Thin Capitalization Rule and Earnings Stripping Rule

The two rules are similar and are both trying to restrict interest expenses paid to its parent/affiliate companies. But they are a little bit different in their target. Here are the rules:

Thin Capitalization Rule

The interest paid to its affiliated company overseas that owns more than 50% of its shares is allowed to be deductible only up to the amount corresponding to its loan triple of its equity. For example, if its capital is 10M Japanese Yen and retained earnings are 3M. The interest expenses are only allowed only for its loan up to 39M(13M * 3) yen. If the total loan is 50 million yen, the interest on the remaining 11 million yen loan (50M – 39M) will not be deductible.

Earnings Stripping Rule

You can deduct interest expenses paid to overseas affiliated company from taxable income only at maximum 50% of its taxable income. The exception is that the rule is not application if the total interest is less than 10 million yen.

会計アウトソーシング(記帳代行)をやるかどうか

税理士が記帳代行をやるかどうかについて、賛否両論あります。お客様である会社に社内で会計記録をつけていただき、税理士が毎月お客様のところに行ってチェックするというスタイルを「自計化」と言います。「自」分で計算するようにしてもらうからそう呼ばれているのだと思います。

それと反対に、会計事務所が経理を領収書や通帳などのおおもとの資料から入力から請け負うパターンもあります。これを記帳代行と言います。記帳代行は、時間ばかりかかり入力する作業の付加価値が低いから税理士は自分でやらずに、会社でやってもらって、税理士はもっと付加価値の高い仕事にフォーカスするべきだというのが、自計化を良しとする根拠だと思います。

私はどちらのスタイルが特に優れている思いませんし、実際に私の事務所では両方やっています。私は、むしろ記帳代行の方を、質の高い会計アウトソーシングのサービスと考えて積極的に売っていきたいと考えています。キレイに整理されて入力された会計帳簿は会社の経営や効率化に役に立つと思っているので、こっちの方がコンサルティング的な付加価値も出るし、事務所のメインの商品と考えているぐらいです。

一方、年に1回の決算と税務申告書だけを作って欲しいというお客様もいます。こういうお客様には逆に価値を提供しずらいのです。それでも税務相談や、消費税などのアドバイスなど年に一度の決算のタイミングだけでもできることがあるので、そういう出来ることはやるようにしています。しかしそれでも、月次でコンタクトがあって記帳代行を提供しているお客様に比べるとちょっと物足りない感じはします。

キレイな帳簿を意識してつけるようにすると、会社の経営は良い意味で変わると思っています。ですので私の事務所では記帳代行をメインの商品にして、積極的にやっていこう考えています。

Can an LLP be considered as a pass-through entity?

There were some arguments whether a Delaware Limited Liability Partnership (LLP) should be treated as a pass-through entity or not. If it is regarded as a pass-through entity, income or loss made through an LLP has to be included in Japanese taxable income.

As of today (May 2018), it is regarded as a pass-through entity.

There have been several contradicting rulings by Japanese courts but recently in 2017, Japanese Supreme Court gave the decisive ruling that sent many in Japanese and US tax community in panic.

デラウェア州LPSの法人該当性が争われた事案~平成27年7月17日最高裁判決

Japanese Supreme Court rules that a Delaware limited partnership is a corporation

Then, after strong criticism and the change in the tax law that limits loss from partnership for passive members, the National Tax Agency announced a memo in “English” saying that
a Delaware limited partnership is fiscally transparent. (It is rare to make its official announcement not in Japanese. Some people think that it is too embarrassing for Supreme Court if NTA denies their ruling in Japanese.)

Now we have the conclusion here. An LLP can be treated as a pass-through entity.

It affects your tax situation if you do business or invest into something through an LLP. If you are an active partner, your loss in the partnership can be offset against your Japanese loss.

Employee Buyout -EBO

If no one in your family will take your business over, you may want to consider passing it to directors or employees of your company.

Upside is that the person knows the business well. He has been working in the company for long. The education necessary to take over the business will be relatively mild.

The downside is money. He may not have enough money to buy out the business. Also, if your company has taken loans from banks, you are likely a guarantor of the loans too. The successor director/employee will be required to guarantee the loan instead of retiring you. That will be difficult for him to accept.

As to the money to buy out, if the company is performing well or has enough assets on its balance sheet and the successor seems capable, banks will be able to consider lending you money. Also, there are venture capitals or private funds that will provide you with fund to buy out the shares.

The company can also issues preferred shares without or limited voting rights to you so you will have right to receive dividends while the successor will have shares with voting right to control the company management. If the shares with voting right is only a small portion of the total shares, the money needed for buyout will be limited. According to the tax law, shares with voting right can be the same valuation as those without voting right. Therefore, if the majority of the existing shares are non voting shares, the valuation of the shares with voting right can be limited, based on the proportion.

But you still want to keep more than 1/3 shares that give you a veto, because the new management can issue new shares to dilute your shares and therefore reduce your right to receive dividends.

Points to consider

You should avoid giving shares to your employees for free. There will be gift tax. Gift tax can be higher than capital gain tax that you will have to pay in case you sell it. The gift tax can go up to 55% while the capital gain tax is flat 20.42%. Even if your intention is to give the shares for free, you will want to compare the both scenario carefully. You may be able to reduce the total tax amount paid by you and him by raising his salary for years and letting him buy your shares.