Choosing the Legal Vehicle for a Family Office in Japan

"We want to set up a family office — which type of entity should we use?" The question comes up often in conversations about asset-management structure. Japan has no legal entity called a "family office." What is actually established is one of the existing corporate forms, and the choice determines how contributions are treated, how profits may be distributed, and what happens on succession.

By way of background, a family office may serve a single family exclusively (a single family office) or several families sharing one team (a multi family office). What follows concerns the former: a family establishing its own entity as the hub of asset management.

The General Incorporated Association: A Vehicle with No Concept of Capital Contribution

Article 10(1) of the Act on General Incorporated Associations and General Incorporated Foundations requires those intending to become members at incorporation to jointly prepare the articles of incorporation, with all of them signing or affixing name and seal.

What matters is the list in Article 11(1) — the mandatory contents of the articles. It sets out seven items: purpose, name, location of the principal office, the names and addresses of the members at incorporation, provisions on acquisition and loss of membership, the method of public notice, and the business year. Capital contributions by members are not among them. That stands in deliberate contrast to the articles of a membership company, where the value of each member's contribution is a mandatory item. The familiar statement that a general incorporated association "has no stated capital" corresponds to this absence.

That does not mean property cannot be committed to it. Article 131(1) allows the articles to provide for soliciting subscribers to a kikin (fund), defined as money or other property contributed to the association under that subsection which the association is obliged to return to the contributor. A kikin is not a contribution of capital; it carries a repayment obligation. A kikin is, however, only one way of receiving property: transfers to the association are not confined to it. Where one party declares an intention to give property gratuitously and the other accepts, the transfer takes effect as a gift (Civil Code, Art. 549).

One further provision is decisive. Article 11(2) states that a provision in the articles conferring on members the right to receive distributions of surplus or residual assets has no effect. A general incorporated association cannot be structured to distribute profits to its members. The absence of proprietary interests, which is what makes the form interesting for succession, is the same feature that makes it unusable as a distribution vehicle.

The Godo Kaisha: A Vehicle That Separates Capital Contribution from Distribution

A godo kaisha is one type of membership company under the Companies Act. Article 576(1)(vi) lists among the mandatory contents of a membership company's articles "the subject matter of each member's contribution (limited to money and other property in the case of a limited liability member) and its value or standard of valuation," and Article 576(4) requires the articles of a godo kaisha to state that all members are limited liability members. Article 578 then requires each prospective member to pay in the full amount of the money contribution, or deliver the whole of any non-monetary contribution, after the articles are prepared and before registration of incorporation. A godo kaisha requires contributions, and they must be paid in before registration.

The rules on distribution are where the two forms diverge most. Article 621(1) entitles a member to demand a distribution of profits from the company, and Article 621(2) permits the articles to prescribe the method of demanding distributions and other matters relating to them. Article 622(1) then provides that where the articles contain no provision on the ratio for allocating profits and losses, the ratio is determined according to the value of each member's contribution. Allocation in proportion to contribution is the default that applies in the absence of a provision. Where the articles do provide otherwise, the contribution ratio and the profit-and-loss allocation ratio need not coincide — one of the principal reasons the form is chosen for asset management.

The Dividing Line When the Association Is Used for Succession

Because a general incorporated association has no proprietary interests, it attracts interest as a succession vehicle. Article 66-2 of the Inheritance Tax Act is what must be checked.

Paragraph 1 provides that where a director of such an association (including a person who ceased to be a director less than five years earlier) dies, and the association qualifies as a "specified general incorporated association," an amount equal to its net asset value at the opening of succession divided by the number of family-related directors plus one is deemed acquired by bequest from the deceased — and the association itself is deemed an individual and charged inheritance tax.

Paragraph 2, Item 3 defines a "specified general incorporated association" as a "general incorporated association, etc." that meets either of the conditions it lists, so the test has two layers. The first is Item 1 of the same paragraph: a general incorporated association or general incorporated foundation, excluding one that, at the opening of succession, is a public interest association or foundation, a non-profit-type corporation under Article 2, Item 9-2 of the Corporation Tax Act, or any other corporation prescribed by cabinet order. The second is sub-item (a) or (b) of Item 3: (a) the proportion of family-related directors to total directors exceeded one half immediately before the opening of succession, or (b) the periods within the preceding five years during which that proportion exceeded one half total three years or more. Family-related directors are those who are the decedent's spouse, relatives within the third degree of kinship, or others in a special relationship prescribed by cabinet order (Paragraph 2, Item 2).

Where the entity is not one of the excluded types, a structure in which family members hold a majority of directorships sits squarely within reach of those conditions. Conversely, a family majority on the board does not by itself make the entity a specified general incorporated association; the entity-type test in Item 1 comes first. The absence of proprietary interests does not, by itself, place the entity outside the scope of inheritance tax — a premise worth establishing before the vehicle is chosen.

Scale, and the Position of the Adviser

Before the choice of vehicle comes a prior question: whether an independent structure is warranted at all. A family office carries continuing fixed costs — dedicated personnel, fees to outside professionals, premises, compliance. Where those costs remain large relative to the asset base, a holding company combined with external professionals will meet the same functions more practically. The judgement turns not only on total assets but on the mix of operating companies, real estate, and financial assets, and on how many jurisdictions must be managed.

One further point when assessing outside advisers: establish what the counterparty is paid for. A party earning revenue from supplying products and a party paid for advice or administration itself proceed from different premises. Neither is inherently better; the structural point is to understand where the interests lie and to use each role accordingly.

A family office is not a device for reducing tax. It is a framework for managing entities, real estate, financial assets, and succession planning as a single system — and which corporate form carries that framework should be designed from the statutory differences set out above.

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.