There are two rules that you need to know if you or your company own a foreign subsidiary about the tax:
- If you own a company more than 50% in a country where (1) its tax rate is lower than 30% AND the company is a paper company or (2) the tax rate is lower than 20% AND the company has only passive income, the shareholder of the foreign company is taxable on the retained earnings of the foreign company (外国子会社合算税制 or Controlled Foreign Corporation).
- If a Japanese company owns a foreign company by 25% or more, the dividends the parent company receives from the foreign subsidiary is taxable only on the 5% of the amount of dividends it receives. The exception is that if the dividends are deductible from the taxable income for the tax calculation of the foreign subsidiary, the whole dividends it receives are regarded as taxable revenue for the parent company in Japan. (Corporate Tax Law Article #23-2 外国子会社配当益金不算入制度).
- Another condition is that the parent company has to have the shares of the subsidiary for more than 6 months at the time dividends are resoluted.
- This foreign dividend exclusion rule was introduced quite recently. It was indirect foreign tax credit to avoid double taxation where the income tax the subsidiary paid for the dividends was credited from Japanese corporate income tax of the recipient.
We have a client who owns exactly 50% of shares in a subsidiary in a low-tax rate country. The company is owned by a Japanese company and a person who is not a resident of Japan by 50:50. I still need to ask the client if this company is a paper company or not. If it is no a paper company, dividends it receives will almost tax free. What a good news for him it should be for him!