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Existing or Proposed subsidiaries of Japanese Companies need to meet “Economic Substance Requirements” so that the Japanese Parent Company can demonstrate that it qualifies for an exemption from Japan’s Tax-Haven Rules.
Why it Matters
To avoid having any income earned via the UAE subsidiary included in its Japanese parent company, and taxed under Japan’s tax rate, the UAE entity must demonstrate real economic presence in the UAE — by merely stating that it is not a shell company or that it does not generate a passive income is not sufficient. Having real economic presence in the UAE strengthens your exemption position under Japan’s Tax Haven Rules – Controlled Foreign Corporation (CFC) Rules.
*Passive income other than business income may be subject to the CFC (Controlled Foreign Corporation) rules.
Four Requirements for the Economic Activity Test under Japan’s CFC Rules in the UAE (All must be met):
- Business Activity Requirement
The subsidiary’s main business must be an active business (such as manufacturing or sales), and not just passive income activities like holding shares or bonds, licensing intellectual property, or leasing ships/aircraft. - Substance Requirement
The subsidiary must have the necessary fixed facilities (such as offices, shops, or factories) in the UAE to conduct its main business. The facilities can be owned or leased. - Management and Control Requirement
The subsidiary must manage and operate its business independently in the UAE. For example, board meetings and shareholders’ meetings are held locally, local directors make actual management decisions, and bookkeeping is done locally. - Location or Unrelated Party Requirement
- For certain businesses (wholesale, banking, trust, financial instruments, insurance, shipping, air transport, leasing), the “Unrelated Party Requirement” applies, meaning that the transactions with unrelated parties account for over 50% of the transaction amount.
- For other businesses, the “Location Requirement” applies, meaning that the main business must be conducted in the country where the subsidiary is located.
How HLS-Global UAE and Japan Helps
- HLS-Global UAE — We can support with the preparation and maintenance of commercial contracts, board meeting documents, shareholder records and statutory registers to substantiate that the UAE company is having an effective economic presence in the UAE.
- HLS Global Japan — We can support with Japan Tax-Haven Compliance Advisory providing services focused on explanation of tax regulations, current situation analysis, and identifying potential risks.
Ready to Secure your Tax Position in Japan?
Contact HLS-Global UAE for a tailored compliance plan and document checklist to demonstrate UAE economic substance.
Disclaimer: All views expressed in this article are solely for informational purposes and should not be construed as legal advice. This information is for reference only and is bound to change in case of any amendments or changes to applicable laws. We do not assume any responsibility or liability for any errors or omissions in the content of this article, and we do not make any warranties about the completeness, reliability, and accuracy of the information expressed in this article.
