The Five Functions of a Family Office: Incorporating Is Not the Same as Operating

"I set up a godo kaisha — we have a family office now." When we follow with "and which functions is it carrying?", the conversation often stops there, because incorporation was understood to be the finish line. But a legal entity is a container, and a container does not do anything by itself. The functions a family office carries can be grouped into five.

1. Tax Structure: The Issue Is Conditions, Not Rate Differentials

Individual income tax applies at 45% to the portion of aggregate taxable income above ¥40 million (Income Tax Act, Art. 89), on top of which the standard rates of individual inhabitant tax on income apply — 4% prefectural and 6% municipal, or 2% and 8% for residents of designated cities (Local Tax Act, Arts. 35 and 314-3). A different rate structure applies to corporations, which makes the attribution of income a structural question.

Incorporation alone, however, settles nothing. Compensation paid by a corporation to its directors is not deductible unless it falls within one of three categories — fixed periodic compensation, compensation notified in advance in a fixed amount, or performance-linked compensation (Corporation Tax Act, Art. 34(1)) — and even where it does, any portion deemed unreasonably high is non-deductible (Art. 34(2)). Whether the formal conditions are satisfied determines whether the structure works as intended.

2. Asset Protection: Understand the Precise Boundary of Separation

Property belonging to a trust estate is not subject to compulsory execution, provisional attachment, provisional disposition, enforcement of security interests, auction, or national tax delinquency proceedings, except where the claim relates to an obligation covered by the trust estate (Trust Act, Art. 23(1)). That said, where a settlor created the trust knowing it would harm creditors, holders of claims arising before the trust may also enforce against it (Art. 23(2)) — an exception that ceases to apply two years after the trust was created (Art. 23(4)).

Holding assets through a company is likewise not absolute separation. Property held by the company and property held by the individual are legally distinct, but the individual's interest or shares in that company remain the individual's own property.

3. Succession Design: There Is a Time Limit

A trust providing that a beneficiary's interest is extinguished on that beneficiary's death and a new interest is acquired by another person remains effective, once thirty years have passed since the trust was created, until the death of the then-existing beneficiary who acquires an interest under that provision, or until that interest is extinguished (Trust Act, Art. 91). Designating beneficiaries across generations is possible, but not indefinitely. The clock starts at creation, and that horizon belongs in the design from the outset.

4. Investment Management: Losses Are Treated Differently by Entity

A corporation may deduct losses incurred in business years beginning within the ten years preceding the start of the current business year, subject to a ceiling generally set at 50% of that year's income (Corporation Tax Act, Art. 57(1)). For individuals, only net losses arising in a year for which a blue return was filed may be carried forward, and only from the preceding three years (Income Tax Act, Art. 70(1)). The periods and the conditions differ, which makes the choice of investing entity a question to settle in advance.

5. Compliance: The Deadline Is Part of the Structure

A resident (excluding non-permanent residents) holding overseas assets with an aggregate value exceeding ¥50 million as of December 31 must file an Overseas Assets Report with the competent tax office by June 30 of the following year (Overseas Wire Transfer Reporting Act, Art. 5(1)). Failure to file by the deadline without justifiable grounds, or filing with false statements, carries imprisonment of up to one year or a fine of up to ¥500,000 (Art. 10). In addition, automatic exchange of financial account information under the Common Reporting Standard, and reporting under the U.S. FATCA regime, deliver overseas account information to the authorities without waiting for any disclosure by the taxpayer.

Design from the Functions, Not from the Vehicle

Setting up an entity is not the hard part. The hard part is satisfying the conditions attached to each of the five functions, managing the deadlines, and keeping the arrangement in the state it was designed to be in. Starting the conversation from "which function should this carry, resting on which statutory provision?" rather than "which vehicle should we form?" leaves considerably less to undo later.

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.