Tokyo District Court Allows Tax Saving From Share Repurchase

On May 9, 2014, the Tokyo District Court reversed a large tax that had been imposed on a large U.S. multinational's Japanese holding company ("Japan HoldCo").

Under the Japanese Corporate Tax Law, if a shareholder returns shares to an issuing company (i.e., the issuing company acquires treasury shares), a portion of the consideration paid to the shareholder is deemed to be a dividend. Further, all or a portion of such deemed dividend will not be considered taxable income (in the case at issue, the entire deemed dividend was not considered taxable income of Japan HoldCo) and will be subtracted for the purpose of calculation of a capital gain or loss. Therefore, if the sale price (paid by the issuing company to the shareholder) and the book value of the transferred shares are equal, the shareholder will incur a capital loss equal to the amount of the deemed dividend resulting from the share transfer to the issuing company.