Silent Partnership (Tokumei Kumiai (TK)) – Limited Liability Company (Godo Kaisha (GK)) Structure

Posted on 30/11/2020 by Koji Takahashi

The most popular investment scheme for real estate and renewable energy, etc. is a “TK-GK structure”.

[General Structure Diagram]

Below is a high level description of the legal character and general tax issues for the TK-GK structure.

 1.      Legal character

①    A TK is a contract stipulated in the Japanese Commercial Code, under which TK investors are entitled to contribute funds to TK operators and receive distributions of profits generated from TK activities.

②    A TK investors’ liability is limited to the amount invested.

③    TK investors have no right to be involved in the operations of the TK.

 2.      Japanese taxation of TK

①    TK operators recognize all revenues and expenses arising from TK activities. In calculating the TK operator’s taxable income, the profits distributed to the TK operator are deducted from the TK operator’s taxable income, and the losses distributed to the TK operator are added to the TK operator’s taxable income. This treatment does not require actual cash transfer of profits or the burden of losses (Basic Corporate Tax Circular 14 -1 -3).

②    The distribution of profits to TK investors is subject to Japanese withholding tax at a rate of 20.42%.

③    TK investors (assuming they are corporations) are taxed on the profits distributed by TK operators. Withholding tax withheld by TK operators can be credited against corporate tax of TK investors.

 3.      Japanese taxation of foreign TK investors

①    Same as in 2 ①

②    Same as in 2 ②

③    There is a risk that the TK may be treated as a general partnership if the TK investor is involved in the TK business. If there is a general partnership in Japan, the foreign investor would be deemed to have a permanent establishment (“PE”) in Japan. If a PE is created in Japan, the foreign investor would be subject to 30% corporate tax. Note that in past tax audits, the National Tax Agency denied the existence of a TK contract and asserted that there was a general partnership.

 We would recommend discussing with a tax expert who is familiar with TKs before implementing such a structure.

By Certified Public Accountant (CPA) & Tax Accountant, Tokyo & Yokohama