Act on Special Measures Concerning Taxation

Where a domestic corporation pays, in each business year beginning on or after April 1, 1992, interest on liabilities, etc. to its foreign controlling shareholder, etc. or fund provider, etc., and the average balance of liabilities regarding the liabilities owed to the foreign controlling shareholder, etc. and the fund provider, etc. of the domestic corporation for the relevant business year exceeds threefold the amount of equity interest held by the foreign controlling shareholder, etc. for the relevant business year, the amount calculated pursuant to the method specified by Cabinet Order as such excess in the amount of interest on liabilities, etc. payable by the domestic corporation to its foreign controlling shareholder, etc. and fund provider, etc. in the relevant business year is not included in the amount of deductible expenses in the calculation of the amount of income of the domestic corporation for the relevant business year; provided, however, that this does not apply where the average balance of liabilities regarding the total liabilities of the domestic corporation for the relevant business year (limited to those which can be the cause of payment of interest on liabilities, etc. or which otherwise pertain to the raising of funds; the same applies in the following paragraph and paragraph (3)) is threefold the amount of equity capital of the domestic corporation or less.

Where the provisions of the preceding paragraph apply, and the domestic corporation has any liabilities arising from a specified bond transaction with a repurchase/resale agreement, etc. among the liabilities owed to the foreign controlling shareholder, etc. and the fund provider, etc. of the domestic corporation, the domestic corporation may use, as the multiple number applicable to the equity interest held by its foreign controlling shareholder, etc. or applicable to the amount of equity capital of the domestic corporation, the multiple number applicable to the equity interest held by the foreign controlling shareholder, etc. or applicable to the amount of equity capital, which is calculated pursuant to the method specified by Cabinet Order based on [1] the average balance of liabilities calculated by deducting the average balance of liabilities regarding the specified bond transaction with a repurchase/resale agreement, etc. calculated pursuant to the method specified by Cabinet Order from the average balance of liabilities regarding the liabilities owed to the foreign controlling shareholder, etc. and the fund provider, etc., or [2] the average balance of liabilities calculated by deducting the average balance of liabilities regarding the specified bond transaction with a repurchase/resale agreement, etc. calculated pursuant to the method specified by Cabinet Order from the average balance of liabilities regarding the total liabilities for the relevant business year, and thereby determine the amount calculated by deducting the amount of interest on liabilities, etc. arising from the specified bond transaction with a repurchase/resale agreement, etc. calculated pursuant to the method specified by Cabinet Order from the amount of interest on liabilities, etc. payable to the domestic corporation's foreign controlling shareholder, etc. and fund provider, etc., to be the amount of interest on liabilities, etc. payable to its foreign controlling shareholder, etc. and fund provider, etc. In this case, the term "threefold" in that paragraph is to be replaced with "twofold."

Where the provisions of paragraph (1) apply, the domestic corporation may use, in lieu of the multiple number applicable to the equity interest held by a foreign controlling shareholder, etc. of the domestic corporation and applicable to the amount of equity capital of the domestic corporation, a multiple number that is found to be appropriate in light of the percentage specified by Cabinet Order as the percentage of the total liabilities of another domestic corporation to its net assets on condition that such other domestic corporation's business is the same type as the domestic corporation's business, and the size and other details are similar between the two businesses.

The provisions of paragraph (1) do not apply where the amount calculated pursuant to the method specified by Cabinet Order as corresponding to the excess prescribed in that paragraph (including as applied with the terms replaced pursuant to the provisions of paragraph (2)) for the relevant business year of the domestic corporation is less than the amount of the excess prescribed in paragraph (1) of the following Article for the relevant business year of that domestic corporation; provided, however, that this does not apply where the provisions of paragraph (3) of that Article apply.

In this Article, the meanings of the terms listed in the following items are as prescribed respectively in those items:

foreign controlling shareholder, etc.:A nonresident prescribed in Article 2, paragraph (1), item (i)-2 (referred to in item (ix) as a "nonresident") or a foreign corporation who has a relationship with a domestic corporation whereby the nonresident or foreign corporation holds, directly or indirectly, shares or capital contributions that account for 50 percent or more of the total number or the total amount of issued shares of or capital contributions to the domestic corporation (excluding the shares or capital contributions held by the domestic corporation) or any other special relationship specified by Cabinet Order;

fund provider, etc.:A person who provides a domestic corporation with funds, and a person specified by Cabinet Order as being related to such provision of funds;

interest on liabilities, etc.:Interest on liabilities (including moneys specified by Cabinet Order as being equivalent thereto; hereinafter the same applies in this item) and any other expense specified by Cabinet Order (excluding the interest on liabilities and any other expense specified by Cabinet Order, which are included in the taxable income of the person who is to receive payment thereof, and any other expense specified by Cabinet Order);

liabilities owed to a foreign controlling shareholder, etc. and a fund provider, etc.:Liabilities owed to a foreign controlling shareholder, etc. (limited to those which can be the cause of payment of interest on liabilities, etc. or which otherwise pertain to the raising of funds) and liabilities owed to a fund provider, etc. that are specified by Cabinet Order (limited to those which can be the cause of payment of interest on liabilities, etc. or which otherwise pertain to the raising of funds);

average balance of liabilities:The amount calculated pursuant to the method specified by Cabinet Order as the average amount of liabilities;

equity interest held by a foreign controlling shareholder, etc.:The amount calculated pursuant to the method specified by Cabinet Order as the interest in a domestic corporation's net assets held by a foreign controlling shareholder, etc. for each business year;

amount of equity capital:The amount calculated pursuant to the method specified by Cabinet Order as the amount of net assets for each business year;

specified bond transaction with a repurchase/resale agreement, etc.:A bond transaction with a repurchase/resale agreement (meaning a bond transaction with a repurchase/resale agreement prescribed in Article 42-2, paragraph (1)) and a cash-secured bond lending transaction (meaning a transaction for borrowing or lending bonds secured by cash), which are specified by Cabinet Order; and

income subject to taxation:[For a resident prescribed in Article 2, paragraph (1), item (i)-2] each type of income (meaning each type of income prescribed in Article 2, paragraph (1), item (xxi) of the Income Tax Act) for each year; [for a domestic corporation] income for each business year; [for a nonresident or foreign corporation] domestic source income listed in Article 164, paragraph (1), item (i), (a) of that Act or Article 141, item (i), (a) of the Corporation Tax Act, which is specified by Cabinet Order.

The provisions of paragraph (2) apply only where a domestic corporation has filed a tax return, etc. with a document attached thereto stating that it seeks the application of the provisions of the paragraph and a written statement attached thereto concerning the calculation of the average balance of liabilities regarding the liabilities from a specified bond transaction with a repurchase/resale agreement, etc. and the amount of interest on liabilities, etc., both of which are deducted pursuant to the provisions of the paragraph, and preserved the documents on such calculation.

Even where a domestic corporation has filed a tax return, etc. without the document or written statement set forth in the preceding paragraph attached thereto or failed to preserve the documents on the calculation set forth in the paragraph, the district director may, when the find any unavoidable reason for the domestic corporation's failure to attach a necessary document or written statement or preserve the necessary documents on the calculation, apply the provisions of paragraph (2), only if the document and written statement as well as the documents on the calculation are submitted.

The provisions of paragraph (3) apply only where a domestic corporation has filed a tax return, etc. with a document attached thereto stating that it seeks the application of the paragraph, and preserved documents or any other materials (referred to in the following paragraph as "materials, etc.") that certify that the multiple number that it applies is appropriate.

Even where a domestic corporation has filed a tax return, etc. without a document attached thereto stating that it seeks the application of the provisions of paragraph (3) or failed to preserve the materials, etc. that certify that the multiple number that it applies is appropriate, the district director may, when they find any unavoidable reason for the domestic corporation's failure to attach a necessary document or preserve the necessary materials, etc., apply the provisions of the paragraph, only if the document and the materials, etc. are submitted.

The calculation of the average balance of liabilities, etc. regarding liabilities prescribed in paragraph (1) in the case where there is more than one foreign controlling shareholder, etc. prescribed in the paragraph, the application of the provisions of the Corporation Tax Act with respect to the amount excluded from the amount of deductible expenses pursuant to the provisions of the paragraph, and other necessary matters concerning the application of the provisions of the paragraph through paragraph (5) are specified by Cabinet Order.