Qualified Merger as joint venture. The conditions to be met.

There are two types of merger and acquisition under Japanese corporate tax law. Namely qualified and unqualified merger.

Well, the difference is that, in case it is qualified, unrealized gain on asset will not be taxed in the merger. More importantly you will carry the tax loss accumulated in the past.

On the other hand, in a unqualified merger, all the assets in the merged company are to be regarded as sold or acquired by the other company (buyer), and therefore they are to be taxed. No tax losses are allowed to be carried in the buyer company.

To be “qualified” merger for the tax, there are two types, (1) merger in a same company group and (2) joint venture. To meet the condition to qualified for “joint venture” type merger, the condition #1 and either of the condition a) or b) of #2 and the #3 have to be met:

1)  The two companies must have businesses that relate each other in nature.

2-a) The  proportion of the size of the both companies has to be with in the ratio of 5:1.

2-b) C level directors of the acquired company have to participate in the management of the acquiring company as a senior director.

3) More than 80% of shareholders of acquired company has to keep owning the newly issued shares of the acquiring company.

If you are buying a company for the carried losses that it has or at least the loss is one of the major reasons, you need to confirm that the conditions for the joint venture type merger are met. Otherwise, it will be  waste of money.

How to get consumption tax refund

If your business is to export goods or services from Japan, it is likely that you are able get consumption tax refund. However, you need to meet the following conditions:

1) you need to register your company business to Japanese Tax Office. 事業開始届 or 会社設立届
2) you are by default exempt of consumption tax if you are a sole proprietor or a company with paid-in capital less than 10 MM yen. It is usually a good thing for a small company because you do not have to pay consumption tax. The Japanese government encourage you to start your own business and give you such incentive to take the consumption tax that you receive as your own income.

But this will not be your choice if your business is to export goods/services. You want to file your consumption tax return and get refund. You have to choose to be a consumption tax filer by submitting an application form to become a tax filer (消費税課税事業者届出書). This has to be filed by the end of the first fiscal year for the first year to make it taxable (refundable) or before your fiscal year starts for the second fiscal year and later years.

3) Documentation. You need to get export permission under your (company) name. Its term has to be “FOB” or “CIF” and the ownership has to be transferred NOT in Japan. If the risk and ownership of your merchandises are transferred in Japan, it will be regarded as a domestic transaction, which is therefore taxable of consumption tax.

The worst is “EX-FACTORY” or “EX-WORK” where, according to wikipedia, the definition is like this:

EXW means that a buyer incurs the risks for bringing the goods to their final destination. Either the seller does not load the goods on collecting vehicles and does not clear them for export, or if the seller does load the goods, he does so at buyer’s risk and cost. If the parties agree that the seller should be responsible for the loading of the goods on departure and to bear the risk and all costs of such loading, this must be made clear by adding explicit wording to this effect in the contract of sale.

The reason of making export sales consumption tax free of Japanese Consumption Tax is because it will not be sold in Japan and therefore will not be “consumed” domestically. And it is to make the export placed in equal fitting against competitors from other countries.

If you have any questions, please feel free to ask us through the form available in this web site. We are happy to help you!

Ex-work is not what you want for consumption tax refund

This post is about claiming refund of Japanese Consumption Tax.

The rule about Japanese consumption tax is complex at first glance. If you are not a law person or accounting person, you may want to leave this matter to your accountant. But there are not that many that you need to know. Actually, you only need to know a dozen or so of rules and that will cover most of the important rules. It is manageable if you are ready to spare some time to go through and understand each rules.

It is well known that you will get refund of consumption tax back if your sales are generally made to overseas customers, no matter whether is is a tangible product or intangible service.

You will have to meet three conditions to get a refund.

You have to be a tax filer of consumption tax

By default, small and medium sized company are exempt from consumption tax liability for its first two years. Japanese government gives the tax privilege to free the burden of the newly introduced indirect tax when it came 20 years ago. The company will stay exempt in the third year when its sales for the first year was less than 10 million yen.

But if you wish to claim for refund, you have to be a tax filer of consumption. You can choose it by applying the status explicitly. It will be done by submitting a form. Remember that there is a deadline for this. It has to be before the beginning of the fiscal year that you want to be a tax filer. The only exception is the first year. The form to elect a tax filer status has to be submitted by the end of the first year.

Once you elect a tax filer status, you will be a tax filer at least for two years. You will remain a tax filer for three years in case you receive a refund by purchasing a capital expenditure bigger than 1 million yen (as opposed to receiving a refund by export sales).

FOB, CIF, Ex-Work

There are standard terms for international transactions. Either FOB or CIF is ok for consumption tax refund but Ex-Work not. Ex-Work is a condition where seller should deliver his products to buyers in front of his factory. This means the delivery will occur in the origin country, which is a domestic transaction but not international export. It will of course be a taxable transaction of Japanese Consumption Tax and it will cause the seller rather consumption tax to pay.

When you claim for the tax refund, the tax office will always ask the invoice and receipt of the sales to verify it was export sales. They will also ask for export permission certificate (輸出許可証) issued by Customs. It says on the document the term of the transaction such as FOB, CIF or Ex-Work.

Revenue from overseas customers for service is also regarded as “export”. But a permission certificate will not be required for service export, of course.

Non-taxable Income

Consumption tax paid to purchase residential property is not refundable. Consumption tax is deductible only from consumption tax on taxable income. Because rent is not taxable for residential property, for a political reason, consumption tax on its cost are not deductible.

Consumption tax refund – be careful with ex-works or how you pay freight and insurance. You may not get it back.

Exporting used cars to Russia. Consumption tax refund rejected

There was a tax ruling in the past where a car exporter to Russia was rejected for a consumption tax refund. The company was buying used cars in Japan and exporting to Russia. Because all the purchases took place in Japan and cars were exported to overseas, we would think that consumption taxes paid on top of the price of used cars would surely be refunded.

Niigata tax office turned down the tax return they submitted for refund saying the cars were handed down to Russian importers in Niigata (Japan), meaning their transactions were not crossing the border, but were domestic transactions at all.

In real world tax audit, evidences to be used by the tax office are often “Export Permission Certificate”. Export Permission Certificate is a document provided by Customs before shipping things from Japan with information such as name of exporter, destination, price of goods, terms defined by incoterms etc. If the term mentioned in the certificate is EXW or EX-WORKS (or EX-FACTORY), transactions will be regarded as domestic.

EX-WORKS means the term where a seller provides goods to a buyer at their factory gate, meaning the place of delivery will take place at the place of seller in the origin country. Therefore, it is a domestic trade.

To prove that ownership of goods are transferred across the border, the term shown in its export permission certificate has to be “FOB” or “CIF”.

You also need to be careful that the transportation cost of the goods to airport or port has to be paid by you but not your purchaser. It will be regarded as a strong evidence that ownership or control of the goods are transferred only in Japan. The same for insurance on domestic transportation.

Sometime, you are a SME and your counter party buyer is a very large company and goods are so expensive that you may want your customer to take control here and pay all the cost of transportation, insurance, paperwork to ship. Those facts are all to be used as evidences against you.