Partnerships are Regarded as a Pass-Through Entity for Individual Income Tax in Japan

photo of people near wooden table 3184418 - Partnerships are Regarded as a Pass-Through Entity for Individual Income Tax in Japan

A partnership (Civil Code Article #667) is not usually regarded as an independent corporate entity, therefore it is taxable on each individual partners’ distribution. The tax implication is similar to that of co-owning. You claim income and expenses on a prorated basis. The rate can be whatever you agree to with the other partners (#674). Unless the partnership has its own fiscal year, revenue and expenses should be recognized on the calendar year.

According to the NTA website:

A member that acts only passively, who doesn’t participate in decisions for important purchases, dispositions, or material loans, and only receives a distribution from the partnership is regarded as a“Passive Partner” or 特定組合員 (Tokutei Kumiai-in). A Passive Partner cannot offset his losses from the partnership against his other income (Special Taxation Measures Law #41-4-2).

Whether an individual is a Passive Partner or not is determined by each partnership.

Is LLP or LLC in US a pass through entity?

There have been contradictory rulings by the lower courts in the past which made tax planning and filing confusing.

Recently, the Japanese Supreme Court gave a ruling on the case of a Limited Liability Partnership under Delaware Law. The case centered on an LLP established in Delaware to purchase properties. The properties were put in a trust to be managed by a trust bank.

The plaintiffs claimed the loss from the LLP as though it was a pass-through entity and could offset against other income in their tax returns. The tax authority rejected the offsetting, reasoning that the LLP was an independent legal entity, similar to a corporation.

There were two considerations in the Japanese Supreme Court Ruling on July 17, 2015, and they are taken to be standard criteria for future judgment.

1) Is it the entity a legal entity?

2) Can the entity it own and exercise legal rights and bear liabilities?

The ruling stated that the most fundamental element of a corporation is that it can have its’ own legal rights and liabilities, and that since a Delaware LLP also can, the two types of organizations are similar.