A Japanese group that places a holding company in Europe usually spends its preparation time on Europe. The board discusses market access and the acquisition pipeline, whether the Dutch entity should hold the German operating company directly or through a second tier, and which bank will open the account. What it discusses too late is what Tokyo will ask for once the structure exists.
The answer is not a single filing. It is a file, assembled across four regimes written at different times for different purposes, which between them cover the ownership chain, the pricing of everything moving inside it, the tax actually borne by each company and the treatment of what comes home. Very little of that file can be reconstructed convincingly three years afterwards, and the parts that can be reconstructed are the parts an examiner discounts.
Four questions, not one obligation
Japanese international tax rules ask four separate questions of a group with subsidiaries abroad, and a European holding company sits inside all four. Who owns what, and can the group show the chain. At what prices does the group deal with itself across borders, and on what analysis. What tax did each foreign company actually bear on its own profit. And what came back to Japan, in what form.
Each question has its own statute, its own threshold and its own deadline, and they do not line up. A group can sit outside the reporting package that captures large multinationals and still carry a full contemporaneous documentation duty on a single intragroup loan. It can satisfy every transfer pricing requirement and still find the holding company treated as an entity whose income is added back to the Japanese parent.
The recurring failure is organizational rather than technical. Documentation is handed to Tokyo as a year-end task, while the facts that would support it are created in Europe throughout the year and never recorded in a form the file can use.
The reporting package and the hundred billion yen line
The first regime is the reporting package introduced in the 2016 reform to give effect to the recommendations of the Base Erosion and Profit Shifting project. It applies to what the legislation calls a Specified Multinational Enterprise Group, meaning a group whose total consolidated revenue for the ultimate parent’s preceding fiscal year was 100 billion yen or more, a definition that sits in article 66-4-4 of the Act on Special Measures Concerning Taxation. Japanese corporations, and foreign corporations with a Japanese permanent establishment, that are constituent entities of such a group must file through the electronic system e-Tax.
Three items make up the package. The Notification for Ultimate Parent Entity identifies the ultimate or surrogate parent, its principal office, its corporate number and its representative, and it is due by the day on which the ultimate parent’s fiscal year ends. That deadline is the one most often missed, because it falls on the closing date itself rather than after it. The Country-by-Country Report and the Master File are each due within one year of the day following the end of the fiscal year they cover, as the National Tax Agency sets out in its outline of the transfer pricing documentation rules.
The two documents are not treated alike on language. The country report has to be provided in English, under article 22-10-4 of the Ordinance for Enforcement of the Act on Special Measures Concerning Taxation. Only the master file may be provided in Japanese or in English, under the following article of the same ordinance, and where it is provided in English a Japanese translation may be requested. Failure to provide either by the deadline without good reason carries a fine of up to 300,000 yen, imposed for the country report by article 66-4-4 of the Act and for the master file by article 66-4-5. Treating that figure as the measure of the risk is a mistake. The package gives the examiner a map of the group before any question is asked, and an incomplete map invites the question.
The local file, which does not depend on group size
The second regime is easier to overlook because it has nothing to do with how large the group is. Under article 66-4 of the Act on Special Measures Concerning Taxation, a corporation that carries out controlled transactions with a single foreign related party must prepare or obtain and keep the documents needed to establish arm’s length prices, by the deadline for filing its final return. This is the contemporaneous documentation duty, and it bites where the total of those transactions in the previous business year reached 5 billion yen, or where transactions in intangibles reached 300 million yen.
The second figure is the one that catches European holding structures. A holding company rarely buys or sells goods. It does lend to the operating companies, guarantee their facilities, charge them for management and, more often than the group realizes, hold or sublicense a trademark, software or know-how. Transfers and licensing of intangible assets fall within the intangibles measure, and 300 million yen of annual royalty flow is not a large business.
Where the thresholds are not met the duty is not contemporaneous, but the documents can still be demanded on examination. The difference is who chooses the moment. Below the thresholds the analysis gets prepared under pressure, with the transaction already several years old. Above them it has to exist when the return is filed, which is the only point at which the people who negotiated the terms are still available to explain them.
Dividends home, and the six months nobody diaries
The third regime is the one that determines what the structure is worth. Under article 23-2 of the Corporation Tax Act, a Japanese company receiving dividends from a foreign subsidiary excludes them from taxable revenue where it has held shares representing 25 per cent or more of the issued shares or capital of the foreign company, continuously for six months or more ending on the date the obligation to pay the dividend becomes fixed. Both the holding percentage and the six month period are fixed by article 22-4 of the Order for Enforcement of the Corporation Tax Act, which also treats five per cent of the distribution as related cost that is not excluded, and that is where the familiar description of a 95 per cent exemption comes from. Where a tax treaty sets a lower ownership ratio in its double taxation relief provision, the seventh paragraph of the same article applies the treaty ratio instead.
Two features of the rule matter for a European holding. The first is that the test is applied to each distribution separately, by reference to the holding position in the six months before that payment obligation crystallized. A restructuring completed shortly before a dividend, a share transfer between two Japanese group companies, a capital increase subscribed unevenly, any of these can move the shareholding percentage or interrupt the period at exactly the wrong moment.
The second is that the exclusion operates at the level of the Japanese company that holds the shares. Where the European holding company sits between Tokyo and the operating businesses, the relevant participation for Japanese purposes is the participation in the holding company itself, and the profits of the operating tier reach Japan only once they have passed upward through it. The distribution policy of the European entity therefore becomes a Japanese tax variable rather than a treasury preference.
The tax burden ratio and the paper company test
The fourth regime is the one that treats a holding company with suspicion. Under article 66-6 of the Act on Special Measures Concerning Taxation, which sets out the special provisions on income of foreign related companies and is commonly described as the controlled foreign company regime, income of a foreign company can be aggregated with the income of the Japanese parent. The regime is switched off by reference to a tax burden ratio, and the seventh paragraph of that article sets two figures. A company that fails the economic activity test has its income aggregated unless the ratio is 20 per cent or more. A company in the category the legislation treats more severely, which covers a paper company, a company that is in substance a cash box and a company established in a jurisdiction designated as seriously uncooperative on exchange of information, has its income aggregated unless the ratio is 27 per cent or more. That second figure was 30 per cent until the 2023 reform reduced it, and the National Tax Agency’s outline of that reform confirms the reduction applies to parent fiscal years beginning on or after 1 April 2024. A separate 20 per cent figure, in the twelfth paragraph, switches off the narrower inclusion of passive income for a company that does pass the economic activity test.
The headline corporate rate of the country of establishment is not the answer to that test. The ratio starts from income as the home state computes it and adds back what that state excludes from its tax base, which drags it down for a company living on exempt income. Dividends received are the express exception: article 39-17-2 of the Order for Enforcement of the Act on Special Measures Concerning Taxation keeps them out of that add-back, and keeps the foreign tax charged on them out of the numerator. For a European holding whose receipts are mostly participation income the result runs the other way from the usual assumption. The exempt dividends never enter the denominator, so the ratio is set by what is left, on a base small enough for a modest difference to move it across the 20 or 27 per cent line.
The characterization as a paper company turns on facts that are European rather than Japanese: whether the company has a fixed place of business of its own, and whether it manages, controls and runs its own business in the state where it is established. It is tempting to assume that a file built to satisfy the Netherlands answers the same question, and it does not. The Dutch presence conditions in article 3a of the Uitvoeringsbesluit internationale bijstandsverlening bij de heffing van belastingen apply to a company whose activities consist mainly of receiving and paying interest, royalties, rent or lease instalments within its own group, they are set against a flat wage cost figure of 100,000 euro, and the second paragraph of that article leaves activities connected with holding participations out of the test altogether. The comparable list in article 2d of the Uitvoeringsbeschikking vennootschapsbelasting 1971, which multiplies the same 100,000 euro by a country factor, measures the foreign shareholder in the state where that shareholder is established rather than the Dutch company. A group that builds a Dutch file for Dutch purposes alone, and never sends anything to Tokyo, has answered one supervisor and left the other one guessing.
The global minimum tax layer
Since the 2023 legislation, a further layer applies. The income inclusion rule was enacted as a Japanese corporate tax on the international minimum taxable amount for each covered fiscal year, aimed at groups with annual total revenue of 750 million euro or more, and designed to bring taxation on income other than the substance-based exclusion up to a minimum rate of 15 per cent country by country, as the National Tax Agency explains in its outline of the global minimum tax changes. Both the revenue test and the 15 per cent standard rate are defined in article 82 of the Corporation Tax Act. It applies to covered fiscal years beginning on or after 1 April 2024.
A separate information return was created alongside it, requiring the names of constituent entities, the jurisdictional effective tax rates and the group’s minimum taxable amounts to be provided to the tax authorities. The tax return under article 82-6 and the information return under article 150-3 are each due within one year and three months of the day following the end of the covered fiscal year, and the information return has to be provided through e-Tax.
The two size tests should not be confused. The 100 billion yen figure governs the country report and master file package; the 750 million euro figure governs the minimum tax. A group can fall inside one and outside the other, and the fiscal years to which each applies are defined differently.
Building the file while the facts are still true
None of these regimes rewards retrospective work. The country report is a description of where profit and people are, and a group that assembles it from unreconciled subsidiary accounts publishes an inconsistency it will be asked about. The local file is an analysis of transactions that were priced by people who are still at their desks now and may not be later. The dividend exclusion depends on a holding position that either was or was not in place six months before a payment date that has already passed.
What a Japanese parent should hold for a European holding is unglamorous and short. Minutes that record deliberation where the company is established rather than ratification of decisions taken elsewhere. Intercompany agreements that match what actually happens, priced with support built at the time. A calculation of the holding company’s own tax burden, prepared annually. A dated record of the shareholding chain and its changes.
That file is not a defence prepared for an examination. It is the ordinary evidence that a group which owns European businesses, decides about them where it says it decides, and moves money between them on terms it can explain, is doing what it says it is doing. A structure assembled the other way round, with the European holding created first and its justification written afterwards, is where the four regimes stop being separate and start reinforcing each other.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.