On December 8 2006, Japan's Trust Law was completely replaced by a new Trust Law (Law 108 of 2006), which will come into effect sometime before June 2008. It is the first big revision in decades.
The new Trust Law introduces the concept of the business trust. In countries such as the US and Germany, business trusts have been available for quite some time, but this is the first time Japan has been able to use a legal trust to manage or run a business.
Normally in a business trust, the estate is a business managed by a trustee for the benefit of its beneficiaries. Under the original Trust Law, business trusts were prohibited, because an entrustment of assets was restricted to entrusting rights attached to the assets. An entrustment of obligations alone or entrustment of a business with both rights and obligations attached to assets was not permitted. However, business trusts will be possible under the new Trust Law because debt associated with property will now be considered a permitted trust asset.
Business trusts make it possible for a company to entrust a business that is not competitive to a company that has greater skills and know-how in order to revitalize the business. The introduction of business trusts will provide many business opportunities through various combinations of a declaration of trust, a limited liability trust, and the treatment of a beneficiary interest right as a security, all of which have been introduced by the new Trust Law. By combining a business trust with a declaration of trust and limited liability trust, it will be easier for a company to isolate risk while using its know-how to start up a new high-risk business. Also, a business trust can be combined with a limited liability trust and the treatment of a beneficiary interest right as a security to achieve a whole business securitization.
Unlike companies, trusts are able to operate under a flexible governance system making business trusts convenient when used in a business that can be run simply by following the business policy provided in the trust agreement, such as project finance. On the other hand, business trusts are not appropriate for large businesses requiring sophisticated governance structures (for example, where a trustee, who owes a duty of care of a prudent manager to the entrusted business, does not have the benefit of the business judgment rule, which would be available to managers of a company).
Until more information is available about how business trusts will be taxed, it is difficult to tell how useful business trusts will be. However, business trusts do provide another option, and this alone will be welcomed by Japanese business.
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