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As the J-REIT market has matured, recent legislation has focused on regulating the market and providing further protection to investors through enhanced transparency. In conjunction with these efforts, the tax burden on J-REIT funds and investors has remained historically light to establish a credible system of real estate securitization and promote investment while rejuvenating the real estate market as a whole.

Taxation of Investment Corporations

Although both open-end and closed-end funds are permitted, all currently listed J-REITs are closed-end funds with corporation structures which qualify for tax deductions of distributions paid to investors provided certain requirements are met. As pay-through tax conduits, they are able to avoid nearly all double taxation of their income. The amount of the distributions made to investors must exceed 90% of the J-REITs distributable income as stipulated in Article 67-15 of the Special Taxation Measures Law to maintain this conduit status. The Investment Trusts and Investment Corporation Law (ITIC Law) also stipulates the following general requirements for deduction of distributions as expenses:

1. 1) The investment corporation is registered with the Prime Minister;
2. 2) Investment units were publicly offered at the time of establishment and the total issuance was greater than 100 million yen or investment units are owned by at least 50 individuals or solely by qualified institutional investors at the end of the business term;
3. 3) More than half of the investment units are owned domestically; and
4. 4) The business term does not exceed a calendar year.

In addition to the abovementioned requirement concerning distribution of more than 90% of the investment corporation's net income to investors, the ITIC Law also established the following requirements applicable each business term to maintain conduit status:

1. 1) The investment corporation does not conduct business outside of the management of its own assets;
2. 2) The management of its assets is entrusted to a licensed asset manager separate from the investment corporation;
3. 3) The custodianship of its assets is entrusted to an outside asset custodian;
4. 4) The investment corporation is not classified as a family corporation at the end of the relevant year;
5. 5) The investment corporation has no borrowings from entities other than qualified institutional investors; and
6. 6) The investment corporation does not hold a majority stake in equity of any other corporation.

The remainder of the investment corporation's income after distribution to investors is taxed at the normal corporate income tax rate. Capital gains from the sales of real estate, etc. are also taxed as ordinary income. 

Taxation of Investors

Individual investors in investment corporations are taxed in a similar manner to stockholders in a corporation. However, double taxation is avoided since the distributions have been deducted as an expense from the investment corporation's taxable income. Corporations receiving distributions are taxed at the normal corporate rate. Capital gains from the sale of investment units by individual investors are taxed separately.

Foreign investors in J-REITs without a presence in Japan are generally subject to the above taxation, although foreigners residing in countries with a double taxation treaty with Japan may be eligible for certain exemptions or reductions of the above taxes according to the details of each particular treaty and whether or not they qualify for such entitlements.

The preceding is a general overview of information regarding tax regulations concerning J-REITs and is provided as a service to promote understanding of the J-REIT system. Please note that, due to the ever-changing legal environment and taxation of J-REITs, Kenedix Realty Investment Corporation does not guarantee the accuracy of this information.