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The Conditions for a Qualified Merger to be Treated as Joint Venture in Japan

person holding blue ballpoint pen on white notebook 669610 - The Conditions for a Qualified Merger to be Treated as Joint Venture in Japan

Under Japanese corporate tax there are two types of mergers and acquisitions (M&A), qualified mergers, and unqualified mergers.

With qualified mergers unrealized gains on assets will not be taxed as part of the merger. More importantly, you can carry over accumulated past losses.

During an unqualified merger, all the assets in the acquired company are to be regarded purchased by the acquiring company and thus they are taxed. No tax losses are allowed to be carried into the acquiring company.

There are two types of qualified mergers, (1) a merger in the same company group, (2) a joint venture. To qualify as a joint venture type of merger, the following conditions have to be met.

  1. The two companies must have related business.

And the conditions either 2-a or 2-b must be met.

2-a) The size difference between the two companies must be within a 5:1 ratio.

2-b) The c-level directors of the acquired company must participate in the management of the acquiring company as senior director.

And condition 3 must be met.

3) More than 80 percent of the shareholders of the acquired company must own newly issued shares of the acquiring company.

If you are considering to buy a company for its’ losses to be carried forward that is outside your company’s group, you will need to confirm that the conditions of the joint venture type merger are met before proceeding.