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AmCham Voices Concerns Over Japan's Triangular Merger Tax Plans

by Mary Swire,, Hong Kong

12 December 2006

The American Chamber of Commerce in Japan (ACCJ) has expressed concern regarding reports that the Japanese government is finalising a tax policy that will make it impossible for foreign companies newly investing in Japan to use their stock as consideration in tax-deferred triangular mergers.

According to the reports, the government will likely reject the Ministry of Economy, Trade and Industry (METI)’s Tax Item Request, which was submitted to the Ministry of Finance (MOF) in August, and would have allowed tax deferral consideration for legitimate triangular mergers between foreign parent companies, their domestic special purpose companies, and Japanese companies.

“METI’s tax item request was designed to promote foreign direct investment (FDI)," noted ACCJ President Charles D. Lake II.

"Any rejection of this request would be a significant setback for the Government of Japan’s stated goal to promote sustained and stable growth through increased FDI. Most experts agree that, without tax deferral, these friendly triangular mergers simply will not occur. Denying tax deferral for triangular mergers by new investors would severely limit FDI into Japan and be interpreted by the global community to mean that Japan has weakened its commitment to expanding inward FDI," he added.

Under Japanese tax law principles, tax deferral at the shareholder and company level can be granted when merging companies are considered to operate businesses that have a “synergy relationship” with each other. METI’s proposal recognizes foreign parent companies and their special purpose companies as a single group when evaluating synergy for qualification as tax-deferred transactions.

Nicholas Benes, Chair of the ACCJ’s FDI Committee, stated: “Recent press reports indicate that METI’s proposal is being mischaracterized as facilitating ‘abuse’ and the inappropriate use of ‘paper companies.’ The ACCJ has long been supportive of appropriate anti-abuse measures, proposing detailed rules more than three years ago. But it is not ‘abuse’ when foreign firms set up special purpose companies in Japan for the provision of support and added synergy to their new Japanese partners for their mutual long-term growth and success.”

Benes continued: “The treatment of triangular mergers as two-way domestic mergers between a special purpose company in Japan and a Japanese company would mean that synergy with the foreign parent company – no matter how large – would not qualify for tax deferral consideration, even though such potential economic benefits were the main reason behind facilitating triangular mergers in the first place.”

A triangular merger is a structure whereby a company (foreign or domestic) can issue its own shares as consideration in a merger with a Japanese company. The foreign company first issues its shares to a special purpose company it owns in Japan, which then merges with the Japanese company for legal purposes. Prior shareholders of the Japanese company will receive the newly issued shares in an effective 'swap'.

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