Japan to Relax M&A Rules Though Tax Barrier Remains

by Mary Swire, Tax-News.com, Hong Kong

28 March 2003

The Japanese government is planning to relax the rules relating to acquisitions of domestic firms by foreign companies using share swap deals in a bid to increase the flow of investment into the country's beleaguered economy.

However, the plan may not be as successful as the administration hopes if they do not simultaneously reform the present system of taxation on share swap deals, analysts have warned. Nevertheless, it is hoped that the policy proposed by the Japan Investment Council (JIC) will double the total amount of inward foreign direct investment (FDI) over the next five years.

The present tax regime on such deals dictates that shareholders in the company which is targeted in a take-over have to pay tax in the form of cash when they receive stock from the company's buyer. In most other industrialised countries, capital gains tax is only paid when the shares are subsequently sold on. It is thought this acts as a major disincentive to those interested in buying Japanese firms.

Speaking to Reuters, Goldman Sachs managing director Nobumichi Hattori acknowledged that the government is moving in the right direction with the proposal, but warned: "without a vital change in the tax code, no one will use the share swap scheme to buy Japanese listed companies."

The Ministry of Trade, Economy, and Industry signalled that it has recognised that this could be a potential stumbling block for foreign firms, and says it is currently negotiating with the Japanese tax authorities in a bid to solve the dilemma.

The new measure, which forms part of the Revised Industrial Revitalisation Law will not, however, allow foreign firms to use their own stock to buy a stake in a Japanese firm. Instead, the share swap will have to be conducted through a Japanese subsidiary. In spite of this, analysts say that the opening up of Japan to foreign firms is a trend that is likely to continue and there is set to be a steady interest in cross border M&A activity as cash-strapped Japanese firms look for further sources of investment.

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