Tokumei kumiai ‘TK’ tax benefits
This section on Japanese tax structuring would not be complete without a brief discussion of the TK tokumei kumiai. Many Japanese tax accountants, more used to dealing with the KK kabushiki kaisha and GK godo kaisha, are not familiar with the TK tokumei kumiai, but many international tax attorneys know it well as the heart of sophisticated cross-border tax structures. In the previous section about structuring a KK kabushiki kaisha or GK godo kaisha, we noted one such structure, the ‘GK TK’ structure, which uses a tokumei kumiai “TK” silent partnership to fund an independent GK godo kaisha which manages the TK tokumei kumiai but which itself is held by an offshore entity. Such a structure is very tax-efficient for major investments, especially in Japanese real-estate, because the TK tokumei kumiai is a Japanese silent partnership which gives true pass-through taxation to its partners. Any structure using a TK tokumei kumiai needs very careful and precise setup. If you decide to structure your business in Japan using a TK tokumei kumiai, then you will need help from Ernst & Young (to whom we refer all clients who need Japanese business tax advice, especially in the real-estate sector), Deloitte & Touche (who also provide excellent international tax advice), or PwC (who also seem very proficient in structures utilizing the tokumei kumiai).Two or more partners create a TK tokumei kumiai using a contractual agreement, one partner is the ‘proprietor’ or ‘operator’, and the other partners are ‘silent’ or ‘limited’ partners. The silent partners contribute cash or other assets to the operator who then manages the assets for the business designated in the partnership agreement. The silent partners have:
- No operating or voting rights.
- No involvement in the conduct of the business.
- No co-ownership interest or legal exposure with respect to any of the business assets or liabilities of the operator.
- If a silent partner is not a Japanese resident, then participation in a TK tokumei kumiai does not usually result in such partner creating a permanent establishment in Japan.
The TK tokumei kumiai does not file annual tax-returns but distributes its profits (and potentially its losses) to the partners based on the ratio agreed in the partnership agreement. The only Japanese tax liability of a non-resident partner of a TK tokumei kumiai is a 20% withholding tax on the income distribution received. Until the past decade, that 20% was often cut to zero by a loophole in many of Japan’s tax-treaties that allowed income distributions from TK tokumei kumiais as tax-free ‘other income’. The tax benefit of the infamous ‘Dutch TK’ arose because under the 1970 Japan-Netherlands tax treaty, ‘other income’ was exempt from Japanese income tax. The revised Japan-Netherlands tax treaty closed that loophole in 2010 and imposed a 20% withholding tax on TK tokumei kumiai distributions to Dutch silent partners.
DISCLAIMER: This section is here only for reference and provided as-is, free of charge, and without warranty. Japan has 45 or more tax treaties in place, each of which is different and all of which are constantly being challenged and reinterpreted. BEFORE SETTING-UP IN JAPAN, YOU MUST GET INDEPENDENT TAX ACCOUNTING AND LEGAL ADVICE!