SEISEI INSIGHTS — Family Wealth
Operating Company, Holding Company, Asset-Holding Association: What the Statutes Say About the Three-Layer Structure
2026-09-10
"The profits, the shares, the real estate — everything sits in my own name. Can it stay that way?" We hear this from owners whose businesses have reached a certain scale. The conversation usually begins with a tax bill, but what actually comes under examination is the structure itself: which layer the income and the assets belong to. What follows sets out what Japanese law provides about the so-called three-layer structure — a holding company above the operating company, with a separate entity holding the family's assets. Adding layers does not, in itself, make anything lighter. What gives the structure substance is the set of conditions the statutes impose between those layers.
The Holding Company Layer: Inter-Company Dividends
When shares in the operating company move from direct personal ownership to ownership through a holding company, the first thing that changes is the route a dividend travels. Article 23(1) of the Corporation Tax Act excludes dividends received by a domestic corporation from gross revenue, by category of shareholding.
| Category of shareholding | Amount excluded from gross revenue |
|---|---|
| Shares in a wholly owned subsidiary corporation | The full amount of the dividend |
| Shares in an affiliated corporation | The dividend less an amount corresponding to related interest expense, computed as prescribed by Cabinet Order |
| Shares in none of the above categories | 50 per cent of the dividend |
| Shares held for non-controlling purposes | 20 per cent of the dividend |
The condition most often overlooked sits in the top row. Article 23(5) defines shares in a wholly owned subsidiary corporation as shares, prescribed by Cabinet Order, in another domestic corporation with which a complete controlling relationship has existed throughout the calculation period for the dividend. A complete controlling relationship is, under Article 2(xii)-7-6, a relationship prescribed by Cabinet Order in which one party holds the entirety of the issued shares, directly or indirectly.
A snapshot of full ownership is therefore not enough: that state must have subsisted across the whole calculation period. A dividend paid part-way through the year in which shares were transferred to the holding company may fall outside this category. Where the first year of a newly built structure produces an unexpected result, this timing condition is usually the reason.
The Asset-Holding Layer: The Association and Its Family Directors
A general incorporated association is sometimes used as the vehicle that separates real estate and financial assets from personal ownership. The association has no concept of an equity interest, and property held in its name does not, of itself, form part of a director's estate.
Article 66-2(1) of the Inheritance Tax Act, however, provides that where a person who is — or ceased within the past five years to be — a director of such an association dies, and the association is a specified general incorporated association, the association's net asset value divided by the number of family directors plus one is deemed acquired from the decedent by bequest, and the association is deemed an individual and charged inheritance tax. The test sits in Article 66-2(2)(iii). Limb (a): immediately before the commencement of inheritance, family directors exceed one-half of all directors. Limb (b): within the preceding five years, the periods in which they exceeded one-half total three years or more. Either limb suffices.
What warrants care is the reach of "family director". Article 66-2(2)(ii) covers not only the decedent, the spouse and relatives within the third degree, but also persons in a special relationship prescribed by Cabinet Order — and Article 34(3) of the Inheritance Tax Act Enforcement Order enumerates those: a de facto spouse, employees of the decedent, persons whose livelihood is maintained by property received from the decedent, and officers or employees of another corporation in which the decedent serves as an officer, among others. Being unrelated by blood does not by itself make a director "outside" for these purposes.
Creating the vehicle and transferring property into it are also governed separately. Article 66(4) of the Inheritance Tax Act addresses gifts and bequests to a corporation without equity interests where the result is found to unduly reduce the inheritance or gift tax burden of the transferor's relatives and others in a special relationship with them.
Between the Layers: Remuneration and Travel Allowances
Director remuneration is the mechanism by which income shifts between the corporate and personal layers, and its deductibility is constrained. Article 34(1) of the Corporation Tax Act denies a deduction for director remuneration that is none of fixed periodic remuneration, remuneration notified in advance in a fixed amount, or performance-linked remuneration. Article 34(2) denies a deduction, even within those categories, for any portion that is excessive as computed under Cabinet Order.
Remuneration on retirement is computed differently. Under Article 30(2) of the Income Tax Act, retirement income is the amount received less the retirement income deduction, halved (with an exception for short-tenure retirement allowances). Article 30(3) sets that deduction at ¥400,000 per year of service for the first 20 years, and ¥8,000,000 plus ¥700,000 for each year beyond 20.
As for travel, Article 9(1)(iv) of the Income Tax Act exempts money and goods provided to cover expenditure necessary for travel in the performance of duties, to the extent "ordinarily regarded as necessary for that travel". The exempt range is defined by that standard — not by the formality of having adopted an internal policy.
Where assets sit overseas, ordering the internal structure does not displace a separate reporting obligation. Article 5 of the Act on Submission of Reports concerning Overseas Wire Transfers requires a resident (excluding non-permanent residents) holding overseas assets exceeding ¥50 million in aggregate as of 31 December to file an Overseas Assets Report.
Treat It as a Structural Question
A three-layer structure is not a device for reducing tax. It is a framework for managing the business, the assets and the succession in separate vehicles. Three things bear confirming at the design stage:
- Whether the ownership relationship between holding and operating company has been maintained throughout the dividend calculation period
- Where the asset-holding entity's board sits relative to the reach of "family director", including the categories enumerated by Cabinet Order
- Whether remuneration, retirement benefits and travel allowances satisfy, respectively, the deductibility and exemption conditions
Board composition, ownership relationships and overseas asset balances all move from year to year, and their relationship to these conditions moves with them. Continuing review matters as much as the original design.
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.