From the viewpoint of tax, are there any problems if the company keeps retained
earnings without paying dividends?
Some companies charge an additional corporate tax for accumulating profits
without paying dividends.
Corporation tax law defines a company as "specified family corporation" if more than 50%
of its shares are held directly or indirectly by a specific individual (and his/her relatives).
This rule also applies if the company is a shareholder of a company that is listed overseas.
If this "specified family corporation" has retained excessive profits, it is subject to income
tax withheld after deducting a certain amount. To avoid this tax, companies must pay
dividends if they earn more than the above deductions.
There are exceptions to the above rule, and the rule only applies to 100% of large
corporations with capital of 500 million Yen or more that are SMEs with capital of 100
million Yen or less.
In Japan, it is easy for tax authorities to assume that subsidiaries of foreign listed
companies are not "specified family corporation". Starting in fiscal 2010, however, under
the Group Corporation Tax System, which was introduced for domestic corporations that
are 100% owned by corporations and individuals in Japan and overseas, it became
mandatory to attach a diagram showing the investment relationships of the 100% corporate
group to corporate tax returns. As a result, the details of top shareholders, whether non-
residents or foreign corporations, may become of interest to tax authorities. If you fall under
the category of "specified family corporation" we recommend that you consider paying
dividends in the fiscal year in which you make a large profit.