Features of Laws and Regulations Concerning Tokutei Mokuteki Kaisha (TMK)

When proceeding with liquidation of assets through TMKs, it is necessary to understand the TMKs’ characteristic systems and regulations under the Law Concerning Asset Liquidation (hereinafter referred to as the "Asset Liquidation Law").
Characteristic systems and regulations for TMKs are, for example, as follows.

(1) Preferential tax treatment measures
(2) Limitations on assets that can be acquired
(3) Limitations on the business that can be conducted (prohibition of other businesses)
(4) Restrictions on the acquisition of additional specified assets
(5) Mandatory outsourcing of business

Preferential tax treatment measures

The following preferential tax treatments are generally available for TMKs.

(1) Reduction of registration and license tax
The registration and license tax on the transfer of ownership of real estate to be acquired by a TMK is reduced to 13/1,000 (1.3%) (Article 83-2-2 of the Act on Special Measures Concerning Taxation).
In order to qualify for tax reduction of registration and license tax, the following requirements must be met.

(A) Notification of commencement of business has been submitted.
(B) An asset liquidation plan must state that asset-backed securities (specified bonds (Tokutei-Shasai), preferred equity interest (Yusen-Shussi), etc.) will be issued.
(C) An asset liquidation plan must state that the total value of specified real estate must be 75% or more of the total value of all specified assets acquired by a TMK.
(D) A lender for specified borrowing is not the same as a specified equity interest holder（Tokutei-Shain）.
(E) Total value of specified real estates（Tokutei-Fudosan）is actually 75% or more of total value of all specified assets, or will become 75% or more by the acquisition of the specified real estates（Tokutei-Fudosan）.

In addition, in order to be given reduction of registration and license tax, it is necessary to submit a certificate of tax reduction issued by the local finance bureau when applying for registration of transfer of ownership.

(2) Reduction of real estate acquisition tax:
With regard to real estate acquisition tax levied on the acquisition of real estate to be acquired by a TMK, three-fifths of the real estate price will be deducted in the calculation of the tax base (Article 11, Paragraph 3 of the Supplementary Provisions of the Local Tax Law).

In order to qualify for the real estate acquisition tax reduction, the requirements in (B) through (E) of (1) above must be met.

(3) Inclusion of profit dividends in deductible expenses:
The amount paid as dividends of profit can be included in the amount of deductible expenses only for the fiscal year in which certain requirements are met (Article 67-14 of the Act on Special Measures Concerning Taxation).

The main requirements for inclusion of amount of profits dividends in deductible expenses, for example, as follows.

(a) In an asset liquidation plan, there must be a statement that more than 50% of the respective offerings and allocations of the issued preferred equity interest (Yusen-Shussi), etc.) and Kijun-Tokutei-Shussi (specified equity interest (Tokutei-Shussi) other than those specified in an asset liquidation plan to waive both profit dividends and distribution of residual assets) will be made in Japan;
(b) It is expected that all of specified bonds (Tokutei-Shasai) to be issued will be held by institutional investors, etc. (e.g., investment managers, Type I financial instruments business operators, banks, LPSs, etc.);
(c) Accounting period of the TMK should not exceed one year; and
(d) Amount of profit dividends paid for a fiscal year exceeds the amount equivalent to 90% of the amount specified by cabinet order as amount of distributable profit for the fiscal year.

Restrictions on assets that can be acquired

For example, a TMK may not acquire the following assets (Article 212 of Asset Liquidation Law, Article 96 and Article 97 of the Ordinance for Enforcement of the Asset Liquidation Law). However, if certain requirements are met, acquisition may be exceptionally permitted (Article 95 of the Enforcement Regulations of the Law Concerning Asset Securitization).

(1) Equity interest in an association agreement (Kumiai Keiyaku)
(2) Equity interest in an anonymous association agreement (Tokumei-Kumiai Keiyaku)
(3) Trust beneficiary interest in monetary trust

Limitation of business that can be conducted (prohibition of other businesses)

Scope of business of a TMK is limited to (1) business related to asset liquidation and (2) incidental business (Article 195 of the Asset Liquidation Law). Since an asset liquidation plan is submitted along with a notification of commencement of business, TMK can conduct business related to liquidation of assets, such as acquisition of specified assets (Tokutei-Shisan), issuance of preferred equity interest (Yusen-Shussi), issuance of specified bonds (Tokutei-Shasai) and borrowing, only after the notification of commencement of business.
In addition, the TMK may not do anything contrary to what is stated in an asset liquidation plan. Therefore, for example, a TMK can only acquire the specified assets (Tokutei-Shisan) specified in an asset liquidation plan.

On the other hand, specified assets that are incidental to real estate or other specified assets, are used together with real estate, and contribute to securing profits from operations related to asset liquidation are called "subordinate specified assets (Jūtaru-Tokutei-Shisan)" (Article 4, Paragraph 3, Item 3 of the Asset Liquidation Law, Article 6-2 of the Ordinance for Enforcement of the Asset Liquidation Law) (hereinafter referred to as "Subordinate Specified Assets"). For example, it is possible for a TMK to acquire FF&Es of a hotel incidentally to the acquisition of the hotel building, even if it is not stated in an asset liquidation plan.

Restrictions on the Acquisition of Additional Specified Assets

Assets that are not listed as specified assets (Tokutei-Shisan) in an asset liquidation plan of a TMK at the time of notification of commencement of business are allowed to be acquired by amending the asset liquidation plan to add additional assets as new specified assets (Tokutei-Shisan). However, if the specified assets (Tokutei-Shisan) are residential land/buildings under the Real Estate Brokerage Act that are not closely related to the existing specified assets (Tokutei-Shisan), TMK is not permitted, in principle, to acquire such residential land/buildings as new specified assets (Tokutei-Shisan). As for whether or not it is closely related to the existing specified assets (Tokutei-Shisan), the decision is made by comprehensively taking into consideration the geographical proximity to the existing specified assets (Tokutei-Shisan), the function and role of the building or land to be additionally acquired, and the background of the additional acquisition.

Mandatory outsourcing of operations

As a TMK is just a vehicle that holds specified assets (Tokutei-Shisan), it is necessary to outsource operations related to the management and disposal of specified assets (Tokutei-Shisan) to a third party. In principle, the method of outsourcing is to establish a trust (Article 200, Paragraph 1 of the Asset Liquidation Act). However, with respect to certain specified assets (Tokutei-Shisan) such as real estate, nominated claims (Shimei-Saiken), and other specified assets and subordinate specified assets (Jūtaru-Tokutei-Shisan), the business pertaining to the management and disposal of such assets can be entrusted to the transferor of such assets or a person who has sufficient financial basis and human resources to properly perform the management and disposal of such assets (trustee for the management and disposal of specified assets) (Article 200, Paragraph 2 of the Asset Liquidation Act). Therefore, it is possible to acquire actual real estate by entering into an asset management agreement to entrust the management and disposal of assets, etc., without establishing a trust.

In addition, regulations such as the obligation to establish a trust do not apply to subordinate specified assets (Jūtaru-Tokutei-Shisan), so for example, a TMK can acquire FF&E of a hotel without establishing a trust.