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Japanese Eurobond taxation

On April 1 2010, an amendment to Article 6 (the special provisions) of the Act on Special Measures Concerning Taxation of Japan (Law No. 26 of 1957) became effective. The special provisions removed the time period limitation on the exemption from income tax imposed on interest payable outside Japan to non-resident individuals or foreign corporations, in respect of bonds issued by Japanese corporations outside Japan (minkan kokugaisai, or Japanese Eurobonds). Accordingly, such interest will no longer be subject to Japanese taxation (the exemption) so long as certain statutory requirements for the exemption are met.

Japanese companies rely heavily on Japanese Eurobonds as an effective way to raise capital. The aggregate value of all Japanese Eurobonds in 2008 was reported to have been approximately ¥1.4 trillion ($15.2 billion).

Despite removing the time period limitation, the special provisions specify that the exemption does not apply (1) if a Japanese Eurobond is owned by a non-resident individual or a foreign corporation that is a person with a special relationship with the issuer (a person that directly or indirectly controls or is directly or indirectly controlled by, or is under direct or indirect common control of, such issuer, or a specially-related person), or (2) if the calculation of interest payable for Japanese Eurobonds is based on (a) the amount of profits generated by the business of, or the gross revenue of, the issuer or a specially-related person, (b) the fair value of the assets of the issuer or a specially-related person, or (c) the amount of dividends or other distributions paid by the issuer or a specially-related person.

Most Japanese Eurobonds are held through Euroclear, Clearstream or other clearing systems and categorised as 'specified' Eurobonds. Generally, in order to qualify as a 'specified' Eurobond, the underwriting agreement relating to the issuance and purchase of such bonds must, among other things prescribed by the Act, contain a provision prohibiting the sale of such bonds to residents of Japan, domestic corporations or specially-related persons, except as specifically allowed under the Act. In addition, a legend to the effect that Japanese withholding tax will apply to interest payments to residents of Japan, domestic corporations or specially-related persons must be included in the certificates representing the Japanese Eurobonds and in the prospectus or other offering document relating to the issuance of such bonds.

Some modifications to these documents and to certain verification procedures of the clearing systems are required to reflect the special provisions.

Tsubasa Kubota

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