How the IRS Taxes the KK (Kabushiki Gaisha)

The Kabushiki Gaisha goes by many names. Sometimes spelled Kabushiki Kaisha, or KK, or joint-stock company, this is a Japanese corporate entity that is the structural equivalent of a C Corporation. As the predominant type of corporate entity in Japan, the Kabushiki Gaisha commands a perception of respect and prestige from employees, clients, and the larger business community. Find out what American expats in Japan can expect from their expat taxes if they have a Kabushiki Gaisha.

A Primer on the Kabushiki Gaisha

The KK protects shareholders from personal liability and permits additional capital to be raised by selling shares, stock options grants, etc. Note that there is a clear organizational distinction between ownership (shareholders) and management (directors), although it is possible to be a shareholder and director at the same time. All Kabushiki Gaisha entities must have at least one representative director, and this person can be a resident or non-resident of Japan.

A KK is the most expensive form of corporate entity to incorporate and must meet more strict requirements than its LLC counterpart (Godo Kaisha, or GK). Its organization is scalable and can accommodate most companies of varying sizes. The KK designation is most appropriate for medium to large companies. Still, many small or “one-person” businesses can choose to incorporate as a KK if the brand image of a KK is preferred.

Since a KK is held in high esteem in Japan, depending on the industry, it can be easier to attract local, new clients and business partners to grow your business. The majority of the Japanese workforce prefers to work for a KK type of entity; hence it is easier to attract the best local talent. A KK is the preferred form of entity in terms of growth and expansion since it is easier to attract additional outside investors in the public stock market.

Other Corporate Structures in Japan

In comparison to a KK, a GK type of corporate entity, also known as the Japanese LLC, offers a real cross-border tax advantage for a US sole member. For all companies outside the US, however, both the KK company and the GK offer identical tax efficiencies. A GK is more economical to incorporate, has slightly lower administration costs, and marginally less corporate governance overhead as compared to a KK, but gives similar litigation protection for its foreign parent.

The IRS recognizes a corporation organized outside the US as a foreign corporation. The KK is classified as a “per se” corporation and having a de-facto corporate status for federal tax purposes by the IRS.

Expats in Japan With a Kabushiki Gaisha May Be Required to File Form 5471

To comply with US tax law, a US shareholder of a Japanese KK entity should file Form 5471, or Information Return of U.S. Persons with Respect to Certain Foreign Corporations, and it’s supporting schedules (A, B, C and F, E, G, H, I, I-1, J, M, O – Part I& Part II, and P). The requirement to file a particular schedule depends on the percentage of ownership of shares of a US person in the KK.

A US person (US citizen, green card holder or resident alien, a domestic partnership, a domestic corporation, and an estate or trust that is not a foreign estate or trust) who may need to file Form 5471 is an individual or entity who owns:

  • 10% or more of the total value of the KK’s stock, or
  • 10% or more of the total combined voting power of all classes of stock with voting rights, or
  • A US person who is a director or officer of a KK in which a US person has acquired stock in the KK, which meets the 10% stock ownership requirement, or
  • If a US person has acquired an additional 10% or more in value or voting power of the outstanding stock of the KK, or
  • A US person who had “control” of a KK at any time during the year, i.e., owned >50% of the total combined voting power of all classes of stock of the KK, or, owned >50% of the total value of shares of all classes of stock of the KK, or
  • A US person who owns 10% or more of the total combined voting power of all classes of voting stock of a KK, which is a Controlled Foreign Corporation (CFC). A CFC is a foreign corporation that has US shareholders that own more than 50% of the total combined voting power of all classes of its voting stock, or the total value of the stock of the corporation.

Form 5471 should be attached to the expat’s income tax return. Both the individual income tax return and Form 5471 should be filed by the due date—including extensions—for that return.

Other Forms You May Need to File

In addition to form 5471 and its supporting schedules, the following forms are filing requirements:

Form 926 is required for a US person to report certain transfers of property or cash to a KK, especially if immediately after a transfer of cash, the US person holds at least 10% of the total voting power or the total value of the KK.

Form 965 is for anyone who is a 10% or more US shareholder of a KK that is a Controlled Foreign Corporation (CFC), which includes accumulated post-1986 deferred foreign income.

Form 8992 should be filed by a KK that is a CFC to report Global Intangible Low-Taxed Income (GILTI) for each tax year.

Form 8938, the Statement of Specified Foreign Financial Assets, should be filed if the maximum aggregate balance of the foreign financial assets, (including foreign bank accounts, pension accounts, stocks held, stock brokerage accounts, custodial accounts, and life insurance value with a cash value) exceeds $400,000, on the last day of the tax year, or, $600,000, at any time during the tax year, for those who are married filing jointly. The number of Forms 5471 filed should be indicated on Form 8938.

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