2017.10.24

2016 (Gyo-Hi) 224

Minshu Vol. 71, No. 8

Judgment on a case where regional management services performed by a specified foreign subsidiary company, etc. related to a domestic corporation were deemed not to be included in the business of holding shares as referred to in Article 66-6, paragraph (3) of the Act on Special Measures Concerning Taxation (prior to amendment by Act No. 13 of 2009)

Case seeking revocation of dispositions of reassessment of corporation tax

Judgment of the Third Petty bench, quashed and decided by the Supreme Court

Nagoya High Court, Judgment of February 10, 2016

1. The regional management services performed by a specified foreign subsidiary company, etc. related to a domestic corporation are deemed not to be included in the business of holding shares as referred to in Article 66-6, paragraph (3) of the Act on Special Measures Concerning Taxation (prior to amendment by Act No. 13 of 2009) under the factual circumstances described in the judgment, including that such regional management services consisted of a wide variety of services, i.e., regional planning, procurement, financial affairs, material technology, personnel affairs, information systems and logistics improvement, and intended to reinforce the centralized production and mutual complement systems and to improve the efficiency and reduce costs in the business operation at each center.

2. The regional management services performed by a specified foreign subsidiary company, etc. related to a domestic corporation constitute the principal business of such specified foreign subsidiary company, etc. as referred to in Article 66-6, paragraphs (3) and (4) of the Act on Special Measures Concerning Taxation (prior to amendment by Act No. 13 of 2009) under the circumstances described in the judgment, including: (i) that a considerable proportion of its earnings came from logistics improvement services out of the regional planning, procurement, financial affairs, material technology, personnel affairs, information systems and logistics improvement services provided by it to the group companies located within the target region; (ii) that, even though a high proportion of its income (i.e., income before taxes) came as dividends earned on shares held by it, the dividend income considerably reflected profits arising as a result of the reduced cost rate across the aforementioned group companies owing to the aforementioned regional management services; and (iii) that many of the employees working at the local office of such specified foreign subsidiary company, etc. were engaged in the said services and most of the tangible fixed assets held by it were made available for such services.

(For 1 and 2) Article 66-6, paragraphs (1), (3) and (4) of the Act on Special Measures Concerning Taxation (prior to amendment by Act No. 13 of 2009)



Act on Special Measures Concerning Taxation
(Prior to amendment by Act No. 13 of 2009)
Article 66-6
(1) Where an affiliated foreign company related to any of the following domestic corporations, which falls under the category of affiliated foreign company specified by a Cabinet Order as a company whose tax burden to be imposed on its income earned in a state or territory where its head office or principal office is located is significantly lower than the tax burden to be imposed on the income of a corporation in Japan (hereinafte referred to in this Subsection as a "specified foreign subsidiary company, etc."), in each business year beginning on or after April 1, 1978, retains as part of the amount of undistributed income, pursuant to the provision of a Cabinet Order, any amount that is adjusted, with respect to the said amount of undistributed income, based on the tax amount pertaining to the said amount of undistributed income and the amount of dividend of surplus, dividend of profit or distribution of surplus prescribed in Article 23(1)(i) of the Corporation Tax Act (hereinafter referred to in this paragraph and the next paragraph as "dividend of surplus, etc.") (such adjusted amount hereinafter referred to in this Article as "eligible retained income"), the amount equivalent to the part of eligible retained income which is calculated pursuant to the method specified by a Cabinet Order as the amount of income corresponding to the number of shares, etc. of the said specified foreign subsidiary company, etc. held by the domestic corporation through direct and/or indirect ownership, while taking into consideration the contents of the claim (meaning a claim to demand divided of surplus, etc., distribution of property and any other economic benefit; hereinafter the same shall apply in this paragraph and the next paragraph) vested in such shares, etc. (meaning shares or capital contributions; the same shall apply in this paragraph and the next paragraph) (such part of eligible retained income hereinafter referred to in this Subsection as "taxable retained income") shall be deemed to be the amount of the domestic corporation's profit, and included in its gross profit in the calculation of the amount of its income for the business year that includes the day on which two months have elapsed since the day following the last day of the relevant business year:

(i) A domestic corporation that holds shares, etc. of the affiliated foreign company through direct and/or indirect ownership, the ratio of whose shares, etc. to the total number or total amount of issued shares of or capital contributions to the said affiliated foreign company (excluding the shares, etc. held by the said affiliated foreign company) (in the case where the said foreign affiliated company is a corporation listed in (a) to (c): the said ratio or the ratio listed in (a) to (c), whichever is larger; referred to in the next item as the "direct and/or indirect ownership ratio for shares, etc. of an affiliated foreign company") is five percent or more:

(a) A corporation that issues shares, etc. in which more than one voting right (limited to a voting right pertaining to a resolution on dividend of surplus, etc.; hereinafter the same shall apply in this item and the next paragraph) is vested (excluding a corporation listed in (c)): The ratio of the number of voting rights in the said affiliated foreign company held by the domestic corporation through direct and/or indirect ownership to the total number of voting rights in the said affiliated foreign company

(b) A corporation that issues shares, etc. in which different claims are vested (excluding a corporation listed in (c)): The ratio of the amount of dividend of surplus, etc. based on the claim for the said affiliated foreign company held by the domestic corporation through direct and/or indirect ownership to the total amount of dividend of surplus, etc. receivable based on the claims vested in the shares, etc. of the said affiliated foreign company

(c) A corporation that issues both shares, etc. in which more than one voting right is vested and shares, etc. in which different claims are vested: The ratio specified in (a) or the ratio specified in (b), whichever is larger

(ii) A domestic corporation that belongs to a family shareholder group whose direct and/or indirect ownership ratio for shares, etc. of the foreign affiliated company is five percent or more (excluding the domestic corporation listed in the preceding item).

(3) With regard to the application of the provision of paragraph (1) in the case where a specified foreign subsidiary company, etc. related to a domestic corporation listed in each item of paragraph (1) (excluding a company engaged in, as its principal business, the holding of shares (including capital contributions) or bonds, the provision of industrial property rights or any other rights concerning technology, production methods involving special technology or any other equivalent rights or methods (including the right to use these rights) or copyrights (including rights of publication, neighboring rights and any other equivalent rights) or the lending of vessels or aircrafts) has an office, store, factory or any other fixed facility that is considered to be necessary for conducting its principal business in the state or territory where its head office or principal office is located, and takes charge of managing, controlling and operating the business by itself (referred to as the "case where a specified foreign subsidiary company, etc. has a fixed facility" in the next paragraph), the phrase "amount that is adjusted" in the said paragraph shall be deemed to be replaced with "amount that is adjusted,..., after deducting therefrom the amount equivalent to ten percent of the amount of expense specified by a Cabinet Order as a personnel expense for people engaged in the business at the said specified foreign subsidiary, etc."

(4) Where a specified foreign subsidiary company, etc. prescribed in the preceding paragraph that is related to a domestic corporation listed in each item of paragraph (1) has a fixed facility in the state or territory where its head office or principal office is located, and falls under any of the cases listed in the following items depending on the type of business listed in the following items to which its principal business corresponds in each business year, the provisions of paragraph (1) and the preceding paragraph shall not apply to the eligible retained income of the said specified foreign subsidiary company, etc. for the relevant business year:

(i) Wholesale business, banking business, trust business, securities business, insurance business, water transportation business or air transportation business: The case specified by a Cabinet Order in which the said specified foreign subsidiary company, etc. conducts business mainly with a person other than [1] a resident listed in each item of Article 40-4(1) who is related to the said specified foreign subsidiary company, etc., [2] a domestic corporation listed in each item of paragraph (1) that is related to the said specified foreign subsidiary company, etc., [3] a consolidated corporation listed in each item of Article 68-90(1) that is related to the said specified foreign subsidiary company, etc. or [4] any other person specified by a Cabinet Order as being equivalent to the persons mentioned in [1] to [3]

(ii) Business other than those listed in the preceding item: The case specified by a Cabinet Order in which the said specified foreign subsidiary company, etc. conducts a business mainly in the state or territory where its head office or principal office is located (including the water areas belonging to the said state or territory which are specified by a Cabinet Order).

1. Of the judgment in prior instance, the first paragraph of the main text is quashed.

2. The appellee’s appeal is dismissed.

3. The remaining portions of the appeal by the appellant are dismissed.

4. The total cost of the suit shall be divided into 400 parts, one of which shall be borne by the appellant and the rest by the appellee.

Reasons for the petition for acceptance of final appeal filed by the counsels for the appeal , KUNIYA Shiro and others (Excluding those that were excluded.)



1. In this case, the appellant, which is a domestic corporation, filed corporation tax returns for the business year commencing on April 1, 2007 and ending on March 31, 2008 and that commencing on April 1, 2008 and ending on March 31, 2009 (hereinafter respectively, the Business Year Ending March 31, 2008” and the “Business Year Ending March 31, 2009” and collectively, the “Business Years”). In response, the appellant received from the District Director of the Kariya Tax Office a disposition of reassessment of previous reassessment of corporation tax and a decision to impose additional tax for deficient returns for the Business year Ending March 31, 2008 and a disposition of reassessment of previous reassessment of corporation tax for the Business Year Ending March 31, 2009, on the grounds, inter alia, that the amount equivalent to the amount of taxable retained income of the appellant’s subsidiary A incorporated in the Republic of Singapore (hereinafter, “Singapore”) (hereinafter, “Subsidiary A”) as described in 2 (1) below should be included in the amount of gross profit of the appellant in the calculation of the amount of its income for the Business Years, pursuant to Article 66-6, paragraph (1) of the Act on Special Measures Concerning Taxation (prior to amendment by Act No. 13 of 2009; hereinafter, the “Special Measures Act”). The appellant requests that the appellee revoke these dispositions (with respect to the aforementioned dispositions of reassessment of previous reassessment, only the portion exceeding the amounts asserted by the appellant; hereinafter, the “Dispositions”).

2. Provisions of relevant laws and regulations

(1) Article 66-6, paragraph (1) of the Special Measures Act provides that where an affiliated foreign company (meaning a foreign corporation in which the ratio of the sum of the number or amount of shares or capital contributions (hereinafter, “shares, etc.”) held through direct and/or indirect ownership by domestic corporations, etc. to the total number or total amount of issued shares, etc. is more than 50 percent; see item (i), paragraph (2) of the said article) related to any of the domestic corporations listed in the items of the said paragraph, which falls under the category of affiliated foreign company specified by a Cabinet Order as a company where tax burden to be imposed on its income earned in a state or territory where its head office or principal office is located (hereinafter, the “country of head office”) is significantly lower than the tax burden to be imposed on the income of a corporation in Japan (meaning an affiliated foreign company that has its head office or principal office in a state or territory where there are no taxes imposed on corporate income or an affiliated foreign company whose tax imposed on its income for the relevant business year is 25 percent or less of the said income; see Article 39-14, paragraph (1) of the Order for Enforcement of the Act on Special Measures Concerning Taxation prior to amendment by Cabinet Order No. 108 of 2009) (hereinafter, a “specified foreign subsidiary company, etc.”), in each business year, retains as part of the amount of undistributed income, any amount that is adjusted in the prescribed manner (hereinafter, the “taxable retained income”) shall be included in the domestic corporation’s gross profit in the calculation of the amount of its income.

(2) However, Article 66-6, paragraph (4) of the Special Measures Act provides that where (I) a specified foreign subsidiary company, etc. prescribed in paragraph (3) of the said article (i.e., a specified foreign subsidiary company prescribed in paragraph (1) of the said article excluding a company engaged in, as its principal business, inter alia, the holding of shares, etc. or bonds, the provision of industrial property rights or any other rights concerning technology; hereinafter the criterion that the principal business is not, inter alia, the holding of shares, etc. or bonds, the provision of industrial property rights or any other rights concerning technology is referred to as the “business criterion”) (II) has in the country of head office an office, store, factory or any other fixed facility that is deemed necessary to carry on its principal business (the substantive criterion) and (III) manages, controls and operates its business by itself (the management and control criterion), and (IV) (a) where its principal business in each business year falls under wholesale business, banking business, trust business, financial instruments business, insurance business, water transportation business or air transportation business and where such specified foreign subsidiary company, etc. conducts such business mainly with a person other than the specified persons related to such specified foreign subsidiary company, etc. (the non-related person criterion; see item (i), paragraph (4) of the said article) or (b) where its principal business in each business year falls under a business other than the businesses listed above and where such specified foreign subsidiary company, etc. conducts such business mainly in the country of head office (the country of location criterion; see item (ii) of the said paragraph), then the provisions of paragraph (1) of the said article shall not apply (hereinafter the requirements listed in (I) through (IV) above are referred to as the “exception requirements”).

3. An outline of the facts and other circumstances related to the case which duly became final and binding in the judgment of prior instance is as described below:

(1) a. The appellant is a stock company (a domestic corporation) whose purposes include the manufacture and sale of automotive-related parts. The appellant have operations in 35 states and territories and has over 200 group companies worldwide.

b. In order to facilitate its centralized production and mutual complement systems in the Association of Southeast Asian Nations (hereinafter, “ASEAN”) region, in 1995 the appellant set up B in Singapore (hereinafter, “B”) as a regional management center with the intention of providing coordination and support to business activities between centers in the Asia/Oceania region . In 1998, in order to enhance its leadership over its group companies in the ASEAN region, the appellant set up Subsidiary A through in-kind contribution of shares held by the appellant in its group companies in the ASEAN and Taiwan regions, including B.

c. As of March 31, 2007 and March 31, 2008, Subsidiary A was a wholly-owned subsidiary of the appellant. During the business year commencing on April 1, 2006 and ending on March 31, 2007 and the business year commencing on April 1, 2007 and ending on March 31, 2008 (hereinafter respectively, the “Business Year 2007” and the “Business Year 2008” and collectively, the “Subsidiary A Business Years”), Subsidiary A held shares in thirteen subsidiaries and three affiliated companies located in ASEAN countries.

d. The rate of tax imposed on Subsidiary A’s income in Singapore was 22.89 percent and 12.78 percent in the Business Year 2007 and the Business Year 2008, respectively.

(2) a. Since its incorporation, Subsidiary A had expanded its operations as the regional management company in the Asia/Oceana region in order to reinforce the centralized production and mutual complement systems and to ensure increased efficiency and cost reduction in the business operation at each center. At that time in the Subsidiary A Business Years, Subsidiary A was engaged in services related to share holdings (such as general meetings of shareholder meetings and disposal of dividends), program design services, and agency services of various types for B, as well as services related to regional management involved in regional planning, procurement, financial affairs, material technology, personnel affairs, information systems and logistics improvement (hereinafter these services are referred to as the “regional management services”).

At that time in the Subsidiary A Business Years, Subsidiary A performed the regional management services for thirt een group companies of the appellant located in ASEAN countries, India and the Commonwealth of Australia (hereinafter, the “regional group companies”), and collected from the regional group companies, for each service, an amount calculated by multiplying their respective sales, etc. to third parties by a certain rate or an amount equivalent to the actual cost, etc.

b. At that time in the Subsidiary A Business Years, Subsidiary A was performing its services at its local office (hereinafter, the “Local Office”) that had been opened in Singapore, through its Japanese representative director who resided in Singapore and its thirty-odd employees who worked there. More than twenty of these employees were engaged in the regional management services, with the remaining employees being engaged in program design services and in agency services of various types for B. There were no employees engaged exclusively in services related to share holdings.

Subsidiary A rented the Local Office and possessed tangible fixed assets, such as office supplies and equipment, vehicles and computers. All of these facilities, etc. were used for services other than services related to share holdings, with most of them being made available for the regional management services.

c. In Subsidiary A’s earnings, its logistics improvement services, which are among the regional management services, produced sales of as much as approximately 490 million Singaporean dollars and approximately 610 million Singaporean dollars in the Business Year 2007 and the Business Year 2008, respectively, each accounting for approximately 85 percent of the amount of earnings. In Subsidiary A’s income (i.e., income before taxes), on the other hand, dividends earned on shares held by Subsidiary A accounted for a high proportion (approximately 92.3 percent and approximately 86.5 percent in the Business Year 2007 and the Business Year 2008, respectively). However, efforts made through the regional management services for construction, maintenance and development of the centralized production and mutual complement systems brought profits resulting from a significant reduction in cost rate across the regional group companies. In the Subsidiary A Business Years, these profits were considerably reflected in Subsidiary A’s dividend income from the regional group companies.

d. At that time in the Subsidiary A Business Years, Subsidiary A held its shareholder meeting and its board of directors’ meetings in Singapore and its officers performed their duties in the same country. In addition, Subsidiary A kept and maintained its accounting books at its Local Office.

(3) The District Director of the Kariya Tax Office issued the appellant, on June 28, 2010, a disposition of reassessment of previous reassessment of corporation tax and a decision to impose additional tax for deficient returns for the Business Year Ending March 31, 2008 and a disposition of reassessment of corporation tax for the Business Year Ending March 31, 2009, and on February 28, 2013, a disposition of reassessment of previous reassessment of corporation tax for the Business Year Ending March 31, 2009, in each case on the grounds that Subsidiary A’s principal business was the holding of shares and that the amount equivalent to the amount of taxable retained income of Subsidiary A should be included in the amount of gross profit of the appellant in the calculation of the amount of its income for the Business Years.

4. Based on the facts and other circumstances described above, the court of prior instance dismissed all of the appellant’s claims (except the claim for revocation of the following portions of the disposition of reassessment of previous reassessment of corporation tax for the Business year Ending March 31, 2009: (a) the portion which does not exceed the amount of income stated on the appellant’s tax return; and (b) the portion which exceeds the amount of loss carried forward to the next period) by concluding as follows in summary:

The holding of shares as referred to in Article 66-6, paragraph (3) of the Special Measures Act, to the extent that it is engaged in as a business, automatically implies that the shareholder gains profits from it. The manner in which the shareholder gains such profits may be limited to receipt of dividends or may include activities in an attempt to obtain more dividends through controlling share-issuing companies and determining the details of their operations at the shareholder’s discretion. Therefore, the holding of shares as a business is not limited to simply continuing to hold shares but also contains, as part of the business, activities to control and manage share-issuing companies. Since various activities to manage the controlled companies located within a certain region also form part of the business of holding shares, the regional management services are only one type of activity included in the business of holding shares and cannot be regarded as a separate, independent activity. In addition, Subsidiary A’s principal business is considered to be the holding of shares in terms of substance as well. In any case, Subsidiary A fails to meet the business criterion, and the Dispositions are lawful.

5. However, the above conclusion of the court of prior instance is not acceptable, for the following reasons.

(1) Because cases began to arise where a domestic corporation attempts to evade the tax burden in Japan by establishing a subsidiary in a state or territory where there are no or extremely low taxes imposed on corporate income, etc. (i.e., a tax haven) and by conducting economic activities through, and retaining income in, such subsidiary, Article 66-6, paragraph (1) of the Special Measures Act, intending to deal with such cases and to ensure substantive equality in tax burden, defines a foreign subsidiary company meeting certain requirements as a specified foreign subsidiary company, etc. and requires that the taxable retained income of such specified foreign subsidiary company, etc. be included in the amount of gross profit of the relevant domestic corporation in the calculation of the amount of its income (see Supreme Court, 2005 (Gyo-Hi) 89, Judgment of the Second Petty bench of September 28, 2007, Minshu Vol. 61, No. 6, p. 2486). However, if this treatment is extended even to cases where a specified foreign subsidiary company, etc. has a tangible presence as an independent enterprise and where there is a sufficient economic rationality for it to conduct business activities in the state or territory where it is located, Japanese private companies’ normal and reasonable economic activities in foreign countries may be hindered. For this reason, paragraph (4) of the said article provides that the provisions of paragraph (1) of the said article shall not apply to cases where all of the exception requirements, including the business criterion, are met.

(2) a. Article 66-6, paragraph (4) of the Special Measures Act provides that a specified foreign subsidiary company, etc. whose principal business is the holding of shares as referred to in paragraph (3) of the said article does not meet the business criterion. A person who holds shares is entitled to exercise his rights of self-interest, such as the right to demand distribution of profits, and his rights of common interest, such as rights to vote at shareholder meeting, and is also entitled to gain trading profits from trading shares he holds. For this reason, a specified foreign subsidiary company, etc. which holds shares with a majority of all voting rights in another company is able to control and manage the operation of such company through exercising the shareholder rights mentioned above.

However, in cases where a specified foreign subsidiary company, etc. which holds shares in another company performs, as its activities for controlling and managing the said company, services related to the establishment of business polities and in the management, coordination, etc. of performance of duties, usually the direct purpose of these services is to improve the profitability of such company through streamlining, and improving the efficiency of, its operations and such services will cover an extensive scope as described above. Since such specified foreign subsidiary company, etc. will manage a certain group of companies, including the company in which it holds shares, through such services, even if such services result in contributing to increase in the amount of dividends or in the asset value of the said company, such services should be deemed to have their own purpose, content, function, etc. that are different from those of services related to the exercise of shareholder rights or to the trading of shares. It is not appropriate to understand that these services are included in, and form part of, the business of holding shares. Then, the regional management services performed by Subsidiary A in the Subsidiary A Business Years consisted of a wide variety of services, i.e., regional planning, procurement, financial affairs, material technology, personnel affairs, information systems and logistics improvement. These services of Subsidiary A, as the regional management company in the Asia/Oceana region , can be regarded as intending to reinforce the centralized production and mutual complement systems and to ensure improved efficiency and cost reduction in the business operation at each center. Considering also that Subsidiary A performed individual services for a consideration, the Court cannot conclude that its regional management services described above are services related to the exercise of shareholder rights or to the trading of shares.

b. The reason why Article 66-6, paragraph (4) of the Special Measures Act provides that a specified foreign subsidiary company, etc. whose principal business is the holding of shares does not meet the business criterion is that the business of holding shares, by its nature, can be sufficiently carried on in Japan, which makes it difficult to find any active economic rationality for such company to reside and carry on such business in a tax haven other than reduction in tax burden. In this regard, the regional management services performed by Subsidiary A intended to streamline, and improve the efficiency of, the operations of the regional group companies based on the existence of the regional economic bloc, and there is an undeniable active economic rationality for Subsidiary A to conduct business activities in the region. Therefore, understanding that its regional management services are included in the business of holding shares is not consistent with the intention of Article 66-6, paragraph (4) of the Special Measures Act.

c. The amendment of the Act on Special Measures Concerning Taxation by Act No. 6 of 2010 excluded, from specified foreign subsidiary companies, etc. whose principal business is the holding of shares, etc., those (I) which perform services that contribute to the improvement of the profitability of another foreign corporation through comprehensive management and coordination of the business activities of the said foreign corporation and (II) which are specified by a Cabinet Order as specified foreign subsidiary companies, etc. which hold shares, etc. of a foreign corporation that is specified by a Cabinet Order as the aforementioned another foreign corporation (i.e., management companies which perform management services set forth in Article 39-17, paragraph (4) of the Order for Enforcement of the Act on Special Measures Concerning Taxation after amendment by Order No. 58 of 2010 and which meet the requirements listed in the items of paragraph (3) of the said article) (Article 66-6, paragraph (3) of the Act on Special Measures Concerning Taxation after the aforementioned amendment). A management company which meets the business criterion as a result of this exclusion must, in the first place, be a corporation whose principal business is the holding of shares, etc. (the introductory clause of the said paragraph), and a management company whose principal business is not the holding of shares, etc. cannot so meet the business criterion. Therefore, the amendment history described above does not provide grounds for an argument that the management services described above are included in the business of holding shares, and the Court cannot conclude that the regional management services performed by Subsidiary A are included in the business of holding shares.

d. For the reasons described above, the Court cannot conclude that the regional management services performed by Subsidiary A in the Subsidiary A Business Years are included in the business of holding shares as referred to in Article 66-6, paragraph (3) of the Special Measures Act.

(3) a. Next, it is appropriate that the principal business as referred to in Article 66-6, paragraphs (3) and (4) of the Special Measures Act is determined from the specific and objective details of the business activities of the specific foreign subsidiary company, etc. during the relevant business year. If the specific foreign subsidiary company, etc. carries on two or more businesses, it is appropriate that such determination is made by taking comprehensively into account the amount of earnings or income obtained from the respective business activities of such specific foreign subsidiary company, etc., the number of employees required for such business activities, the conditions of offices, stores, factories and other fixed facilities required for such business activities.

b. If we turn our eyes to the present case, Subsidiary A, in its capacity as the regional management company in the Asia/Oceana region, provided the regional group companies with a wide variety of regional management services, i.e., regional planning, procurement, financial affairs, material technology, personnel affairs, information systems and logistics improvement, in an organically related manner for the purpose of ensuring the streamlining of, and the improvement of the efficiency of, the regional group companies’ operations, while receiving compensation for individual services. In the Subsidiary A Business Years, Subsidiary A’s sales related to the logistics improvement service as part of the regional management services accounted for as much as approximately 85 percent of Subsidiary A’s earnings. While dividends earned on shares held by Subsidiary A accounted for 80 to 90 percent of Subsidiary A’s income, this dividend income considerably reflected profits arising as a result of the reduced cost rate across the regional group companies owing to the regional management services. Many of the employees working at the Local Office were engaged in the regional management services, and most of the tangible fixed assets held by Subsidiary A were made available for the regional management services.

If these factors are comprehensively taken into account, the regional management services performed by Subsidiary A can be considered to have had a considerable scale and substance and to have been, even in light of the fact that dividend income accounted for a high proportion of its income, a business activity of high relative importance, and it is appropriate to find that the regional management services were Subsidiary A’s principal business as referred to in Article 66-6, paragraphs (3) and (4) of the Special Measures Act. Therefore, the Court finds that Subsidiary A met the business criterion in the Subsidiary A Business Years.

(4) According to the facts and other circumstances described in 3 (2) above, it is found that: (I) during the Subsidiary A Business Years, Subsidiary A managed, controlled and operated its business by itself in Singapore, which was its country of head office, as seen by such facts as that Subsidiary A had fixed facilities that are considered necessary to carry on the business of regional management services in the same country, and that Subsidiary A’s shareholder meeting and board of directors’ meetings were held in, its officers performed their duties in, and its account books were kept and maintained in, the same country; (II) the business of regional management services does not fall under any of the businesses listed in Article 66-6, paragraph (4), item (i) of the Special Measures Act; and (III) Subsidiary A was engaged in its businesses mainly in Singapore. Thus, the Court can conclude that Subsidiary A meets the criteria corresponding to the respective requirements listed in 2 (2) (II) through (IV) above.

Therefore, since Subsidiary A met all of the exception requirements in the Subsidiary A Business Years, the appellant is excluded from the application of Article 66-6, paragraph (1) of the Special Measures Act for the Business Years. Consequently, all of the Dispositions (however, as for the disposition of reassessment of previous reassessment of corporation tax for the Business Year Ending March 31, 2009, limited to: (a) the portion exceeding the amount of income stated on the appellant’s tax return; and (b) the portion falling below the amount of loss carried forward to the next period) issued by applying the said paragraph on the grounds that the appellant failed to meet the business criterion should be considered illegal.

6. The conclusion of the court of prior instance, which is different from the above discussion, contains a violation of law that obviously affects its judgment. The appellant’s reasons for the petition for acceptance of final appeal are well-grounded in that it is consistent with the above, and the first paragraph of the main text of the judgment in prior instance should inevitably be quashed. Based on the above discussion, the judgment in first instance is appropriate in that it accepted all of the appellant’s claims with respect to that portion, and the Court dismisses the appellee’s appeal. With respect to the remaining portions of the final appeal, the Court dismisses the same since the reasons for the petition for acceptance of final appeal were excluded in the order to accept final appeal.

Therefore, the Court unanimously decides as set forth in the main text.

Justice YAMASAKI Toshimitsu

Justice OKABE Kiyoko

Justice KIUCHI Michiyoshi

Justice TOKURA Saburo

Justice HAYASHI Keiichi