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Trusts, foundations and charities

Trusts

Are trusts legally recognised in your jurisdiction? If so, what types are available and most commonly used?

Trusts are legally recognised in Japan under the Trust Act. There are three types of trust:

  • trust by contract;
  • trust by will; and
  • declaration of trust. 

Traditionally, trusts have been used as substitutes for bank deposits and securities investments, as well as for vehicles for securitisation and other commercial transactions. However, it has recently become popular as a vehicle for succession of business or assets from the owner to its family member as a substitute for a will.

What rules and procedures govern the establishment and maintenance of trusts?

Trusts may be set up under the Trust Act. Once the granter entrusts its properties to a trust, such properties will not be affected by the bankruptcy of the grantor or the trustee (so-called ‘bankruptcy remoteness’) and the trusted properties are managed and disposed of by the trustee in accordance with the terms in the trust certificate and in compliance with its duties of care and loyalty. By setting up the trust, the grantor acquires the trust’s beneficial interests and may with relative ease transfer such interests to a third party for succession of business, financing or another purpose.

How are trusts taxed in your jurisdiction?

For Japanese tax purposes, there are three categories of trust:

  • Beneficiary-taxed trusts – such trusts are generally treated as conduit beneficial interests and the holder of the trust will be deemed to directly own the underlying entrusted property. Generally, beneficiary-taxed trusts cannot defer tax on income arising from the entrusted property or alienation of the underlying entrusted property from the inheritance estate for tax purposes.
  • Trusts taxable on distribution – such trusts will be taxed when the distribution of the profit is made to the beneficiaries. Collective investment trusts or lending trusts will be included in this category.
  • Trusts taxable as a corporation – such trusts are taxable in a similar manner as an ordinary corporation. A specific purpose trust with no beneficiary will be categorised as a trust taxable as a corporation. 

Foundations and charities

Are foundations and charities legally recognised in your jurisdiction? If so, what forms can they take?

Associations and foundations are legally recognised and popular vehicles for a family’s wealth management use in Japan. The most typical associations and foundations are:

  • general incorporated associations;
  • general incorporated foundations;
  • public interest incorporated associations; and
  • public interest incorporated foundations.

There are various other non-profit organisations approved by various acts – for example:

  • social welfare corporations;
  • medical corporations;
  • private school corporations;
  • religious corporations; and
  • non-profit corporations.

What rules and procedures govern the establishment and maintenance of foundations and charities?

A general association corporation or general foundation corporation may be incorporated by registration if certain corporate law criteria are satisfied without demonstrating their public purpose. There is the option to apply for transfer into public interest incorporated associations or foundations. Public interest approval is made by the prime minister or the governor of prefecture after receipt of recommendation by an independent commission based on certain criteria (eg, whether such an organisation has public interest projects as its primary goal).  

Social welfare corporations, medical corporations, private school corporations and religious corporations will be incorporated if certain criteria are satisfied and the relevant incorporation processes under each relevant specific law are pursued. 

Non-profit corporations may be incorporated in the prefecture in which their main offices are located once they have been authenticated by the prefecture following the submission of the required documents and pursuit of certain processes required under the Act on Promotion of Specific Non-profit Activities of Japan.

How are foundations and charities taxed?

Public-interest corporations are generally not subject to corporation tax on income from non-profit public activities. As such, public-interest incorporated associations and foundations are sometimes used as vehicles through which to own the shares of a publicly listed Japanese operating company as transferred from the owner-individual. As stable shareholders they prevent hostile takeovers of the Japanese operating company. By doing so, the owner-individual can alienate these shares from his or her inheritance estate to reduce a future inheritance tax burden. Gift or donation of an asset to public-interest incorporated associations is generally deductible as a qualified donation for the donor’s income or corporation tax purposes. Gift or donation of appreciated assets (eg, shares of the Japanese operating company) by a resident individual to public-interest incorporated associations (and certain other qualifying corporations) may be exempt from capital gains tax subject to specific approval of the Japanese tax authority.

When a taxpayer has made certain qualified donations (eg, donations to the government or municipalities, certain specified organisations or foundations for educational, scientific, social welfare or other public-interest purposes, or the Japanese Red Cross or certain authorised non-profit corporations), donations exceeding Y2,000 in one year may be deducted from the total income, provided that the deducted amount does not exceed 40% of the taxpayer’s total income.

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