Chris Klug, JD, LLM Founder, Klug Counsel PLLC
Tetsunori (Ted) Chiba, LLM, MST International Tax Partner, Actus Tax Corporation
Edited By Integra International Grant Gilmour, CPA (Canada, BC) CPA (USA, Arizona)
Klug Counsel had the wonderful opportunity to collaborate with Actus Tax Corporation to provide cross-border tax representation to our now mutual client. The Company develops solar and wind projects in Japan. Both owners of the Company are U.S. citizens with one of the owners also being a Japanese tax resident at the time of initial representation. The Company’s business was entering a new phase with a clean energy U.S. private equity fund investor (“PE Investor”) leading to the restructuring of the solar energy ownership structure. Since there were Japanese tax implications, based on the location of the project, and U.S. tax implications, based on the owners U.S. citizenship, the Company needed comprehensive cross-border tax planning in order to obtain the maximum overall after-tax return.
Through the structuring, the Company would sell the solar project to a new special purpose vehicle which was created as a Japanese godo kaisha (“GK”). The GK is considered a corporation for U.S. tax purposes and direct ownership in the GK by the U.S. owners and PE Investor (collectively, “U.S. Investors”) would result in unfavorable tax treatment for Japanese and U.S. tax purposes. The structure needed to contemplate tax efficient distributions from the GK during the ownership of the solar project and expected gains on the exit in the hundreds of million dollars.
Instead of investing in the GK, the U.S. Investors would invest in a Tokumei Kumiai (“TK”) which has the contractual rights to the profits of the GK. This structure is commonly referred to as a GK-TK structure and is common for foreign ownership of real estate in Japan. As a starting point, Japan taxes at higher rates than the U.S. so the Japanese tax implications drove the tax efficient structure.
Since the U.S. Investors’ TK interest is not an equity interest in the GK, the TK investment does not create a permanent establishment in Japan, unless the U.S. Investors are involved in the management of the GK. This allows the U.S. Investors to be taxed at about 20.42 percent in Japan on their TK investment instead of progressive rates (max. 55.945 percent for an individual investor and max. 34.59% for a corporate investor) which would be the case if there was a direct equity interest in the GK. In the U.S., the payments received on the TK interest would be taxed at 21 percent for corporate investors and up to 37 percent for individual investors. This planning reduced the total Japan and U.S. tax rate on distributions from 55.945 percent to 37 percent.
There were several other areas that we had to collaborate with each other to navigate the tax laws of Japan and the U.S. to obtain the best tax result for our client. Through collaborating with Integra member firms, we can safely state that we saved the client millions in taxes.