SEISEI INSIGHTS — Family Wealth
Choosing the Vehicle for a Family Office: What Entity Form and Board Composition Actually Decide
2026-09-09
"I set up a general incorporated association as the vehicle for our family office. The directors are myself, my spouse, and my child." We hear this structure described repeatedly, and it usually rests on one assumption: that because a general incorporated association has no equity interest, inheritance tax simply does not arise. The first half of that is correct. The second half is not. Japan's Inheritance Tax Act reaches the entity by a different route.
Having No Equity Interest Is Not the Same as Not Being Taxed
A general incorporated association has no concept of a capital interest, and no such interest forms part of an estate. But Article 66-2(1) of the Inheritance Tax Act imposes inheritance tax on the entity itself.
The mechanism is this: where a director of a general incorporated association or general incorporated foundation dies and the entity qualifies as a "specified general incorporated association, etc.," an amount equal to the entity's net asset value at the time of commencement of inheritance, divided by the number of family-related directors plus one, is deemed to have been acquired by bequest from the deceased, and the entity is deemed an individual and taxed accordingly.
Three points are easily missed. First, the taxable amount is not the entire net asset value but the quotient after dividing by the number of family-related directors plus one. Second, the statute attaches a parenthetical to "a person who is a director," expressly including a person for whom five years have not elapsed since ceasing to be a director. Resignation alone does not remove someone from scope. Third, the divisor carries its own parenthetical: where a person died simultaneously with the decedent, and that person was a family-related director (or a former director within the five-year window) standing in a special relationship with the decedent as specified by Cabinet Order, the number of such persons is added to the divisor.
Two Routes to "Specified" Status
Qualification turns on meeting either of the following (Article 66-2(2)(iii)):
| Test | What the statute requires |
|---|---|
| Point-in-time test | Immediately before commencement of inheritance, family-related directors exceed one-half of the total number of directors |
| Look-back test | Within the five years before commencement of inheritance, the periods in which family-related directors exceeded one-half of the total number of directors total three years or more |
The second test carries the practical weight. Adding outside directors once succession comes into view does not escape it: the five-year look-back can still bring the entity within scope. Board composition is not something to arrange when it becomes necessary — it is a regime with time built into its conditions.
"Family-related director" means the decedent, the decedent's spouse, relatives within the third degree of kinship, and others in a special relationship with the decedent as specified by Cabinet Order (Article 66-2(2)(ii)).
The reach of the provision is also bounded. Public interest associations and foundations, non-profit type corporations under Article 2(ix)-2 of the Corporation Tax Act, and others specified by Cabinet Order are excluded from the definition of "general incorporated association, etc." altogether, provided they qualify as such at the time inheritance commences (Article 66-2(2)(i)). Being a general incorporated association does not by itself place an entity on this route.
There is a further provision governing the moment assets move into the entity. Article 66(4) of the Inheritance Tax Act provides that where property is given or bequeathed to a corporation without defined equity interests, and this is found to result in an unjust reduction of the inheritance or gift tax burden of the transferor's relatives or others in a special relationship, the provisions of Article 66(1) through (3) — under which the corporation is deemed an individual and taxed — apply mutatis mutandis.
What the Choice of Entity Changes
| Form | What the statutes provide | Where the succession question sits |
|---|---|---|
| General incorporated association | One or more directors (Act on General Incorporated Associations and General Incorporated Foundations, Art. 60(1)); three or more where a board of directors is established (Art. 65(3)) | No equity interest exists. Unless the entity qualifies as a public interest corporation, a non-profit type corporation, or another category specified by Cabinet Order, tax may arise at the entity level under Inheritance Tax Act Art. 66-2 |
| Godo kaisha (LLC) | All members are limited liability members (Companies Act, Art. 576(4)); the profit-and-loss allocation ratio may be fixed in the articles, and absent such provision follows the value of contributions (Art. 622(1)) | Death of a member is a statutory ground for withdrawal (Art. 607(1)(iii)). The articles may provide that heirs or other general successors succeed to the membership interest (Art. 608(1)). Whether the articles contain such a provision determines whether the interest is succeeded to at all, or whether the situation becomes one of refund on withdrawal |
| Kabushiki kaisha (joint-stock company) | Shares form part of the estate | The value of property acquired by inheritance is its market value at the time of acquisition (Inheritance Tax Act, Art. 22). How that market value is computed for unlisted shares follows administrative circulars in practice, making the valuation premise itself the live question |
The advice "have at least three directors" is common. Under the statute, three or more directors are required only where a board of directors is established; for an association without one, the statutory minimum is one. Moreover, the test in Article 66-2 is framed in terms of the proportion of family-related directors, not the number of directors — so setting the board at three neither satisfies nor avoids the test in itself. Headcount and proportion are different questions.
The Regimes Between Entity and Individual
Once an entity is used as the vehicle, how payments from entity to individual are treated becomes part of the structure. The discussion below assumes a domestic corporation and a resident individual, but the conditions of each provision differ: it is Article 34 of the Corporation Tax Act that requires the payer to be a domestic corporation, while the Income Tax Act provisions each set their own conditions.
- Director remuneration — Where a domestic corporation pays remuneration to its directors — excluding retirement benefits that are not performance-linked, amounts paid to a director who also holds an employee role in respect of that employee role, and amounts to which Article 34(3) applies — the portion falling outside fixed periodic remuneration, pre-notified fixed remuneration, and performance-linked remuneration is non-deductible (Corporation Tax Act, Art. 34(1)). Separately, amounts constituting an unreasonably high portion as specified by Cabinet Order are non-deductible (Art. 34(2)).
- Director retirement benefits — Retirement benefits that are not performance-linked fall outside Article 34(1), but the "unreasonably high portion" rule in Article 34(2) still applies. This is not a regime under which the full amount is automatically deductible.
- Retirement income — Retirement income equals one-half of the amount remaining after deducting the retirement income deduction from gross receipts (Income Tax Act, Art. 30(2)). The deduction is ¥400,000 multiplied by years of service for service of 20 years or less, and ¥8,000,000 plus ¥700,000 multiplied by the excess years beyond 20 (Art. 30(3)); where the amount so calculated is less than ¥800,000, the deduction is ¥800,000 (Art. 30(6)(ii)). Further, for specified officer retirement allowances received by a person whose years of service as an officer — as prescribed by Cabinet Order — are five years or less, the one-half treatment does not apply (Art. 30(5) and the parenthetical in Art. 30(2)). Further, for short-term retirement allowances received by a person whose years of service other than as an officer — as prescribed by Cabinet Order — are five years or less, the one-half treatment applies only to the first ¥3,000,000 of the amount remaining after the deduction, and not to any excess above that (Art. 30(4) and the items of Art. 30(2)). Those years of service are determined under the Cabinet Order and do not simply track how long the entity has existed. Where director retirement benefits are contemplated, how that period is computed is the prior question.
- Travel expenses — What is exempt is money or goods paid to a person having employment income, to cover expenses necessary for travel away from the place of work in the performance of duties, travel for relocation on transfer, and the other situations enumerated in the provision, to the extent recognized as ordinarily necessary for that travel (Income Tax Act, Art. 9(1)(iv)). The statutory test is ordinary necessity; the existence of an internal travel allowance policy does not by itself secure the exemption.
- Company housing — The calculation of the ordinary rent amount is set out separately for housing lent to officers and to employees, and in both cases follows a formula prescribed by administrative circular (Income Tax Basic Circular 36-40 and 36-45). It should also be understood at the outset that circulars are internal administrative documents and do not directly bind taxpayers or the courts.
Three Things to Confirm Structurally
- The proportion of family-related directors on the board — not only now, but across the past five years
- Under the entity form chosen, whether succession occurs as inheritance of an interest, as taxation at the entity level, or as something else again by operation of the articles of incorporation
- Whether payments from entity to individual sit inside the statutory conditions or inside the carve-outs
Choosing the vehicle is not a question of formation procedure. It is a structural question with a five-year time axis built into it.
This article provides general information on tax systems and does not constitute individual tax consultation. Specific filings and tax computations are handled by licensed partner tax accountants whom we introduce.