2024.07.18

2022 (Gyo-Hi) 373

Minshu Vol. 78, No. 3

(Civil Case)Judgment concerning the meaning of the phrase "insurance for covering the assets held by a person other than affiliated persons or the liability for damages borne by a person other than affiliated persons as the subject of insurance" referred to in the provision in parentheses of Article 39-117, paragraph (8), item (v) of the Order for Enforcement of the Act on Special Measures Concerning Taxation (prior to the amendment by Cabinet Order No. 159 of 2016)

Case seeking revocation of dispositions of reassessment of corporation tax, etc.

Judgment of the First Petty Bench, quashed and decided by the Supreme Court

Tokyo High Court, Judgment of September 14, 2022

The phrase "insurance for covering the assets held by a person other than affiliated persons or the liability for damages borne by a person other than affiliated persons as the subject of insurance" referred to in the provision in parentheses of Article 39-117, paragraph (8), item (v) of the Order for Enforcement of the Act on Special Measures Concerning Taxation (prior to the amendment by Cabinet Order No. 159 of 2016) means insurance for covering financial losses arising in relation to the assets held or the liability for damages borne by a person other than affiliated persons.

Article 68-90, paragraph (1) of the Act on Special Measures Concerning Taxation (prior to the amendment by Act No. 4 of 2017); Article 68-90, paragraph (3) of the Act on Special Measures Concerning Taxation (prior to the amendment by Act No. 15 of 2016); Article 39-117, paragraph (8), item (v) of the Order for Enforcement of the Act on Special Measures Concerning Taxation (prior to the amendment by Cabinet Order No. 159 of 2016)

The judgment in prior instance is quashed.

The appeal to the court of second instance filed by the appellee of final appeal is dismissed.

The court costs for the appeal to the court of second instance and for the final appeal shall be borne by the appellee of final appeal.

Concerning the reasons for a petition for acceptance of final appeal stated by the counsel for final appeal, OHARA Kazuto, et al.

1. The appellee of final appeal, which is a consolidated corporation, filed tax returns for corporation tax and local corporation tax for the consolidated business year and the taxable business year from April 1, 2016, to March 31, 2017 (hereinafter referred to as the "Business Year"). The administrative agency reaching the dispositions issued dispositions of reassessment to increase the amounts of corporation tax, etc. and dispositions of assessment and determination to impose penalty tax for understatement to the appellee, on the grounds such as that, under the provisions of Article 68-90, paragraph (1) of the Act on Special Measures Concerning Taxation (prior to the amendment by Act No. 15 of 2016; hereinafter referred to as the "Special Measures Act"), the amount equivalent to the amount of individually taxable income of Nissan Global Reinsurance, Ltd. (hereinafter referred to as "NGRE"), a foreign corporation in which the appellee indirectly holds all of its shares, should be included in the amount of gross profits in the calculation of the amount of the appellee's consolidated income for the Business Year.

In this case, the appellee sues the appellant of final appeal to seek the revocation of the portions of the abovementioned dispositions which exceed the amount alleged by the appellee (hereinafter referred to as the "Dispositions").

2. The provisions of the related laws and regulations are as follows.

Article 68-90, paragraph (1) of the Special Measures Act provides that if a specified foreign subsidiary, etc. of a consolidated corporation set forth in the items of the same paragraph (hereinafter simply referred to as a "specified foreign subsidiary, etc.") has an amount of eligible income in each business year, the amount equivalent to the amount of individually taxable income out of the amount of eligible income is deemed to be the amount of the consolidated corporation's profit, and is to be included in the amount of its gross profits in the calculation of the amount of its consolidated income for the consolidated business year that includes the day on which two months have elapsed since the day following the last day of the relevant business year. Paragraph (3), item (i) of the same Article provides that if a specified foreign subsidiary, etc. is one that is prescribed in the main sentence of the same paragraph and that falls under the case specified by Cabinet Order as a case where it conducts insurance business, which is its principal business, mainly with persons other than the persons prescribed in the same item (such persons prescribed in the same item are referred to as "affiliated persons"), the provisions of paragraph (1) of the same Article do not apply to the amount of eligible income of said specified foreign subsidiary, etc. for the relevant business year (hereinafter the requirement of "falling under the case specified by Cabinet Order" is referred to as the "criterion based on business with non-affiliated persons").

With regard to the expression "the case specified by Cabinet Order" mentioned above, Article 39-117, paragraph (8), item (v) of the Order for Enforcement of the Act on Special Measures Concerning Taxation (prior to the amendment by Cabinet Order No. 159 of 2016; hereinafter referred to as the "Enforcement Order") defines it as the case where, out of the total premium income for the relevant business year, the ratio of the sum of the premium income to be received from persons other than affiliated persons (where the premium income pertains to reinsurance, limited to premium income from insurance for covering the assets held by a person other than affiliated persons or the liability for damages borne by a person other than affiliated persons as the subject of insurance) exceeds 50 percent (the provision in parentheses in the same item is hereinafter referred to as the "Provision in Parentheses").

3. The outline of the facts lawfully determined by the court of prior instance is as follows.

(1) a. The appellee is a consolidated corporation established for the purpose of manufacturing, sale, etc. of automobiles.

b. NGRE is a foreign corporation established in the Bermuda islands and is engaged in insurance business as its principal business. It is a specified foreign subsidiary, etc. of the appellee in the Business Year.

c. NR Finance Mexico, S.A. de C.V. SOFOM ER (hereinafter referred to as "NRFM") is a foreign corporation located in the United Mexican States and is engaged in finance business. It was an affiliated person of NGRE in the business year of NGRE from April 1, 2015, to March 31, 2016 (hereinafter referred to as "NGRE's Business Year").

d. Assurant Vida Mexico, S.A. (hereinafter referred to as "AVM") is a foreign corporation located in the United Mexican States and engaged in insurance business. It was not an affiliated person of NGRE in NGRE's Business Year.

(2) NRFM concluded a credit agreement with customers who purchased automobiles manufactured by the appellee's corporate group on an instalment plan (hereinafter such customers are referred to as the "Customers") to lend them funds for their purchases (hereinafter such agreement is referred to as the "Credit Agreement"; and the loan claims under the Credit Agreement are referred to as the "Credit Claims").

The Credit Agreement included the following provisions.

a. The Customers must conclude an insurance contract for life insurance to cover the outstanding amount of the Credit Claims and for insurance for unemployment, etc. to cover monthly installment payments of the Credit Claims for at least six months, while designating NRFM as the primary beneficiary.

b. If the Customers do not conclude an insurance contract referred to in a. above, NRFM may conclude a predetermined insurance contract and have the Customers subscribe to the insurance contract, under which the Customers must pay expenses therefor.

(3) NRFM concluded an insurance contract with AVM for the insurance period from August 6, 2014, to August 5, 2015, and then concluded an insurance contract of the same content with AVM for the insurance period from August 6, 2015, to August 5, 2016 (hereinafter these contracts are collectively referred to as the "Original Insurance Contract"). If the Customers did not conclude the insurance contract referred to in (2) a. above, NRFM had the Customers subscribe to the Original Insurance Contract and collected from the Customers an amount equivalent to the insurance premiums under the Original Insurance Contract, and paid the insurance premiums to AVM.

The Original Insurance Contract included the following provisions.

a. NRFM is designated as the primary beneficiary and this designation may not be cancelled.

b. In the event of the death or permanent total disability of the Customers, AVM pays the outstanding amount of the Credit Claims to the primary beneficiary (NRFM), up to the prescribed limit amount.

In the case of unemployment or temporary total disability of the Customers, AVM pays the monthly installment payments of the Credit Claims for six months to the primary beneficiary (NRFM), up to the prescribed limit amount.

c. The monthly amount of insurance premiums is 0.96 Mexican Peso per 1,000 Mexican Peso of the outstanding amount of the Credit Claims at beginning of year.

(4) AVM and NGRE concluded a reissuance contract for the contract period of five years from July 1, 2014, under which AVM cedes reinsurance to NGRE for 70% of the insurance risk that AVM assumes under the Original Insurance Contract, and NGRE underwrites reinsurance (hereinafter referred to as the "Reinsurance Contract").

(5) The total premium income of NGRE in NGRE's Business Year was [i] USD 525,214,976, of which the premium income received from persons (except for AVM) other than the affiliated persons was [ii] USD 253,183,120, and the premium income received from AVM was [iii] USD 11,493,075. The amount in [ii] does not exceed 50 percent of the amount in [i], but the amount in [ii] plus the amount in [iii] exceeds 50 percent of the amount in [i].

(6) On July 31, 2020, the administrative agency reaching the dispositions issued the abovementioned dispositions of reassessment to increase the amounts of corporation tax, etc. and dispositions of assessment and determination to impose penalty tax for understatement to the appellee. In making these dispositions, the administrative agency applied the provisions of Article 68-90, paragraph (1) of the Special Measures Act, on the grounds that: the premium income under the Reinsurance Contract does not satisfy the requirement under the Provision in Parentheses because it is related to insurance for covering the assets held by NRFM, which is an affiliated person of NGRE, as the "subject of insurance," and it therefore does not fall within the scope of "premium income to be received from persons other than affiliated persons" as referred to in Article 39-117, paragraph (8), item (v) of the Enforcement Order, in which case the ratio referred to in the same item does not exceed 50 percent, and as a result, NGRE does not satisfy the criterion based on business with non-affiliated persons in NGRE's Business Year.

4. Based on the facts mentioned above, the court of prior instance determined as summarized below, and it ruled that the Dispositions are illegal and upheld the appellee's claim.

It is appropriate to construe that the terms "assets" and "liability for damages" referred to in the Provision in Parentheses are merely examples and that the phrase "insurance for covering the assets held by a person other than affiliated persons or the liability for damages borne by a person other than affiliated persons as the subject of insurance" means insurance for covering the insurance risks on assets, etc. of a person other than affiliated persons. Since the Original Insurance Contract is an insurance contract for covering the insurance risks on the life, body, etc. of the Customers, the premium income under the Reinsurance Contract falls within the scope of "premium income from insurance for covering the assets held by a person other than affiliated persons or the liability for damages borne by a person other than affiliated persons as the subject of insurance" as referred to in the Provision in Parentheses and falls within the scope of "premium income to be received from persons other than affiliated persons" as referred to in Article 39-117, paragraph (8), item (v) of the Enforcement Order, in which case the ratio referred to in the same item exceeds 50 percent in this case. As a result, NGRE satisfies the criterion based on business with non-affiliated persons in NGRE's Business Year, and therefore NGRE is excluded from the application of Article 68-90, paragraph (1) of the Special Measures Act.

5. However, the abovementioned determination by the court of prior instance cannot be affirmed, for the following reasons.

(1) Article 39-117, paragraph (8), item (v) of the Enforcement Order specifies the criterion based on business with non-affiliated persons, which is one of the requirements for the exclusion from the application of the provisions of Article 68-90, paragraph (1) of the Special Measures Act, with regard to a specified foreign subsidiary, etc. engaging mainly in insurance business. It is understood that the Provisions in Parentheses is intended to clarify how to treat premium income in the case where a specified foreign subsidiary, etc. conducts insurance transactions with an affiliated person via a person other than affiliated persons, and prevent a specified foreign subsidiary, etc. from satisfying the criterion based on business with non-affiliated persons by having such non-affiliated persons involved in the transactions only as a matter of form, and becoming eligible for the exclusion from the application of the same paragraph.

In addition to the intention of the Provision in Parentheses mentioned above, considering that persons who take out insurance would conclude an insurance contract while paying insurance premiums, usually for the purpose of receiving coverage or compensation for financial losses by receiving payment of insurance proceeds, the provision in parentheses can be interpreted as stipulating that when a specified foreign subsidiary, etc. conducts reinsurance transactions as an insurer, the premium income to be received by the specified foreign subsidiary, etc. from the reinsurance transactions is to be treated as premium income to be received from a person other than affiliated persons only if the reinsurance transactions are intended to cover financial losses arising in relation to the assets held or the liability for damages borne by a person other than affiliated persons. Consequently, the phrase "insurance for covering the assets held by a person other than affiliated persons or the liability for damages borne by a person other than affiliated persons as the subject of insurance" referred to in the Provision in Parentheses should be interpreted as meaning insurance for covering financial losses arising in relation to the assets held or the liability for damages borne by a person other than affiliated persons.

(2) In this case, according to the facts mentioned above, if the Customers who had concluded the Credit Agreement did not conclude a predetermined insurance contract, NRFM had the Customers subscribe to the Original Insurance Contract, and collected from the Customers an amount equivalent to the insurance premiums under the Original Insurance Contract to be determined based on the outstanding amount of the Credit Claims, and paid the insurance premiums to AVM. In addition, under the Original Insurance Contract, NRFM was designated as the primary beneficiary and this designation could not be cancelled, and upon occurrence of an insured event, such as the death or unemployment of the Customers, NRFM was to receive insurance benefits equivalent to the outstanding amount of the Credit Claims or the monthly installment payments of the Credit Claims for six months, up to the prescribed limit amount.

In light of the substance of the Original Insurance Contract mentioned above, the insurance under the Reinsurance Contract can be regarded as insurance for covering financial losses arising in relation to the Credit Claims, an asset held by NRFM, which was an affiliated person of NGRE in NGRE's Business Year. Consequently, such insurance does not fall within the category of "insurance for covering the assets held by a person other than affiliated persons or the liability for damages borne by a person other than affiliated persons as the subject of insurance" referred to in the Provision in Parentheses, and therefore NGRE does not satisfy the criterion based on business with non-affiliated persons in NGRE's Business Year, and is not eligible for the exclusion from the application of Article 68-90, paragraph (1) of the Special Measures Act.

6. According to the above, the abovementioned determination by the court of prior instance contains a violation of law or regulation that has clearly influenced the judgment. The counsel's arguments are well-grounded, and the judgment in prior instance should inevitably be quashed. Under the abovementioned facts of the case, there are no illegal points to be found in the Dispositions, and hence, the Dispositions should be judged to be legal. It follows that the appellee's claim is groundless, and therefore the judgment in first instance that dismissed this claim is justifiable and the appeal to the court of second instance filed by the appellee should be dismissed.

For the reasons stated above, the Court unanimously decides as set forth in the main text of the judgment.

Justice OKA Masaaki

Justice MIYAMA Takuya

Justice YASUNAMI Ryosuke

Justice SAKAI Toru

Justice MIYAGAWA Mitsuko