Investment structuring into Japan

1. 1 Investment structuring into Japan Jeroen van Mourik Max Severens Loyens & Loeff Loyens & Loeff Tokyo, Japan Rotterdam, the Netherlands  Sydney � July 10, 2007

2. 2 Introduction of Loyens & Loeff Part I: Equity investments Taxation in Japan (overview) Case studies / investment structures Part II: Real estate investments Taxation in Japan (overview) Case studies / investment structures Agenda

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6. 6 PART I: EQUITY INVESTMENTS

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8. 8 Why Japan? Increasing confidence in Japanese economy Low interest rates Availability of investments: first-rate returns

9. 9 Main Tax Issues

10. 10 Tax characterisation of the Fund Risk of a permanent establishment Tax treaty benefits Taxation of dividends Taxation of capital gains Main Tax Issues (2)

11. 11 Tax Characterisation Pass-through entity vs. corporate entity Comparison with Japanese entities Nini Kumiai (general partnership) Tokumei Kumiai (silent partnership) Investment Limited Partnership Limited Liability Partnership Kabushiki Kaisha (stock corporation) Gomei Gaisha (unlimited partnership) Goshi Gaisha (limited partnership) Godo Kaisha (limited liability company)

12. 12 Main elements for characterisation (case-by-case basis): legal personality contract-based ownership of assets liability of partners etc. Japanese tax treatment of Australian investment vehicles (eg Unit Trust) Tax Characterisation (2)

13. 13 Tax Characterisation (3) For Japanese tax purposes: Cayman LP is generally accepted as being regarded tax transparent; Luxembourg FCP is generally accepted as being regarded tax transparent; Australian Unit Trust?

14. 14 Consequences: Domestic tax liability Direct PE or Agent PE Definition of Direct PE �branches, factories and other fixed places in which business is being conducted inside Japan� Definition of Agent PE �person � other than an agent of independent status � acting on behalf of a foreign taxpayer, who has, and habitually exercises an authority to conclude contracts in the name of the foreign taxpayer� Permanent establishment

15. 15 Substance for dividend, interest and royalty purposes Australian resident should be beneficial owner: �Australian resident" means a person who is a resident of Australia and is not resident in Japan. Special purpose companies or interposed companies Special purpose companies or interposed companies designed to achieve tax benefits are closely scrutinized by Japanese tax authorities

16. 16 Dividends Domestic rate: 20% Reduction may be available under tax treaty: In general, the Australia � Japan treaty reduces dividend withholding tax to 15% if beneficially owned by a resident of Australia.

17. 17 Domestic taxation depends on ownership (25/5 Rule): Shareholding of 25% or more in JapanCo at any time during the last 3 years preceding the end of the book year of the sale; and At least 5% of interests is sold. Real estate holding company (= 50% real estate), threshold will be: More than 5% of the shares (listed) More than 2% of the shares (privately held)  Partnerships: aggregated common ownership will be relevant Capital gains

18. 18 If sale is subject to taxation, domestic tax rate is 30% (corporations) or 15% (individuals) However, capital gain may be exempt under tax treaties: Netherlands - Japan: yes Australia - Japan: no Capital gains (2)

19. 19 Case Study I: Cayman LP

20. 20 Overview Cayman LP will invest directly in shares of Japanese corporations Tax characterisation Cayman LP commonly viewed as a pass-through entity for Japanese tax purposes Capital gains from sale of Japanese shares Not exempt from Japanese taxation under Aus - Japan tax treaty Case Study I: Cayman LP (2)

21. 21 Dividends paid by Japanese corporations Subject to reduced Japanese withholding tax under Aus -Japan treaty i.e. 15%. Interest paid by Japanese corporations Deductible for Japanese tax purposes (local thin cap to take into account; 3:1 applies to loans from >50% shareholder) Subject to 10% Japanese withholding tax under Aus -Japan treaty Case Study I: Cayman LP (3)

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23. 23 Overview Fund establishes Luxembourg SARL to hold 100% of shares of Belgium BVBA BVBA invests directly in shares (at least 25%) of Japanese corporations Capital gains from sale of Japanese shares No Japanese taxation under Belgium-Japan treaty BVBA applies for certification that it is a Belgium tax resident for purposes of treaty BVBA�s management must be conducted from Belgium Also helpful for BVBA to make other investments in other jurisdictions or to have Belgium-based substance (e.g., employees, office, local business activities, etc.) No Belgium taxation as long as Japanese corporations are subject to corporate income tax of at least 15%

24. 24 Dividends paid by Japanese corporations to BVBA Subject to reduced Japanese withholding tax of no greater than 15% 95% exempt as long as BVBA qualifies for Belgium �participation exemption� Distributions by BVBA to SARL In principle, no Belgian withholding tax No Luxembourg tax if SARL qualifies for �participation exemption� with respect to BVBA

25. 25 Capital gain from sale of BVBA Shares No Luxembourg taxation if: SARL is fully subject to Luxembourg corporate income tax acquired its interest in BVBA for at least EUR 6 million or owns a 10% interest in the nominal capital issued by BVBA holds or will continue to hold its interest in BVBA for at least 1 year

26. 26 Redemption of SARL Shares When an investment in a Japanese corporation is sold or disposed, BVBA makes a distribution of sales proceeds to SARL Then, SARL redeems class(es) of SARL shares held by Funds that corresponds to the liquidated Japanese investment Such redemption is treated as a partial liquidation of SARL Contributions in exchange for SARL shares are potentially subject to a 1% Luxembourg capital tax ? Minimize impact by partially capitalizing SARL through issuance of convertible bonds to Funds No Luxembourg dividend withholding tax on either (1) redemption at FMV of the bonds prior to conversion, or (2) payment of interest on the bonds

27. 27 Case Study III: Dutch Co-op

28. 28 Overview Dutch Co-operative (�Co-op�) will invest directly in shares of Japanese corporations A Dutch Co-op is a separate legal entity. Its statutory purpose must be to satisfy the needs of its members. Traditionally used by farmers, but also allowed to hold shares. Main advantage: no withholding tax on dividends distributed by Co-op (since Co-op is not considered to be an entity with a capital divided into shares). For Australian tax purposes; qualification of Dutch Co-op. Case Study III: Dutch Co-op (2)

29. 29 Capital gains from sale of Japanese shares No Japanese tax under NL-Japan tax treaty Co-op applies for certification that it is a resident of NL for purposes of treaty Co-op�s management must be conducted from NL Also helpful for Co-op to make other investments in other jurisdictions or to have Dutch-based substance (e.g., employees, office, local business activities, etc.) No NL taxation under participation exemption Case Study III: Dutch Co-op (3)

30. 30 Main conditions for participation exemption: At least 5% of nominal paid up share capital of subsidiary, and Subsidiary must not be a low taxed portfolio investment company (�LTPC�). Subsidiary is a LTPC when it fails: Asset test: More than half of all its directly and indirectly owned assets are of a passive nature (so-called �free portfolio investments�), and Subject-to-tax test: Its profits, restated under Dutch rules, carry a tax burden of less than 10% Different (more liberal) asset test for subsidiaries owning >90% real property �Definition� free portfolio investments: other portfolio investments than those reasonably necessary for business activities. If asset test and subject-to-tax test are not met: subsidiary is an LTPC: no participation exemption, but credit system for dividends and capital gains with a deemed 5% credit. Case Study III: Dutch Co-op (4)

31. 31 Dividends paid by Japanese corporation to Co-op Subject to reduced Japanese withholding tax (5 -15%) No NL taxation under participation exemption Dividends paid by Co-op No Dutch withholding tax under Dutch domestic law (since Co-op is not considered to be an entity with a capital divided into shares) Case Study III: Dutch Co-op (5)

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33. 33 Taxation of Real Property Investment

34. 34 Non-resident corporate investor

35. 35 Non-resident individual investor

36. 36 Vehicles / Structures for real estate investment in Japan Tokumei Kumiai (�TK�) TK is a contractual agreement, whereby one or more silent partners (�TK investors�) contribute funds for the operation of a specific business (e.g. real estate investment) carried on by a Japanese operator (�TK Operator�). Tokutei Mokuteki Kaisha (�TMK�) TMK is a special purpose Japanese company created for securitization of certain specified assets. The number of registered TMKs in Tokyo/Osaka is currently approx. 677. Real Estate Investment Trust (�J-REIT�) Real Estate Investment Trust (Toshi Houjin) is commonly referred to as J-REIT, which is a special purpose Japanese company created for securitization of real estate. Currently approx. 39 J-REITs are listed.

37. 37 TK - Structure

38. 38 What is a TK? � Japanese perspective Tokumei Kumiai (�TK�) Contractual relationship Silent partnership TK itself is not a taxable entity. If TK Operator distributes profit to TK investors, the distribution is deductible for TK Operator. In case losses are allocated to TK partners, the TK Operator is required to recognize corresponding taxable income. Liability limited to contribution No management relation TK Investor � TK Operator In case TK Operator has a business other than the TK business, bookkeeping should be done separately.

39. 39 Taxation of TK investors

40. 40 Tax authorities hostile towards �tax evasion structures�  Audit by Japanese tax authorities: - TK Investor acting merely as nominee: �look through� - TK Investor part of jointly operated partnership with TK Operator: permanent establishment in Japan with 42% tax burden Policy Japanese tax authorities: - Watch closely, tackle severely - Court case: September 30, 2005 Tokyo District Court TK Japanese approach

41. 41 TMK - Structure

42. 42 Tokutei Mokuteki Kaisha (�TMK�) TMK is a special purpose Japanese company for securitization of certain specified assets (e.g., real estate investment) Asset Liquidation Plan TMK is subject to the ordinary corporation tax (approx. 42%) A qualified TMK is � subject to certain conditions - allowed to deduct dividends from its taxable income. Remaining profits after the deduction of dividends are subject to ordinary corporation tax The domestic dividend withholding tax rate is 20%. Reduction under a tax treaty may be available TMK is entitled to a reduced registration tax of real property of 0.8% (from 1%). Real estate acquisition tax is reduced to 1% (from 3%). What is a TMK?

43. 43 Taxation on TMK investors Capital gains on disposition of TMK shares Domestic taxation depends on ownership (5/25-rule): Shareholding of 25% or more in TMK at any time during the last 3 years preceding the end of the book year of the sale; and At least 5% of TMK interests is sold. Real estate holding company (= 50% real estate), threshold will be: More than 5% of the shares (listed) More than 2% of the shares (privately held)

44. 44 If sale is subject to taxation, domestic tax rate is 30% (corporations) or 15% (individuals) However, capital gain may be exempt under tax treaties - Netherlands-Japan: yes - Australia -Japan: no Taxation on TMK investors (2)

45. 45 10 conditions for tax qualification: Formed pursuant to Art. 8 of the Asset Liquidation Law. TMK conducts business in line with the Asset Liquidation Plan and does not conduct any other business. TMK entrusts management and disposal of specified assets to a separate third party entity with knowledge and experience, or places assets into a trust with a third party trustee for the management of the assets.

46. 46 4. One of the following conditions must be met: The TMK issues specified bonds in the amount of JPY 100 million or more through a public offering; Specified bonds are subscribed only by qualified institutional investors (i.e., Japan licensed banks); Preferred investment certificates are subscribed by 50 or more investors in a Japanese public offering (i.e., primarily Japan offered); Preferred investment certificates are subscribed to only by qualified institutional investors.

47. 47 5. If there is a public offering of bonds or preferred stock, more than 50% of the debt/equity instruments must be subscribed to in Japan. 6. TMK is not a family corporation under Japanese tax law. 7. TMK does not own any assets other than the specified assets. 8. TMK�s fiscal year does not exceed one year. 9. Loans to TMK, if any, must be from a qualified institutional investors only (never from shareholders of the TMK or affiliates of shareholder). 10. More than 90% of the TMK�s distributable amount for the fiscal year has been distributed as a dividend to equity holders.

48. 48 J-REIT - Structure

49. 49 What is a J-REIT? J-REIT/Toshi Houjin (�J-REIT�) Two types: Trust and Corporation J-REIT is subject to the normal corporate income tax (approx. 42%) A qualified J-REIT is � subject to certain conditions - allowed to deduct dividends from its taxable income. Remaining profits after the deduction of the dividends are subject to ordinary corporation tax J-REIT is entitled to a reduced acquisition tax of real property of 1% from 3%. Real estate registration tax is reduced to 0.6%

50. 50 The following 11 conditions are to be met: Registration of J-REIT with the Financial Services Agency One of the conditions below must be met: The shares are publicly offered at the time of incorporation and the total issued amount at the time is JPY 100 million or more; or At fiscal year-end, the issued shares are held by 50 or more shareholders, or held solely by qualifying financial institutions. The total issued shares are offered primarily in Japan

51. 51 The fiscal year of J-REIT must be a period of one year or less J-REIT does not violate Art. 63 of the Investment Corporation Law A licensed Fund Manager A qualifying Custodian J-REIT is not a family corporation under Japanese tax law J-REIT does not hold 50% or more of shares in another corporation If J-REIT borrows funds, the loan provider must be a qualifying financial institution The amount of declared dividends exceeds 90% of the amount of distributable profits

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54. 54 Case Study I: Dutch Co-op - TMK

55. 55 Case Study I: Dutch Co-op - TMK (2) Beneficial tax treatment for TMK in Japan: dividends deductible If Dutch-Japan tax treaty benefits for Co-op: - 5% withholding tax on dividends from TMK to Co-op - No Japanese capital gains tax ? Substance Participation exemption for shareholding in TMK (= 90% real estate investment): income and capital gains on TMK tax exempt for Co-op No dividend withholding tax on distributions of profit by Co-op

56. 56 Look at investment on a case by case basis Crucial: qualification of Japanese target for Australian tax purposes; qualification of Australian investing entity for Japanese tax purposes. Special focus of Japanese authorities when interposing entity to obtain treaty benefits Japan considered as a high-tax jurisdiction(42 % corporationtax), but tax cost on real estate investment can be kept at manageable level with careful planning Conclusions

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58. 58 Contact details Jeroen van Mourik Max Severens Tel : + 81 3 5281 5582 Tel: +61 2 9225 5955 Fax : +81 3 5281 5583 Fax: +61 2 9221 6516 jeroen.van.mourik@loyensloeff.com max.severens@gf.com.au max.severens@loyensloeff.com