Japan Legal Update Vol. 12 | March 2016

Tax

First Supreme Court Decision on General Anti-Avoidance Rule Concerning Reorganization Transactions

On February 29, 2016, the Supreme Court (first petty bench) issued a decision describing the standards for applying the general anti-avoidance rule concerning reorganization transactions under Article 132-2 of the Japanese Corporate Tax Law (the "Anti-Avoidance Rule").

The Anti-Avoidance Rule authorizes tax authorities to disallow a taxpayer's act or calculation if "the corporate tax burden is determined to have been unduly decreased" due to reorganization transactions including, but not limited to, a merger. In this case, the surviving company (the "Taxpayer") in a tax-qualified merger claimed that it assumed the net operating losses of the acquired company and included the same in its deductible expenses. However, the relevant tax authority denied the above inclusion by applying the Anti-Avoidance Rule.