The Financial Services Agency (FSA) is encouraging foreign asset managers to enter the market, with the aim of establishing Japan as an international financial center that is open to the world. Comprehensive regulatory reforms are underway, which include revisions to the tax system, the establishment of “Specially Permitted Business for Foreign Investors, etc.” and “The Specially Permitted Business for Transition Period” as well as the simplification of procedures.
Traditionally, overseas asset management companies have typically entered the domestic market by registering as either an Investment Management Business Operator or a Type II Financial Instruments Business Operator. Alternatively, they could submit a notification for “Special Business Operations specifically for Qualified Institutional Investors, etc.”. Of these options, both the Investment Management Business Operator and Type II Financial Instruments Business Operator registrations require setting up a physical presence in Japan, either in the form of subsidiaries or branches.
Under the regulations for “Special Business Operations specifically for Qualified Institutional Investors, etc.”, setting up a business office in Japan is not required. However, having a liaison agent for procedural matters is necessary. While there are no specific qualifications for this role, it is common to appoint a lawyer, an administrative scrivener, or a financial instruments business operator based in Japan as the agent. In recent years, as part of a national policy, the Japanese government has been providing strong support to foreign asset management companies looking to enter Japan and has decided to implement new preferential measures.
Tax Reform
The tax system has been revised to facilitate easier asset management based in Japan. Starting next year, performance-linked pay for executives, which was previously not permissible under tax law, will be allowed. This means that performance-linked salaries for executives can now be included in the company’s expenses.
Double taxation will be eliminated, with taxation completed solely through income tax, which ranges from 0 to 55%. This change makes it more advantageous for executives to receive performance-based pay as fund managers.
Furthermore, foreign nationals residing in Japan for work or other reasons will not be subject to inheritance tax on their foreign assets, regardless of their length of stay.
It has also been confirmed that the preferred profit distribution received by individual fund managers as General Partners (GPs) will be taxed separately at a rate of 20.42%. For high-income individuals, this substantially reduces their tax rate from a previous maximum of 55% to 20.42%.
Introduction of the New License
Asset management firms that serve overseas professional investors can now provide the following services by establishing offices in Japan:
The Specially Permitted Business for Transition Period: Asset managers who have approval and licenses from overseas authorities and have a track record of managing overseas client funds can engage in discretionary investment business, investment trust management, investment trust offering business, and partnership fund offering & management business. This is subject to a time limit of 5 years.
Specially Permitted Business for Foreign Investors, etc.: Asset managers of funds, whose clients are mainly overseas professional investors, may offer and manage partnership-type funds in Japan upon notification.”
Japan as an asset management base
When it comes to tax benefits, if the income is received in the form of preferential profit-sharing that an individual fund manager gets as a General Partner (GP), the effective income tax rate is 20.42%, which is comparable to the income tax payroll taxation in Hong Kong and Singapore.
Moreover, by using the ‘ Specially Permitted Business for Foreign Investors, etc.’ provision, it becomes possible to set up a large-scale fund catering to a wide range of investors, mainly overseas investors and domestic institutional ones, in a straightforward and short span of time. Furthermore, within an administrative structure characterized by extremely low levels of fraud and corruption, regulatory supervision has been digitalized and translated into English, enabling direct asset management operations in English. Consistent with Japan’s policy of attracting international asset managers, we will continue to enhance our support for overseas asset managers.
