A godo kaisha or "GK" is a type of corporation which may be established under the Companies Act (kaisha ho). A GK resembles a Delaware limited liability company in its structure, but it is not a pass-through entity for tax purposes. A tokumei kumiai or "TK" is a bilateral contract, often referred to as a "silent partnership." Under a TK agreement, a TK investor contributes funds to the business of the TK partnership, in consideration for the promise by a TK operator to distribute the profits and losses arising from the TK business. A GK is often used as a TK operator to acquire the assets. Typically, TK operators borrow loans for their funding. Only the TK operator may operate and manage the TK business, and generally the TK investor is not entitled to participate in decision making related to the TK business. The titles of the assets belong only to the TK operator, and the TK investor is not responsible for the debts of the TK business. Generally, the TK operator can treat distributions to the TK investor as an expense and thereby avoid double distributions are subject to the Japanese withholding tax of 20%. If a TK operator acquires real estate in fee using funds contributed by a TK investor, such TK operator becomes subject to a licensing requirement under the Real Estate Syndication Law (fudosan tokutei kyodo jigyo ho, the "RESL"). Also, a licensing requirement under the Real Estate Brokerage Law (takuchi tatemono torihiki gyo ho, the "REBL") is also applicable to the TK operator. These licensing requirements are so rigorous that they cannot be satisfied by the TK operator (GK), as a mere asset holding vehicle. On the other hand, these licensing requirements are not applicable if a TK operator acquires a trust beneficiary interest (shintaku jueki ken, a "TBI") in real estate instead of real estate in fee. If a TK operator acquires a TBI using funds contributed by a TK investor, such TK operator becomes subject to a registration requirement under the FIEL, which is also unrealistic to be satisfied by a mere asset holding vehicle. Exemptions from such registration requirement are available; one of which is the QII special exemption and another is the entrustment to a the TK investors consist of (i) one or more QIIs and (ii) 49 or fewer non- QIIs, the TK operator may apply for the QII special exemption. Also, the registration requirement is exempted if the TK operator entrusts the whole of its investment decisions to a registered investment advisor on a discretionary basis. In either case, there are certain filing requirements. A TBI in real estate is created under a trust agreement between an owner of real estate and a trustee, usually a licensed trust bank. Under the trust agreement, the owner entrusts and transfers legal title to real estate to the trustee and in return acquires the TBI. The trustee administers the real estate at the instructions of the TBI holder. The TBI holder receives periodic distributions from trust income after deducting costs and expenses. A reduced tax rate is applicable for the real estate registration tax when entrusting the legal title to the trustee. Generally, the real estate acquisition tax is not imposed on the transfer of a TBI. size, foreign institutional investors tend to use the TMK structure. The TMK structure is more attractive than the GK/TK structure from a tax perspective. However, generally speaking, the set-up and maintenance of a TMK is costly as compared with a GK under the GK/ TK structure. The GK/TK structure tends to be used when investing in real estate in mid or small size. Generally the management of the TK business (including cash distributions) is flexible as compared to a TMK, but the GK/TK structure attracts more regulatory issues. |