March 16, 2023
Japan's Tax Authority confirms that a representative and registration in Japan as required under Companies Act does not create a PE
On 8 March 2023, Japan's National Tax Agency (NTA) published a tax ruling1 analyzing whether appointing a representative (an external lawyer) and obtaining a registration, as required under the Companies Act, would constitute a PE in Japan. The NTA agreed that a PE would not be created by the representative and registration on the basis that the company is not authorized to access any space in which the representative would perform its duties for the company, and that the representative is not involved in the company's business activity.
This ruling is the first to publicly provide guidance concerning the PE implications of a foreign corporation's obligations under the Companies Act.
During 2021, Japan's Ministry of Justice issued a notice to foreign companies that were registered/notified as telecommunications carriers that include a wide range of industries such as social media operators, technology, regarding their registration obligations under the Companies Act. The Ministry subsequently issued further notices to a significant number of companies that it considered to be non-compliant with such requirements. Though these notices were to telecommunications carriers, the same registration obligations apply to other types of foreign companies regardless of registration as a telecommunications carrier.
It had been noted that some companies have not been meeting their registration obligations, especially where they did not have a physical presence in Japan. This is seen as having become easier due to the increase in cross-border electronic services (as in the case for Japan's recent application of consumption tax (Value Added Tax or VAT) to these types of services). Such registration could allow various Japanese agencies to better monitor these foreign companies, as well as assist with legal and tax administration.
From a Japanese corporate income tax (CIT) perspective, the creation of a PE is determined based on all relevant facts and circumstances. Registration under the Companies Act, like registering as a consumption taxpayer, is generally understood to not automatically result in a Japanese PE. However, registration may be considered by the Japanese tax office as a relevant factor when making such a determination. Furthermore, the activities and negotiation/contract concluding authority of a representative in Japan would also typically be considered as potential factors that could indicate a fixed place of business PE, or a dependent agent PE, has been created. In light of this background, the following tax ruling request and conclusions provide some new guidance.
The company in the ruling is an Irish resident as defined under Article 4 (1) of the tax treaty between Japan and Ireland. The company operates an online marketplace in Japan (the Business) and has made a notification that the company intends to operate a telecommunications business in Japan as required by Article 16 of Telecommunications Business Act.2 Based on the fact that the company is engaged in a continuous business activity in Japan, the company has been requested by the Ministry of Justice to consider specifying a representative in Japan under Article 817(1) of the Companies Act and processing the registration under Article 933(1) of the Companies Act.3 To this end, the company has selected an external lawyer as the representative and completed the registration procedures.
The agreement between the company and the lawyer clarifies that:
The lawyer is only authorized to perform the Duties for the company.
The company is not authorized to access any space in which the representative would perform the Duties.
The NTA confirmed that based on the fact that the company is not authorized to access any space in which the representative would perform the Duties, the place in which the representative would perform the Duties would not constitute a fixed place of business PE as defined under Article 6(1) of the tax treaty between Japan and Ireland.
The NTA also agreed that based on the fact that the lawyer is not involved in the Business and is only authorized to perform the Duties for the company, and assuming the lawyer will not actually conduct any other activities for the company, a dependent agent PE as defined under Article 6(5) of the tax treaty between Japan and Ireland4 would not be created.
Based on these discussions, the ruling concludes that appointing an external lawyer as the representative, completing the registration and the lawyer fulfilling the Duties should not give rise to a PE under Article 6(1) or (5) of the tax treaty between Japan and Ireland.
PE matters can be technically challenging, requiring analysis that considers all relevant facts and circumstances. A detailed analysis is therefore recommended to properly assess the level of PE risk derived from any Japan related activities by, or on behalf of a foreign company, including filings and use of representatives.
While the ruling is not legally binding, it is expected that the Japanese tax authorities will apply similar PE analysis and treatment to a foreign company with facts and circumstances that are similar to those described in the ruling. Where the facts and circumstances have significant differences, further consideration should be given to the PE issues and risks.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Co., Tokyo
Ernst & Young LLP (United States), Japanese Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
1 https://www.nta.go.jp/about/organization/tokyo/bunshokaito/hojin/230222/index.htm (only in Japanese)
2 Telecommunications Business Act: https://www.japaneselawtranslation.go.jp/ja/laws/view/4176#je_ch2sc2at9
4 Unlike the current definition of dependent agent PE under the OECD's Model Tax Convention, the treaty between Japan and Ireland includes "concluding contracts" agent and "filling orders" agent in the dependent agent PE provision.