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GK/tK Structure
tK Partnership
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.
taxation
Generally, the TK operator can treat
distributions to the TK investor as an
expense and thereby avoid double
taxation at the TK operator's level. TK
distributions are subject to the Japanese
withholding tax of 20%.
regulations
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
discretionary investment advisor. If
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.
tBI
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.
conclusion
When investing in real estate in large
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.