Japan vs Universal Music Corp, April 2022, Supreme Court, Case No 令和2(行ヒ)303

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An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company.

The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes.

The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment.

The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions.

In 2020 the decision of the district court was upheld by the Tokyo High Court.

The tax authorities then filed an appeal with the Supreme Court

Decision of the Court

The Supreme Court dismissed the appeal and set aside the assessment of the tax authorities.

“The term “economic rationality” is used to refer to the economic rationality of a series of transactions. In examining whether or not the entire series of transactions lacks economic rationality, it is necessary to consider (i) whether the series of transactions is unnatural, such as being based on procedures or methods that are not normally assumed or creating a form that deviates from the actual situation, and (ii) whether there are other rational reasons for such a reorganisation other than a decrease in tax burden. (iii) Whether there are any business objectives or other reasons other than a reduction in the tax burden that would constitute a rational reason for such a reorganisation.”

“However, the borrowings in question were made under an agreement to be used solely for the purchase price of the shares of the domestic corporations in question and related costs, and in fact the appellant acquired the shares and brought the domestic corporations under its control, and there is no indication that the amount borrowed was unreasonably high in relation to its intended use. In addition, the interest and repayment period of the loan were determined based on the expected profit of the appellant, and there is no evidence that the appellant is currently experiencing any difficulty in paying the interest on the loan.
It is therefore difficult to say that the above points make the borrowing unnatural or unreasonable.
(d) Considering the above circumstances as a whole, the borrowing in question cannot be said to be unnatural or unreasonable from an economic and substantive standpoint, i.e. to lack economic rationality.
Therefore, the borrowing in question does not fall within the scope of Article 132(1) of the Corporate Tax Act, which states that “the borrowing is deemed to result in an unreasonable decrease in the corporate tax burden if it is permitted”.”

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Japan vs Universal Music SC

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