Layered Holdings and Trusts: What to Settle Before You Design the Succession

"We listed overseas. I want to pass my holding to my son." Conversations often open with that sentence. But the first thing to establish is not the method of succession — it is the object of it. What do you hold, in which jurisdiction, and in what legal form? Few people can answer immediately.

What Passes Is Not a Company — It Is a Chain

Founders whose business has listed on an overseas market rarely own shares in the operating company itself. An individual holds an interest in a holding vehicle through a trust; that vehicle holds shares in the listed company; the listed company owns the local operating entity through an intermediate holding company. Each layer sits under a different governing law, with its own transfer restrictions, disclosure obligations and tax consequences. Succession means moving something somewhere in that chain — and which layer you move determines what follows.

How Japan's Inheritance Tax Act Treats Trusts

"It is already in a trust, so we just rewrite the beneficiary." Under Japanese tax law, that does not hold. Article 9-2 of the Inheritance Tax Act treats each of the following as a taxable event:

• On the trust taking effect — where a person becomes a beneficiary or equivalent without bearing adequate consideration, that person is deemed at that moment to have acquired the rights relating to the trust from the settlor by gift (or, where the trust took effect by reason of the settlor's death, by bequest) (Art. 9-2(1))
• On a change in beneficiaries — where a trust that has beneficiaries acquires a new beneficiary or equivalent without adequate consideration, that person is deemed to have acquired from the former beneficiary by gift (or, where it arises by reason of that person's death, by bequest) (Art. 9-2(2))
• Where some beneficiaries cease to exist — an existing beneficiary who thereby receives a new benefit is deemed to have received it by gift, or by bequest where it arises on death (Art. 9-2(3))
• On termination — a person entitled to receive or to whom residual trust property vests is deemed to have acquired that property from the beneficiary by gift, or by bequest where the trust terminated by reason of the beneficiary's death (Art. 9-2(4))

Drafting a deed so that beneficiaries can be changed, and changing beneficiaries without tax consequence, are two entirely different propositions. The first is a question of contract; the second is a question of statute.

The Vehicle Is Looked Through — Once

Article 9-2(6) provides that a person deemed under paragraphs (1) to (3) to have acquired rights or benefits relating to a trust is deemed to have acquired or succeeded to the assets and liabilities comprising the trust property, and the Act applies on that basis. The person is not treated as acquiring a beneficial interest as a separate species of property; the trust property itself is what is looked at.

That said, this provision looks through one vehicle — the trust. It does not look through to assets held by companies further down the chain. If the trust holds shares in a holding company, those shares are the object. However many layers there are, each has to be valued on its own terms.

Reserved Powers and the "Specified Settlor"

The "beneficiary or equivalent" under Article 9-2 includes, alongside a person currently holding rights as a beneficiary, a "specified settlor". A specified settlor is a person who currently holds the power to amend the trust (excluding powers of minor amendment prescribed by Cabinet Order) and who is designated to receive distributions of trust property, excluding beneficiaries (Art. 9-2(5)).

Both limbs must be present. "I am not named as a beneficiary, so this does not concern me" is therefore not a safe conclusion — and equally, holding powers alone does not automatically bring someone within the definition. Deciding who serves as protector or guardian, and how much power they retain, is a governance decision and, at the same time, a decision about how close that person sits to these two limbs.

Timing Drives the Outcome

Deemed gifts and bequests are treated as acquisitions "at that time". The tax position is therefore fixed by reference to the circumstances at the moment the structure is created and at each moment a beneficiary changes. In structures where a listing or a financing round moves the value of the interest sharply, when something was moved drives the result. What is appropriate depends entirely on the individual facts — but the assumption that it can all be tidied up later is not one that can be made.

The Legal Character of What You Are Passing On

In some structures, control is not derived from equity ownership but from a combination of contracts that transfers economic benefit and control. Where that is so, what passes is not shares but contractual positions and the control exercised through that set of contracts. A trust is a vehicle that protects the interest placed inside it; it does not strengthen the legal durability of a control relationship sitting outside the vehicle.

The same applies to dual-class arrangements in which shares with different voting rights preserve control through a small economic stake. Once economic entitlement and control are separated, whether they travel by the same route — or to different people at different times — becomes a distinct design question.

Taxation While You Hold, and Annual Disclosure

Succession planning assumes the tax and disclosure position during the holding period is already in order. A holding company in a low-tax jurisdiction may have its income attributed to the shareholder under the foreign subsidiary income inclusion regime even with no dividend paid (Act on Special Measures Concerning Taxation, Art. 40-4). Where a trust is interposed, the question of a de facto control relationship remains open (Art. 40-4(2)(v)).

Disclosure is an annual obligation. A resident (excluding non-permanent residents) holding overseas assets with an aggregate value exceeding ¥50 million as of 31 December must file an Overseas Assets Report with the competent tax office by 30 June of the following year (Act on Submission of Reports concerning Overseas Wire Transfers, Art. 5). False statements, and failure to file by the deadline without justifiable grounds, carry imprisonment of up to one year or a fine of up to ¥500,000 (Art. 10). For the year in which a succession opens, a special rule allows overseas assets acquired by inheritance or bequest to be excluded from the threshold test (Art. 5(2)).

What to Confirm

• What you actually hold — which layer of the chain, and which right
• If there is a trust, who the beneficiaries or equivalents are — including anyone who could fall within the specified settlor definition
• Whether taxation and disclosure during the holding period are in order, every year

Succession design does not begin with how to hand something over. It begins with establishing what the thing in your hands actually is.

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.

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