Report: Japan considers revoking ‘Shinsei tax’

Taxes on capital gains from private equity investments may be scrapped as Japan looks to stimulate investment activity and to address the credit squeeze.

Three years after Japanese regulators imposed a tax on foreign private equity firms’ capital gains from deals, the country is now reportedly planning to scrap them. The government hopes to boost investment in the country and to make up for banks’ reluctance to provide loans to Japan’s small- and medium-sized companies, according to the Asian Wall Street Journal.

It is expected the proposal will be submitted to the Japanese parliament in the coming weeks.

Limited partners in Japanese buyout and venture capital funds are currently subject to capital gains taxes of up to 40 percent. If there are no objections to the proposal, the tax will be revoked by 1 April, officials were quoted as saying.

The tax was introduced in 2005, following the turnaround and sale of Shinsei Bank by a consortium led by US private equity firms Ripplewood Holdings and JC Flowers in what is regarded as one of the most profitable private equity investments of all time. Ripplewood and Flowers raked in some ¥2.2 billion ($24 million) in advisory fees immediately after the transaction, made $2.1 billion in profits from the bank’s public float, and later earned another $2.8 billion when they sold a one-third stake in the bank.

The firms did not pay any capital gains tax on the proceeds from the sale, leading to criticism and outrage domestically. The tax that was then imposed is hence commonly dubbed as the “Shinsei tax”.

There are, however, exceptions to the proposed tax exemption – foreign investments must be more than a year old and should not make up more than 25 percent of a fund’s capital.