Japan Real Estate Investment Services: Overview
JTAX Japan Real Estate Investment Services provide a one stop solution to those investing in Japanese real estate. The team’s client base is diverse and ranges from individuals through to offshore real estate funds, property developers and pension funds.
Japanese real estate continues to hold strong interest for foreign investors. Tokyo and Osaka are continually rated in the top three cities in Asia for real estate investment while commercial property occupancy rates in Tokyo generally hover between 97% and 99%. Reasons for the sector’s strong performance include the high quality real estate, the relatively low management and running costs and competitive net returns.
Our key Japan Real Estate Investment Services include:
- 1Deal Sourcing: Our team works with both individual investors and companies to identify properties based on on the client’s investment objectives and finance profile.
- 2Financing Assistance: Our team can work with local financial institutions to provide the investor with potential Japan-based financing solutions.
- 3Ownership Structuring: Holding the investment in the appropriate structure is critical, from both a tax and legal perspective. For individual investors the structure may be as simple as holding the asset in the investor’s name – versus holding it in an onshore or offshore company. For larger investments more sophisticated structures, such as the TMK (Tokutei Mokuteki Kaisha) and the TK (Tokumei Kumiai) are commonly used.
- 4Financial and Tax Due Diligence: A key step in any acquisition is knowing the true value of the asset as well as any historical tax or financial exposure. This is particularly so when acquiring a real estate holding company. JTAX professionals review the financial and tax position of the target asset to give the investor peace of mind that any material issues have been identified.
- 5Transaction Execution: JTAX’s team works with legal counsel, financial institutions, and licensed real estate professionals to ensure that appropriate documentation is put in place.
- 6Compliance Assistance: Once a deal is in place, JTAX’s tax and outsourcing teams provide ongoing assistance including bookkeeping, tax compliance, and cash management services.
- 7Exit Assistance: Our team can assist with all aspects of the exit, including tax planning, sourcing potential buyers, and working with legal counsel to ensure legal issues are appropriately dealt with.
Please Contact Us for more information about our Japan Real Estate Investment Services.
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Yes. There are few legal restrictions to non-Japanese nationals or non-residents of Japan acquiring Japanese real estate.
Interest in the Japanese real estate market from foreign investors continues to grow. There are many features of the market which foreign investors find attractive, including competitive yields, quality asset and property managers, relatively cheap financing and various tax structuring options which help in securing a competitive effective tax rate.
Yes, we strongly recommend a financial and tax due diligence be performed prior to acquiring the target asset company, particularly for larger deals. While the incidence of fraud in Japan is relatively low it does happen but more importantly understanding the financial and tax attributes of the company allows the investor to negotiate their offer price with confidence.
In Japan most real estate deals are done on an asset basis. This is because acquiring the shares in a real property holding company may result in the investor realizing built in gains at the time of disposal (see Question 5. below). It is also relatively common for the asset to be entrusted which means the investor acquires the trust beneficiary interest (held in trust by a trust bank).
When acquiring the asset directly, the tax base of the asset will equate to the price paid by the investor. However when acquiring the shares in a property holding company the tax base of the asset will be the price of the asset at the time it was acquired by the property holding company. This means that any increase in the value of the property from the time it was first bought to the time the shares are acquired will be a taxable gain at the time the investor disposes of the asset.
Holding Japanese real estate in an offshore company is possible but not commonly used. While this structure can give a potentially reasonable tax outcome this becomes more difficult to achieve where the investor needs to perform activities in Japan (e.g. Construction or supervision or management of the property) or obtain local financing. For these reasons other structures are more commonly used.
Generally no. Holding your Japanese real estate in a local company is generally not tax efficient. This is because the operating income is taxed at the company level (the effective tax rate for most companies is 34-35%) with dividends paid to the offshore shareholder subject to dividend withholding tax (20.42% under domestic tax law but may be reduced under a double tax treaty) which results in an effective tax rate between 38% - 48%.
The TMK (Tokutei Mokuteki Kaisha) is a special type of Japanese corporation designed to facilitate the securitization of investments, typically real estate. The TMK (Tokutei Mokuteki Kaisha) is subject to Japanese corporate tax (at the effective tax rate of 34%) however a “tax qualifying” TMK (Tokutei Mokuteki Kaisha) is able to take a deduction for the dividends it pays to shareholders. The ability to claim a deduction for its dividends can result in a very competitive effective tax rate.
There are a number of requirements which a TMK (Tokutei Mokuteki Kaisha) must satisfy in order for it to be tax qualifying. However, some of the more “important” requirements are that more than 50% of each class of share issued by the TMK (Tokutei Mokuteki Kaisha) is to onshore shareholders, the TMK (Tokutei Mokuteki Kaisha) issues bonds to a qualified institutional investor (i.e. a bank) in the first year it derives income, and it files an Asset Liquidation Plan which sets out details of the TMK’s (Tokutei Mokuteki Kaisha) equity arrangements, debt financing, assets to be acquired, and other relevant details to the investment.
There are several regulatory issues which a TMK (Tokutei Mokuteki Kaisha) may need to satisfy. For example, if the TMK (Tokutei Mokuteki Kaisha) holds the asset in fee simple it is necessary to have an asset manager with a real estate brokerage license.
There is no legal requirement for a bankruptcy remote entity to hold a majority of the voting shares (that get no economic rights) in the TMK (Tokutei Mokuteki Kaisha), however lenders will generally require one be in place.
The TMK (Tokutei Mokuteki Kaisha) involves a number of entities, some of which are required to hold certain licenses. Therefore, the cost of running a TMK (Tokutei Mokuteki Kaisha) structure is higher than other structures. As a result the TMK (Tokutei Mokuteki Kaisha) is generally not suitable for projects less than USD50m.
The TK (Tokumei Kumiai) structure is a contractual arrangement between the TK (Tokumei Kumiai) Operator (TKO) and TK (Tokumei Kumiai) Investor (TKI). The TKI invests in the TKO’s business for a return of the TKO’s profits. The TKI does not hold an equity interest in the underlying asset and must be a passive or silent investor. A key feature of the TK (Tokumei Kumiai) is the TKO is able to take a deduction for the TK (Tokumei Kumiai) distributions it makes to the TKI. Distributions to the TKI are subject to 20.42% withholding tax and represents a final tax for an offshore TK (Tokumei Kumiai) investor.
Yes. The ability for the TKO to claim a deduction for the distributions it makes to the TKI is predicated on the TK (Tokumei Kumiai) structure being respected by the tax authorities. The validity of the TK (Tokumei Kumiai) structure will be challenged where the TKI manages or controls the TKO or its business. Hence where the non-resident investor requires control over the investment (i.e. a property development or construction project) the TK (Tokumei Kumiai) structure may not be appropriate. A TK (Tokumei Kumiai) which is not respected by the tax authorities will result in the TKI being subject to 34% tax (instead of the 20.42% withholding tax noted above).
Yes. The licensing requirements for a TK (Tokumei Kumiai) differs depending on various factors, including whether the TKO holds the asset in fee simple or the asset is entrusted in which the TKO holds a trust beneficiary instrument (TBI).
Where the TK (Tokumei Kumiai) Operator holds the asset in fee simple it needs to hold the appropriate license under the real estate syndication law (RESL). As the TK (Tokumei Kumiai) Operator typically does not hold such a license it will often retain a third party asset manager which does.
Where the TKO holds a TBI, and the TKI is not a Qualified Institutional Investor (QII) status, the TKO needs to retain a third party asset manager which holds the necessary discretionary license under the Financial Instruments and Exchange Law (FIEL).
Yes, particularly for smaller investments such as individual apartments. However once the investment becomes more significant the investors may prefer, from a legal liability perspective to hold their investment in some form of corporate structure. It is not uncommon for individuals holding larger investments to use the Tokumei Kumiai (TK) structure. The Tokumei Kumiai (TK) structure is discussed above.
Yes, loan financing in Japan is relatively cheap with interest rates as low as 1% depending on the nature of the investment, the structure used and the investor’s commitment to Japan and risk profile.
As noted above where a TK (Tokumei Kumiai) Operator holds real estate in fee simple it needs to hold the appropriate license under the real estate syndication law (RESL) or retain an appropriately licensed asset manager. The number of asset managers which hold this license and failure to comply with the RESL is likely to make financing difficult as lenders will typically require a legal opinion and are unlikely to lend where these requirements are not satisfied. Failure to obtain financing can obviously have an adverse impact on closing the deal.
It is critical that your Japanese tax compliance is kept up to date as potential benefits (i.e. obtaining a reduced withholding tax rate under a tax treaty, the TMK’s (Tokutei Mokuteki Kaisha) ability to deduct dividends, or obtaining a consumption tax refund) are only available where the proper documentation has been lodged with the authorities by the prescribed date. Failure to do can result in the investor foregoing considerable tax savings.
Yes, the taxation of gains realized on the disposal of real estate will vary depending on the tax structure in place. For companies the gains will be taxed at its effective corporate tax rate (34-35%), however for the TMK (Tokutei Mokuteki Kaisha) and TK (Tokumei Kumiai) structures the gain will be taxed in the same manner as ongoing income – the dividend paid by the TMK (Tokutei Mokuteki Kaisha) or the TK (Tokumei Kumiai) distribution will be deductible and subject to withholding tax when distributed to the shareholder or TK (Tokumei Kumiai) Investor.
Please Contact Us for more information about our Japan Real Estate Investment Services.