Summary of the deferral treatment
The article 51 provides that capital gain arising from transfer of assets for capital contribution to incorporate a new corporation can be deferred if certain conditions are met. This deferral treatment has been permitted even if the newly incorporated company is a foreign corporation, under the tax law until March 31, 1998.
Main point of the new rule
1. Under the new tax law effective April 1, 1998, the tax deferral treatment is not permitted if assets in Japan are contributed to incorporate a new foreign corporation. The new rule intends to prevent capital gain of assets in Japan to escape from taxation in Japan. Needless to say, the tax deferral is permitted as before if assets in Japan are contributed to incorporate a new Japanese corporation.
"Assets in Japan" is defined in revised tax regulation as "real estates, the leasing right to real estates , the right to exploitation of mines or quarries in Japan and any properties attributed to place of business in Japan." As an exemption for the new rule, the tax deferral treatment will be permitted for contribution of shares in a foreign corporation to incorporate another foreign corporation if the contributing corporation owns at least 25% of the shares in the contributed foreign corporation. Accordingly, the tax deferral treatment can still be enjoyed in the case of incorporation of a foreign holding company by contributing shares in foreign subsidiaries.
2. The requirement of 95%(or more)ownership of a newly incorporated corporation by a contributing corporation, which is one of the conditions for application of the deferral treatment under Article 51, was strengthened under the new regulation. That is, the tax deferral treatment shall not be applied if the ownership percentage is expected to decrease to less than 95% in the future, whereas the former regulation only required the ownership requirement to be met at the time of the incorporation of the new corporation. Although there is no definition for the words " is expected" at this stage, the tax deferral may not be allowed if the newly incorporated corporation is planed to be merged into other corporation.
3. The limitation for the tax deferral for capital gain arising from a sale of land (only 80% of the gain can be deferred) was removed.
The above amendments to article 51 are effective for contribution in kind made after April 1, 1998.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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