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Holding Companies: Investing In Japanese Real Estate

set up holding company from overseasThere are a lot of misconceptions surrounding “holding companies”. Fundamentally, a holding company is just the same as any other type of company, however instead of being an active commercial business that generates revenue from its commercial activities (e.g import & export, online marketing, software sales or selling organic coffee beans), a holding company derives the majority of its revenue from the assets that it owns, or ‘holds‘. For real estate investors, holding companies are a platform to own real estate assets. It’s that simple. The vast majority of people investing in real estate in Japan on a large scale do not own those assets directly. They own a company; most commonly a Godo Gaisha 合同会社- the Japanese equivalent of an LLC.

One of the main differences between owning real estate investments as an individual, and owning a company that owns those same real estate investments, is tax. Precisely, the company will pay up to 30% less in taxes than the individual. This alone is enough to warrant further research, and determine whether or not a holding company would be a clever way to make your investments. That said, there may be other benefits too.

The Benefits Of Owning Japanese Real Estate Investments With A Holding Company

 

  • A company has better control over its costs. As you know, tax is only payable on “profit”- i.e the money left after expenses are paid. A company has more categories of expense, that are often larger in size, than those available to an individual person. Because of this it is easier for the company owner to manage their tax liability by reducing their notional income. As an individual, once rents/revenues are received from your real estate assets they immediately join your taxable income bucket for that financial year. There are still expenses and deductions available as an individual investor, but the degree of control that you will have is limited compared to a company.
  • As an individual once you have more than 10,000,000 JPY in annual income taxes change drastically. This is the point that most individuals will consider corporate ownership as corporate taxes are lower than individual taxes. Even with less than 10,000,000 JPY in annual income some people will still choose to establish a holding company if they are intending to scale up their investments in the future.
  • Your holding company can hire family members who can then be paid a salary (for example, utilising individual income tax allowances) so as to reduce the profits of the company, whilst still releasing funds.
  • If your company has a paid in capital of 5,000,000 JPY or more (this money can be used to acquire property also) then you will be eligible for a Manager/Investor Visa in Japan. That means that a foreign investor can become a self-sponsored, legal Japan resident without having to have a job here in Japan. This is particularly attractive for overseas investors who wish to spend time in Japan without visa constraints. This then applies to their spouses also. Nice.
  • Just because you set up your company with the intention of holding assets does not mean that you cannot perform other commercial activities either should you decide to at a later date- a simple update is made to your articles of incorporation and you’re good to go.
  • Inheritance Tax Planning. Inheritance tax rates can often be high. Japan is one such example where the top bracket rate is an eye-watering 55%. Making your descendants/beneficiaries shareholders in the company ahead of time can remove the “transfer” of your valuable assets on death and potentially save thousands (and in our experience, sometimes even millions) in avoidable taxes. Planning your wealth will enable you to keep it in your family for generations. Failing to plan your wealth could cost you half of it.
  • Loans. Mortgages. Loans and mortgages. As a Japanese company a Japanese bank will be more likely to lend you money to make real estate investments. Why? Because your company lives in Japan and isn’t going anywhere. The assets will be owned by the company and the company will have to abide by Japanese laws; so the bank feels a lot more comfortable than when lending to a foreign individual who could potentially leave Japan (and their loan obligations!) at any time. We can easily assist our company owners with loans for real estate investments, even if they do not speak Japanese and do not intend to live in Japan.

 

The Demerits Of Owning Japanese Real Estate Investments With A Holding Company

  • Even if you run your company “in the red” (I.e by having no profits because all of the money gets spent/sent out) you still have to pay a minimum tax annually circa 70,000 JPY
  • You have to pay an accountant to make your annual tax filings to the government
  • You are obligated to enrol your company in the national health insurance system
  • Voting rights will be split amount the “partners” or LLC shareholders equally (which may not always be appropriate)

 

How To Set Up Your Own Holding Company

  • Setting up your G.K (Godo Gaisha) is cheap and quick and can be done online, via an accountant or by a “Judicial Scrivener” (Japan’s document lawyers, who you will definitely come to know when you buy a property as they are the ones who transfer the ownership titles). The minimum incorporated capital is also 10,000 JPY so initial costs are remarkably low compared to some other G7 countries.
  • If you wish to get an investment loan for your company with a Japanese Bank this can also be applied for at the same time you are setting up your company.

 

Conclusions

There are many moving parts in real estate investment and no number of online tutorials can give you adequately accurate advice. You should take professional advice from your real estate adviser before making the decision to both invest and/or set up a Japanese company for the purpose of real estate investing.

Why Real Estate Is The Best Asset Class (Part 2)

8 Reasons Why Real Estate Is The Best Asset Class (Part 1)

Transaction Costs For Japanese Real Estate Buyers

Taxes For Japanese Real Estate Investment

What Is A Cap Rate?

Why Tenants In Japan Are Great Investments

Investment Loans: How To Choose The Right One

5 Point Checklist Before Investing In Real Estate

How To Calculate Your Breakeven Occupancy Ratio

High Yield Vs. High Liquidity

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