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fund formations, innovative real estate finance transactions, property
acquisitions and development projects.
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invest in Japanese real estate, two
types of investment structures are often
used "TMK" structure and "GK/
TK" structure. In this article, we offer
a general overview of these structures.
Direct investment in real estate and
indirect investment through a corporation
or branch office in Japan are also
possible, but the TMK structure and the
GK/TK structure offer some tax benefits
as discussed below.
is a corporate entity established under
the Law Concerning Asset Liquidation
(shisan no ryudoka ni kansuru horitsu;
the "TMK Law"). A TMK purchases
real estate in fee or trust beneficiary
interests in real estate. The method
for funding to purchase such assets is
generally limited to specified bonds
(tokutei shasai), preferred shares (yusen
shussi) and specified borrowings (tokutei
kariire). Foreign institutional investors
preferred shares of a TMK.
The TMK Law regulates TMKs
strictly. Before commencement of its
business, a TMK must file a business
commencement notice (gyomu kaishi
todokedesho) with a competent Local
Finance Bureau of the Ministry of
Finance. Together with a business
commencement notice, a TMK must
prepare and file an asset liquidation plan
(shisan ryudoka keikaku, an "ALP"),
which contains information on the
property the TMK will purchase, how the
property will be managed and disposed,
how the funding will be done, and so
forth. A TMK must operate its business
in accordance with its ALP. With certain
exceptions, any amendment to the ALP
must be approved by relevant parties
(e.g., shareholders and bondholders), and
be filed with the Bureau. A TMK may
borrow money as a specified borrowing
only from a "qualified institutional
investor" (tekikaku kikan toshika, a
"QII") as defined under the Financial
shohin torihiki ho, the "FIEL"). The
financial statements of a TMK are
required to be audited by an outside
auditing firm. Periodic business reports
must be filed with the competent Bureau.
A TMK may effectively avoid double
taxation on its profit distributions by
deducting the amount of distributions
as an expense, if certain requirements
prescribed by tax code are met. Such
requirements include, among others, (i)
a majority of the common shares and
preferred shares issued by a TMK must
be held by Japanese residents (such as a
Japan corporation or a Japan branch of a
foreign corporation); (ii) specified bonds
in the amount of at least 100 million
Japanese yen must be issued to one or
more "institutional investors" defined
under tax code; and (iii) more than 90
percent of the profits must be distributed
to the shareholders for each fiscal year.
If a TMK purchases real estate in fee,
the TMK may be entitled to a reduced
tax rate for the real estate acquisition tax
and the real estate registration tax. It is a
key advantage to use the TMK structure
that, depending on the residency of the
foreign equity holder, the investor may
enjoy a reduced rate of the withholding
tax on TMK's distributions under a tax
treaty entered into by Japan.
Japanese Real Estate