent clause (e.g., Article 5(6) of the Hong Kong–Japan tax treaty), so the mere existence of an independent agent should not give rise to a PE determination.

The trustee should qualify as an independent agent within the meaning of an applicable treaty because of its legal independence, its economic independence, and the fact that it is operating in the ordinary course of business.

So, overseas investors should consider investing through a SIST from a country that has a tax treaty with Japan.

The principal purpose test (PPT) is a standard that was published in the OECD’s 2015 Final Report on BEPS Action 6, and it is not yet something that has been applied widely in Japan. There is currently no publicly available precedent that shows treaty benefits were denied by the Japanese tax authorities specifically based on the application of the PPT.

Having said that, Japan is an OECD country that, in principle, respects the OECD’s Commentaries on the Articles of the Model Tax Convention, which, in effect, note that the treaty benefits should not be denied if the granting of benefits is in accordance with the “object and purpose” of the treaty. This generally means that, if the investor is a company engaged in business activities in its home country, then it is likely that the treaty benefit will be provided.

Generally speaking, Japanese banks and trusts historically have not been so good at handling cross-border products, partly because there has not been the need for them to expand their businesses abroad as they have had so much business domestically.

None of Japan’s three largest banks have overseas subsidiaries that focus on local retail trust businesses, except for their Luxembourg subsidiaries, which typically provide a platform for investment funds marketed solely to Japanese retail investors.

Answers relating to tax matters have been prepared by Tokyo Kyodo Accounting Office. However, please note that this is just for reference purposes only and Tokyo Kyodo Accounting Office will not be liable for any loss or damage arising from the use of the information contained herein. Anyone interested in investing through CastGlobalTrust should first consult with your own independent professional advisor before making any decision.