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.







NOL (Net Operating Loss) not allowed to be used under certain situations

Some people still believe that it would be a wise idea to buy a zombie company with NOL (Net Operating Loss) and use it to offset against his business income in future. It seems a good idea because you will be able to reduce the tax burden by using NOL when your business turns profitable in future. It was true in the past. Actually, there was a black market where you could buy such a company with accumulated loss. But the loophole was finished and it is not the case anymore today. Japanese government changed the tax law in 2010.

If the following conditions are met, NOL will not be allowed to be used:

1) New owner obtains more than 50% of a company,
2) AND, one of the following events occurs in five years since the change of the ownership,
a) company was dormant at the time point of acquisition and starts a business,
b) company ceases to operate the current business, or finance more than 5 times of the current business volume.
c) all its directors or about 20% of its employee leave the compnay,

There are other events that trigger this restriction but because they seem rare, I will not cover them in this posting.

If the condition #1 and #2 are met, NOL that are carried from the time before the ownership was changed will not be allowed to be used.

Carried Loss – Qualified merger and acquisition

You may think it would be a good idea to buy a company with tax losses accumulated from the past. You buy one and offset against taxable income in your own company.

It will not work.

Carried loss and unrealized loss in assets can only be utilized when its merger is regarded as qualified one. Carried loss obtained through unqualified merger and acquisition will not be allowed to offset against your income.

The tax law defines two types of M and A as qualified:

A) M and A within a same group,
B) Joint venture.

M and A within a same group

1) For the category A, the target company has to be owned more than 50 percent. Both direct and indirect ownership count to determine the percentage. A company in “a same group” includes one that is owned by a same shareholder.

2) They have to have been in a same corporate group for at least 5 years.

Joint venture

1) The both companies (one to acquire and one to be merged) have to be related each other in their business area.

2) Business to be acquired has to continue under the merging company.
3) One to merge and one to be merged have to be within 5 folds in size.
4) At least one senior director from the both companies have to remain and take a senior role in the new company.