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Jūsho caselaw

The Takefuji case​

This is a significant Supreme Court case from 2011 which confirmed that the meaning of jūsho for tax purposes is the same as the one in Article 22 of the Civil Code, and established the principle that the location of a person's jūsho should be determined by looking comprehensively at the person's circumstances (i.e., without too much regard to the person's specific intentions).

A copy of the decision is available as a PDF here.

Summary of the facts​

The founder of Takefuji Corporation, a major consumer loan provider, wanted to transfer ownership of around 165 billion yen (~US$1.3 billion) worth of shares in the company to his eldest son without paying gift tax. So he and his son, with help from lawyers and CPAs, devised and executed the following scheme:

  • The father would create a paper company in the Netherlands and transfer his shares in Takefuji Corp to that company.
  • Takefuji Corp would establish a Hong Kong-based subsidiary and appoint the eldest son CEO of that subsidiary.
  • The son would spend at least two-thirds of his time in Hong Kong over a four-year period (most of the rest of the time would be spent living at his parents' house in Japan).
  • About 2.5 years after starting to live in Hong Kong, the son would be gifted almost all the shares in the Dutch company, thereby indirectly acquiring the shares in Takefuji Corp.

It's important to note that this scheme only worked because Article 1 of the Inheritance Tax Law was quite different in 1999 (when the relevant gift was made). Specifically, under the applicable law, gifts made by Japanese residents were not subject to gift tax unless either (1) the gift property was located in Japan or (2) the recipient was a Japanese resident.

The gift property in the Takefuji case was shares in a Dutch company, which are deemed to exist in the Netherlands for tax purposes. And Toshiki Takei (hereinafter "TT"), the donor's eldest son and recipient of the shares, claimed to be a resident of Hong Kong at the time of receiving the gift. Thus, on the face of it, the gift was not subject to Japanese gift tax.

It's also worth noting that, partly in response to the Takefuji Corp gift, Article 1 of the Inheritance Tax Law was amended in 2003. Under the amended version, Japanese citizens had to live outside Japan for five years before they could receive or make tax-free gifts. Subsequent amendments to the law increased this period to 10 years and added a clause covering donors who gave up their Japanese citizenship within 10 years of leaving Japan.

Path to the Supreme Court​

The NTA determined that TT had a jūsho in Japan (his parents' house) at the time of receiving the gift, and billed TT for gift tax accordingly. TT sued the NTA and the Tokyo District Court agreed that gift tax shouldn't have been imposed. The NTA appealed and the Tokyo High Court overturned the original decision, agreeing with the NTA that TT had a jūsho in Japan.

The basis for the High Court's decision was as follows:

  • The reason for which TT spent time in Hong Kong was to avoid gift tax, and the number of days TT should spend in Hong Kong to avoid gift tax was determined in consultation with a CPA, meaning that the court shouldn't place too much emphasis on the number of days spent in Hong Kong.
  • TT held a senior management position at the Japanese parent company throughout the relevant period.
  • TT's accommodation in Hong Kong was a serviced apartment, not dissimilar to a hotel.
  • TT only held around 0.1% of his assets in Hong Kong.
  • TT did not notify relevant financial institutions that he had moved to Hong Kong.
  • Therefore, TT's jūsho during the relevant period was at his parents' house in Japan, where he stayed for more than 25% of the year.

The Supreme Court's decision​

The Supreme Court overturned the Tokyo High Court's decision and held that TT's jūsho was in Hong Kong when the gift occurred. The basis for their decision was as follows:

  • Jūsho has the same meaning in a tax context as in the context of Article 22 of the Civil Code. Accordingly, the location of a person's jūsho should be determined by examining whether the relevant location has the attributes of the base of the person's life.
  • TT was sent to Hong Kong by his employer for legitimate work purposes. He did actual work in Hong Kong, and it was work that required him to be based in Hong Kong. The posting to Hong Kong was not an illusion or façade.
  • TT's desire to avoid gift tax, or the fact that he acted in a way specifically designed to avoid gift tax, is not relevant to whether his place of residence in Hong Kong had the attributes of the base of his life.
  • A person's purposes for attempting to establish a jūsho in a particular place are not relevant to the question of whether they established a jūsho in that place.
  • The fact that TT stayed at his parents' home while in Japan can be explained on the basis of convenience, and does not necessarily mean it was the base of his life.
  • Although TT held a senior management position at the Japanese parent company, that is not sufficient to overcome the fact that TT spent about 2.5x more time in Hong Kong than in Japan during the relevant period.
  • The fact that TT did not move his furniture and/or financial assets to Hong Kong is understandable given the costs and hassle involved, and does not necessarily mean the base of his life was in Japan.
  • Although TT was staying in a serviced apartment, he signed consecutive two-year leases, giving it a non-temporary character.
  • On the basis of the above, TT's jūsho was in Hong Kong at the relevant time, and thus gift tax should not have been imposed.

In its concluding remarks, the court observed that its decision reflected a kind of injustice, since TT had been able to successfully avoid gift tax in a situation where most people would expect gift tax to be imposed. But it noted that it is the government's responsibility to design effective legislation, and the court cannot ignore the content of legislation merely because it feels the content is flawed. The court also took comfort in the fact that the relevant legislation was subsequently amended by the government to prevent a scheme like TT's from working in the future.

The case of the Singapore-based frequent flyer​

This decision of the Tokyo District Court, which was upheld by the Tokyo High Court, is an interesting example of how significant a taxpayer's occupation can be to their jūsho. A copy of the decision is available as a PDF here.

Summary of the facts​

A Nagoya-based manufacturing company (hereinafter "K Corp") was accused of not withholding income tax appropriately with respect to an employee (hereinafter "KE") who maintained residences in Japan, Singapore, and the US. Specifically, they were accused of treating KE as a non-resident, when (according to the NTA) KE should have been treated as a resident.

Over the relevant period, KE did an enormous amount of travelling, generally spending a total of no more than 100-130 days in any given country throughout the year, and tending to travel to a new country every few days. The country KE spent the most time in during each year was always either Japan or the US, with Singapore consistently third. The average number of days spent in Singapore each year was 66, while the average for Japan was 120.

When he was in Japan, KE stayed at a house that he co-owned in Nagoya. He was also on the resident register and enrolled in Japanese health insurance. He received medical treatment in Japan (including hospitalization and surgery) on a few occasions during the relevant period. KE's wife lived permanently in the Nagoya house, while KE's adult son lived in a residence that KE maintained in the US.

For part of the relevant period, KE was the representative director of K Corp as well as most of K Corp's overseas subsidiaries. Eventually, his brother (hereinafter "RE") became the representative director of K Corp, while KE remained in charge of the overseas subsidiaries. K Corp paid management-level salaries to both KE and RE during the relevant period.

KE inherited the major shareholding in K Corp (and its subsidiaries) from his father and maintained that shareholding throughout the relevant period. (RE did not own any shares in K Corp.) KE had real estate, securities, and luxury vehicles in Japan during the relevant period, as well as 200 million yen cash. He also had the equivalent of 4 million yen in the US and 17 million yen in Singapore.

The NTA's position​

The NTA argued that KE had a jūsho in Japan (at the Nagoya house) during the relevant period, on the basis that:

  • In most years, KE was in Japan for more days than anywhere else.
  • KE was the representative director and most significant shareholder of a Japanese company, and although he was also working for overseas subsidiaries, the Japanese parent company was the main company in the network of companies, thus KE's strongest occupational ties were to the Japanese parent company.
  • KE's assets were mainly in Japan.
  • KE is a Japanese citizen.
  • KE was on the resident register, covered by Japanese health insurance, and received medical care in Japan.
  • KE's wife lives permanently in Japan.

The court's decision​

The Tokyo District Court rejected the NTA's assertion that KE's jūsho was in Japan during the relevant period. The basis for their decision was:

  • KE had stable, long-term accommodation in all three countries, and stayed in all three countries for relatively similar periods of time, so KE's accommodation arrangements and periods-of-stay in each place weren't especially important.
  • Most of KE's business trips consisted of flights departing from Singapore and returning to Singapore, which means time spent on those trips effectively counts as time spent in Singapore.
  • KE had created K Corp's overseas subsidiaries and was now running them almost single-handedly. His duties relating to K Corp itself corresponded to no more than 17% of the year, whereas the vast majority of his work related to the subsidiaries.
  • Due to his work running the subsidiaries, KE was effectively being required by K Corp to be based in Singapore, where there was good access to English-speaking staff and good airport access to places such as Indonesia and China (where K Corp had manufacturing facilities).
  • KE's job required him to be constantly travelling, so the location of his family (e.g., spouse) should not be given much importance. There would have been no point to his spouse living in Singapore instead of Japan, for example, because they still wouldn't have been together for a large number of days.
  • The fact that most of KE's assets were in Japan didn't matter because KE clearly had sufficient assets in Singapore to live a comfortable life.
  • People often join/leave the resident register based on personal convenience, so the fact KE was on the resident register doesn't imply he had a jūsho in Japan.
  • If you travel a lot and regularly spend time in Japan, it is convenient to stay enrolled in Japanese health insurance, regardless of whether you have a jūsho in Japan.

The key factor for the court, by far, seemed to be KE's occupational responsibilities and the fact that he could only really do his job properly (according to K Corp) by being based in Singapore. In this case, that occupational requirement was deemed sufficient to overcome other factors, such as the location of immediate family members and a shorter average period-of-stay.