🌏 Japan’s Controlled Foreign Company (CFC) Rules for Individuals

💡Basic Concept

The Controlled Foreign Company (CFC) Rules, also known as Tax Haven Rules, are designed to prevent Japanese residents from avoiding taxation by establishing companies in countries or regions with low tax rates and accumulating profits there.

In other words, profits retained by an overseas company may be included in the Japanese resident’s taxable income under this system.

⚙️When the Rules Apply
The Tax Haven Rules apply when all of the following conditions are met:
The Japanese resident owns 10% or more of the foreign company’s shares, and Japanese residents collectively own more than 50%, including cases where family members residing overseas hold shares.

The foreign company’s effective tax rate is below 20%.
The foreign company has little or no real business activity in its local jurisdiction (a paper company).

In such cases, the rules may apply even if the effective tax rate is 20% or higher, because the company lacks substantial business substance.

The retained income of such companies is subject to inclusion and taxation in Japan.

🧾Effect
Even if profits remain in the overseas company, Japan’s tax law treats them as if they were distributed to the Japanese resident,
making them subject to Japanese income tax.

In short, profits held in a low-tax jurisdiction or by a paper company can still be taxed in Japan.

👥 Application to Non-Japanese Nationalities in Japan

The Tax Haven Rules apply based on residency status, not nationality.

Anyone who is considered a resident of Japan for tax purposes—whether Japanese or foreign—is subject to these rules.

🗝️Key Points Summary

Tax Haven (CFC) Rules prevent the use of overseas entities in low-tax countries to avoid Japanese taxation.

The rules apply to all residents of Japan, regardless of nationality.

If a resident owns 10% or more of a low-taxed foreign company, and Japanese residents collectively own more than 50% (including family members residing overseas), the company’s retained profits may be taxed in Japan as part of the resident’s income.

Paper companies, which lack real business substance, may be subject to the rules even if their effective tax rate is 20% or higher.

💬 Final Note

The CFC (Tax Haven) Rules are highly complex, and the determination often depends on detailed factual and legal analysis.

It is strongly recommended to consult a qualified tax professional when assessing whether these rules apply to your situation.