Japanese law is grounded primarily in the civil law tradition, though elements of the common law have influenced certain legal developments. Several general categories of legal entities can be characterized as nongovernmental, not-for-profit organizations (NPOs):
“Public Interest Legal Persons” (PILPs), or koeki hojin, sometimes called Public Interest Corporations. These are governed by Article 34 of the Civil Code of 1896. PILPs can be either associations or foundations.
“Special Nonprofit Corporations” (SNCs), or tokutei hieiri katsudo hojin, are sometimes called Nonprofit Organizations. SNCs were created by the Special Nonprofit Corporation Promotion Law (SNC Law), enacted in 1998.
Various public interest organizations (distinct from PILPs), were authorized after World War II by special laws arising under (or "attached to") Article 34. These special bodies include Social Welfare Entities, Medical Organizations, Private Schools, Relief and Rehabilitation Enterprises, and Religious Organizations.
"Intermediary Legal Persons (ILPs)," or chukan hojin, authorized by a 2001 law. These are mutual benefit organizations, which need not pursue public interest objectives and do not enjoy tax benefits. They are generally beyond the scope of this Note. [1]
Three NPO bills were recently enacted in Japan; Japanese sources expect that these laws will become effective in 2008 (perhaps the last quarter of 2008). These laws include the Association and Foundation Law, the Law on Recognizing Organizations as Public Interest (also translated as the “Charitable Recognition Status Law”), and the Law to Consolidate Relevant Laws. These laws will significantly revise the NPO legal framework [2]; in addition, PILPs and ILPs will be given a five year period to transition to another form.
B. Tax laws
NPOs do not pay tax on grants and other income earned from non-business activities. This exemption is automatic and nondiscretionary.
The procedure for acquiring certain other tax privileges is separate from the process of acquiring legal entity status and requires specific authorization from the National Tax Administration/Ministry of Finance. As a result, organizations with the same legal form and that engage in essentially the same activities may have significantly different tax treatment. With the necessary authorization, NPO income earned from economic activities is generally taxed at a lower rate than that imposed on for-profit entities. In addition, some organizations are permitted to receive tax-deductible contributions.
Japan has a VAT of a standard rate of 5 percent, and there are relatively few exemptions.
The United States and Japan have entered into a double tax treaty, which may affect planning decisions of U.S. corporate grantmakers with a legal presence in Japan.
II. Applicable Laws
Civil Code Article 34 (1896)
Trust Law Article 66 (1923) [regulation of public charitable trusts]
Corporation Income Tax Law (1965)
Private School Law, Article 3 (1949)
Religious Corporation Law, Article 4 (1951)
Social Welfare Business Law, Article 22 (1951)
Medical Corporation Law, Article 39 (1950)
Relief and Rehabilitation Enterprise Law (1995)
Local Autonomy Law 260(2) (1991) [regulation of neighborhood associations]
1. Public Interest Legal Persons (PILPs) Established Under Civil Code Article 34
Until 1998, Public Interest Legal Persons (PILPs), or koeki hojin, were the basic norm for not-for-profit organizations in Japan. They are regulated by Article 34 of the Civil Code, which states: "An association or foundation relating to rites, religion, charity, academic activities, arts and crafts, or otherwise relating to the public interest and not having for its object acquisition of profit may be made a legal person subject to the permission of the competent authorities."
All PILPs must have the objective of carrying out activities for the public good. This requirement is applied quite rigorously, and prohibits many groups from being recognized as a PILP. They include:
Groups such as reunion or alumni organizations that organize to maintain personal ties;
Groups that provide welfare services to its founders or to members of specific occupations; and
Organizations that provide economic or spiritual support to individual members (self-help groups).
Some organizations excluded from PILP status can form as Intermediary Legal Persons (or chukan hojin).
PILPs fall into two categories:
Associations (shadan hojin) are formed by members and governed by the general assembly of the membership. Day-to-day activities are generally conducted by a board of directors elected by members.
Foundations (zaidan hojin) in Japan, as in most countries, are based on endowments, which must be, in principle, maintained permanently and managed appropriately to carry out the purposes specified by the founders.
2. Special Nonprofit Corporations (SNCs)
A new form of not-for-profit organization was created under the Special Nonprofit Corporation Promotion Law (SNC Law), which went into effect in 1998 and was amended in 2002 and 2003. The purpose of the law is to alleviate the legal hurdles of creating PILPs. Key objectives of the SNC Law were to free the registration process from bureaucratic discretion and to ensure registration of qualified organizations.
An SNC, or tokutei hieiri katsudo hojin, must have at least 10 members, and its "provisions regarding acquisition and loss of qualifications for membership [must not be] unreasonable" (SNC Law, articles 2, 10, 28). The organization's purpose cannot be for generating profits, and its activities cannot propagate religious teachings, perform religious ceremonies, or educate or foster religious believers (SNC Law, article 2). It must have at least three directors and at least one auditor as an officer (SNC Law, article 15). It may engage only in those activities (as its primary nonprofit activities) specified in the Schedule to Article 2 of the law (SNC Law, article 2). The enumerated activities include health care, environmental work, disaster relief, youth activities, and international cooperation (the full list appears in Section III-B, below).
3. Organizations Established Under Special Laws Arising Under Civil Code Article 34
The following are among the principal subtypes of Organizations Established Under Special Laws Arising Under Civil Code Article 34, which are subject to different rules regarding operations and tax treatment from those governing PILPs and SNCs. Specifically:
Social Welfare Organizations provide services for social advancement, including services for the elderly, children, and the handicapped, among other activities.
Educational Organizations (Private School Corporations) operate private schools.
Religious Corporations engage in religious or evangelical activities.
Medical Corporations establish hospitals and clinics in which doctors or dentists provide regular services, or facilities for the health and welfare of the elderly. Under Japanese law, only not-for-profit entities are permitted to provide medical treatment, creating a prominent role in this field for not-for-profit organizations. However, except for the small category of “Special Medical Corporations,” most Medical Corporations are not accorded the same public interest benefits as PILPs. This is reflected, for example, in tax treatment: Medical Corporations are taxed in the same manner as ordinary corporations.
Relief and Rehabilitation Enterprises (sometimes called "Regeneration and Protection Corporations") assist those who are imprisoned to rehabilitate and integrate them back into society.
B. Public Benefit Status
Acquiring public benefit status is not a separate procedure under Japanese law. Rather, this issue is addressed at the initial registration stage. Nearly all not-for-profit organizations are required to demonstrate to the responsible government agency that they provide a public benefit in order to obtain legal personality. In other words, operating in the public interest is a prerequisite for becoming a legal entity under current law.
The same government ministries that permit the establishment of these organizations also exercise oversight over them. These ministries may dissolve an organization by revoking the initial authorization if they conclude that it no longer serves the public interest.
A PILP must advance the public interest through "rites, religion, charity, academic activities, arts and crafts, or [an objective] otherwise relating to the public interest and not having for its object acquisition of profit." Each ministry decides on its own which objectives qualify, in the course of determining whether to authorize particular organizations to obtain legal status. The wide scope of ministry discretion is one factor prompting NPO legal reform.
An SNC must pursue one or more of the "specified nonprofit activities" listed in a schedule to the SNC Law. Enumerated activities include:
Promotion of health, medical treatment, or welfare;
Promotion of social education;
Promotion of community development;
Promotion of science, culture, the arts, or sports;
Conservation of the environment;
Disaster relief;
Promotion of community safety;
Protection of human rights or promotion of peace;
International cooperation;
Promotion of a society with equal gender participation;
Sound nurturing of youth;
Development of information technology;
Promotion of science and technology;
Promotion of economic activities;
Development of vocational expertise or expansion of employment opportunities;
Protection of consumers; or
Administration of organizations that engage in the above activities or provision of liaison services, advice, or assistance in connection with the above activities.
The Organizations Authorized by Special Laws Arising Under Civil Code Article 34 pursue public benefit objectives, which are specified in the relevant law. Except for most Medical Corporations, the majority of these organizations enjoy tax benefits.
Public interest status in Japan may also be affected by three special designations, under which donations to an entity can be tax deductible. These designations are discussed further in Section V-B, below.
First, PILPs and certain Organizations Authorized by Special Laws Arising Under Civil Code Article 34 can seek status as Special Public Interest Promoting Corporations (SPIPCs), the largest category of organizations eligible to receive tax-deductible donations. An SPIPC must satisfy heightened requirements, including (i) the existence of appropriate management and accounting systems, (ii) internal provisions prohibiting the allocation of special benefits to directors or employees, and (iii) allocation of its resources primarily to one of the activities on a specified list (Article 217 (7) of the Enforcement Ordinance of the Income Tax Law).
Second, PILPs and certain Organizations Authorized by Special Laws Arising Under Civil Code Article 34 can seek status as Organizations Eligible for Designated Contributions. The Ministry of Finance confers this designation. Among other requirements, the funds must be devoted to urgent needs in the promotion of the public good, such as education, science, culture, and welfare services.
Finally, although SNCs are not eligible for tax-deductible contributions under either of the preceding two mechanisms, SNCs with National Tax Administration Approval can receive tax-deductible contributions under the SNC Law. For an SNC to be eligible for the special tax benefits, the Tax Administration must find that the organization contributes to the promotion of public benefit (SNC Law, article 46-2). Other criteria are set forth in the Special Tax Measures Law. Only a small number of SNCs qualify for these tax benefits.
IV. Specific Questions Regarding Local Law
A. Inurement
Relevant legislation does not generally preclude the possibility of inurement to private individuals or for-profit entities. However, such a requirement is implicit in the requirement that the organizations (other than Intermediary Legal Persons) operate in the public interest.
An SNC "must not engage in operations for the interests of a specific individual or corporation or other organization" (Article 3(1), Special Nonprofit Corporation Promotion Law). In addition, an SNC is prohibited from providing remuneration to more than one-third of its officers (SNC Law, articles 2(2)(i)(b)). Those few SNCs with tax-deductible status are subject to more stringent rules against inurement.
Further, organizations that qualify for designation as SPIPCs are subject to regulations on benefits provided to directors and employees, under Article 217 of the Enforcement Ordinance of the Income Tax Law.
B. Proprietary Interest
A donor or founder cannot retain a proprietary interest in donated assets during the life of an organization.
C. Dissolution
The Civil Code states that the assets of legal entities that have been dissolved are “to revert to the persons designated in the Articles of Incorporation or the Act of the Endowment” (The Civil Code, Article 72). If the Articles of Incorporation or the Act of Endowment fail to specify how assets are to be disposed of, “the directors may, with the permission of the competent authorities, dispose of the assets for objectives similar to those of the dissolved legal entity” (The Civil Code, Article 72). There is a practical limitation, however: during the registration process regulatory authorities generally require that the governing documents of a PILP contain the non-distribution constraint on assets remaining upon dissolution.
Upon dissolution of an SNC, remaining assets are distributed pursuant to the organization’s statutes, providing that the recipient is another SNC or is one of the following entities:
the national government or a local public organization;
a corporation established under the provisions of Article 34 of the Civil Code;
a school corporation established under the Private Schools Law;
a social welfare organization established under the Social Welfare Services Law; or
a relief and rehabilitation enterprise created under the Relief and Rehabilitation Enterprise Law (SNC Law, Article 11(3)).
If an SNC has not identified an eligible recipient organization, its assets may be transferred to the national government or a local public organization (The Law to Promote Specified Nonprofit Activities, Article 32). Any assets that are not otherwise distributed pursuant to these procedures are assigned to the national Treasury. (Id.)
Organizations Authorized by Special Laws Arising Under Civil Code Article 34 are generally governed by legislation requiring them to assign remaining assets for public benefit purposes or to the government. Schools organized under the Private Schools Law must assign their remaining assets to other schools or those that are engaged in education (The Private Schools Law, Article 30.3). Social welfare organizations are similarly required to assign their remaining assets to other social welfare organizations or those that will apply them to further social welfare (The Social Welfare Law, Article 31.3). Relief and Rehabilitation organizations are required to assign their remaining assets to relief and rehabilitation organizations engaged in regular protection under the Article 45 or relief and rehabilitation organizations engaged in temporary protection or to provision of grants for communication activities under article 47-2 (The Relief and Rehabilitation Law, Article 11.3).
Mutual benefit organizations established under the 2001 Intermediary Legal Persons Law are able to distribute their residual assets to its members.
D. Activities
1. General
An NPO in Japan is generally permitted to engage in all lawful activities specified in its charter.
If a PILP wishes to change the scope of its activities, and the new activities would fall under the jurisdiction of another ministry, then the organization must gain authorization from the new ministry as if creating an entirely new organization.
This requirement is not applicable to SNCs, as they are subject to the jurisdiction of only one agency, which generally allows changes of purposes within those specified by law. In addition, an SNC "may engage in operations other than those relating to [the nonprofit activities listed in the law] to the extent that said other operations do not interfere with [the nonprofit activities listed in the law]" (SNC Law, article 5(1)). A geographic limitation, however, does apply. If an SNC regulated by one prefecture (or the equivalent) begins operations elsewhere, then regulatory authority over it will shift, and the agency gaining jurisdiction must approve the alterations to the SNC's articles of incorporation (SNC law, article 26(1)).
2. Public Benefit Activities
As noted in Section III-B, above, each ministry decides what constitutes a “public benefit” with regard to applications it receives for PILP status. An SNC must pursue one or more of the 17 public benefit activities listed in a schedule to the law. Most Organizations Authorized by Special Laws Arising Under Civil Code Article 34--including Social Welfare Organizations, Educational Organizations, and Religious Corporations--pursue public benefit objectives and enjoy tax benefits. The majority of Medical Corporations, however, are not accorded tax benefits.
Three designations allow organizations to receive tax-deductible contributions: SPIPCs, Organizations Eligible for "Designated Contributions," and SNCs with National Tax Administration Approval. All three designations impose additional public benefit requirements, as discussed in Section III-B, above.
3. Economic Activities
All forms of NPOs are allowed to engage in profit-generating activities to the extent they do not interfere with the primary not-for-profit objectives of the organization.
If an SNC gains revenue from economic activities, the revenue must be devoted to the nonprofit activities listed in the SNC Law (SNC Law, article 5(1)).
E. Political Activities
An SNC must not undertake activities "for the purpose of promoting, supporting, or opposing a political principle" or "for the purpose of recommending, supporting, or opposing a candidate ... for a public office ... or a political party" (SNC Law, Article 2(2)(ii)).
Otherwise, an NPO is allowed to engage in political activities and to support political candidates and parties, so long as such activities are a means to realize the organization’s objectives. ("The standards for permitting establishment of and guidance and supervision of nonprofit organizations," Cabinet Decision, 1996.)
F. Discrimination
Article 14 of the Japanese Constitution of 1946 states that there “shall be no discrimination in political, economic or social relations because of race, creed, sex, social status or family origin” (Japanese Constitution of 1946, Article 14). Article 3 of the Fundamental Law of Education states: “The people shall all be given equal opportunities of receiving education according to their ability, and they shall not be subject to educational discrimination on account of race, creed, sex, social status, economic position, or family origin.”
G. Control of Organization
In general, no restrictions exist on the control of NPOs by other organizations, individuals, or government agencies. Nothing in Japanese law prevents a Japanese NPO from being controlled by another organization. A Japanese NPO might be established (but not owned) by a for-profit entity, which would continue to control it; this situation would generate additional IRS scrutiny. A Japanese NPO likewise could be controlled but not owned by an American grantor charity; this situation would have to be disclosed in the affidavit.
V. Tax Laws
In order to receive certain tax benefits, organizations must go through a separate application process with the tax authorities and satisfy particular criteria.
A. Tax Exemption
In general, grants from foreign organizations to Japanese NPOs are exempt from corporate income tax, simply because only income from profit-making activities is subject to taxation. This exemption is automatic and nondiscretionary.
PILPs
PILPs must pay corporate income tax on revenue from 33 specified for-profit activities (See Articles 4 and 7 of the Corporation Tax Law). For the 33 activities, PILPs are taxed at a rate of 22 percent. In addition, PILPs are permitted to deduct up to 20 percent of income from profit-making activities if the funds are used to expand their core public interest activities. Passive income, such as interest, dividends, and investment income, is not subject to income tax if the income is used for the advancement of the organization’s not-for-profit activities. PILPs may be exempt from local taxes only if their main purpose is the establishment of a museum or the pursuit of studies.
SNCs
SNCs must also pay corporate income tax on revenue from 33 specified for-profit activities. The first 8 million yen are taxed at a rate of 22 percent. Any amount above that is taxed at a rate of 30 percent (The Corporation Tax Law, Articles 4 and 7). In addition, certain SNCs are allowed to deduct up to 20 percent of income from profit-making activities if the funds are used to expand their core public interest activities.
Organizations Authorized by Special Laws Arising Under Civil Code Article 34
Social Welfare Corporations, Private School Corporations, and Relief and Rehabilitation Enterprises are generally subject to the tax benefits that apply to PILPs but with a few different rules. For example, they can deduct the greater of 50 percent or 2 million yen of income earned from profit-making activities.
Medical Corporations, by contrast, are taxed at the full corporate tax rate, except to the extent they receive medical fees as reimbursements from the social insurance system. An exception applies to “Special Medical Corporations” (tokutei iryo hojin), which the Ministry of Finance has certified as being especially in the public interest. They are taxed at 22 percent on profits and receive other minor tax benefits.
B. Contributions to Japanese NPOs by Individuals and Corporations Based in Japan
The ability to deduct contributions to Japanese NPOs depends on whether the recipient organization has received specific authorization from the appropriate tax authorities. Thus, no broad categories of NPOs are entitled to receive tax-deductible donations. One local expert states that, "There are no clear criteria for eligibility for tax-deductible contributions" (APPC Conference, p. 161).
In general, contributions are deductible if they are made to (i) “Special Public Interest Promoting Corporations" (SPIPCs), (ii) Organizations Eligible for “Designated Contributions” (shitei kifukin), or (iii) SNCs with National Tax Administration Approval.
1. “Special Public Interest Promoting Corporations” (SPIPCs)
The largest group of NPOs eligible to receive tax-deductible donations are “Special Public Interest Promoting Corporations.” SPIPCs must satisfy heightened requirements, including (i) the existence of appropriate management and accounting systems, (ii) internal provisions prohibiting the allocation of special benefits to directors or employees, and (iii) allocation of resources primarily to one of the activities in a specified list (See Article 217 (7) of the Enforcement Ordinance of the Income Tax Law).
This status, however, is effective for 2 years and renewable, requiring organizations to go through the same rigorous screening process as before.
Only certain types of organizations are eligible for SPIPC status:
PILPs: A PILP can qualify as an SPIPC.
SNCs: SNCs are not eligible for SPIPC status.
Organizations Authorized by Special Laws Arising Under Civil Code Article 34: Private School and Social Welfare Corporations are eligible for SPIPC status. Religious and Medical Corporations are not.
Contributions of individuals to SPIPCs are deductible up to 25 percent of their annual income beyond a floor of 5,000 yen. The contributions of corporations are deductible up to a ceiling (1.25 percent of income plus 0.125 percent of paid-in capital). In addition, bequests to SPIPCs are deductible from inheritance taxes.
2. Organizations Eligible to Receive “Designated Contributions”
PILPs, as well as certain Organizations Authorized by Laws Arising Under Civil Code Article 34, are eligible to seek this certification. It is conferred by the Ministry of Finance, based on numerous requirements as to how funds are to be raised and how they will be used. According to Article 78 (2)-[2] of the Income Tax Law, the contributions must be (1) raised from the public at large, and (2) used to meet urgent needs in the promotion of the public good, such as furthering education, science, culture, and welfare services. Before designating contributions as eligible for this treatment, the Ministry of Finance examines the activities to be supported, the target amount to be raised, from whom the funds will be collected, and the period during which the contributions will be raised. If the Ministry’s requirements are met, it declares that the contributions qualify as "designated contributions,” eligible for deduction.
Individuals' contributions to Organizations Eligible to Receive "Designated Contributions" are deductible up to 25 percent of their annual income beyond a floor of 5,000 yen. The contributions of corporations are deductible without limitation.
3. SNCs with National Tax Administration Approval
Provisions in the Fiscal Year 2001 Tax Reform allow SNCs to acquire tax-deductible status if they meet certain conditions. In order for contributions to be tax deductible, SNCs must apply to the National Tax Administration and satisfy a list of requirements, including demonstrating that they receive at least one-fifth of all revenues from qualifying contributions, with various limits on the amounts and sources necessary for contributions to be deemed qualifying (SNC Law, article 46-2).
Contributions of individuals to SNCs with National Tax Administration Approval are deductible up to 25 percent of their annual income beyond a floor of 5,000 yen. The contributions of corporations are deductible up to a ceiling (1.25 percent of income plus 0.125 percent of paid-in capital).
This status, however, is effective for 2 years and renewable.
As of April 2006, only 40 of the 26,395 SNCs have attained tax-deductible status.
C. Value Added Tax
The standard VAT rate in Japan is 5 percent. The relatively narrow range of nontaxable imports includes certain textbooks and certain equipment for use by the handicapped.
D. Double Tax Treaties
A double tax treaty is in effect between the United States and Japan. Provisions of the treaty might be relevant in structuring donations to Japanese organizations.
[1] This Note also generally excludes the following types of organizations: not-for-profit entities established as conventional corporations under Article 35 due to the difficulties of incorporating a PILP under Article 34; neighborhood associations; a relatively small number of public charitable trustsformed under a 1923 law; associations without legal status; and cooperatives.
[2] In April 2007, the Prime Minister established a Public Interest Corporation Commission to study and examine the draft cabinet ordinances and orders. The Commission issued a final report in June 2007 and the ordinances and orders were made public on September 7, 2007.
