Reductions in Amount of Stated Capital Overview

Advantages of Reducing Stated Capital

The following are the main reasons why judicial scriveners are requested by Kabushiki-Kaisha (Join-stock companies) to proceed the reduction of capital.

(i) To reduce stated capital to 100 million yen or less in order to receive preferential tax treatment

Businesses with stated capital of 100 million yen or less as of the end of the fiscal year are exempt from the obligation to pay size-based standard taxation and receive various other preferential tax treatment*. Thus, a company that has received a large number of investments during the current fiscal year and its capital has exceeded 100 million yen request a judicial scrivener to prepare the procedures for capital reduction about two months prior to the end of the fiscal year.
*Please contact a certified public accountant or tax accountant for specific details on how much of an explanatory merit there is.
Note: Since the procedure for capital reduction takes at least one month, it is often too late to start preparations just before the end of the fiscal year.

(ii) To cover the deficiency

If the amount of deficit (i.e., negative retained earnings) becomes too high, it may has negative impact on screening process of financial institution when receiving loans or may lose shareholder’s trust in the company. Therefore, by reducing the amount of capital and increasing other capital surplus, and then transferring from there to other retained earning, it is possible to quickly make up the deficit without waiting for future income to accrue.
Note: It is not feasible to transfer directly from capital to other retained earnings.
A company shall 1. pass the resolution of transferring capital to other capital surplus first, then 2. pass the resolution of transferring other capital surplus to other retained earning.

(iii) To pool dividend resources

In order for a company to deliver dividends to shareholders or to repurchase shares from shareholders by an agreement, it is necessary to have enough “Distributable Amount”. Please refer here for details.
Such distributable amount can be increased by reducing the amount of capital and transferring it to retained earnings.

(iv) Avoid becoming a Large Company

A company whose stated capital in the balance sheet as of the end of its Most Recent Business Year is 500 million yen or more (or whose liabilities are 20 billion yen or more) becomes a Large Company under the Companies Act. A Large Company is obliged to establish a Board of Auditors or a Committee, and an Accounting Auditor. Also, it shall publish a Profit and Loss Statement in addition to the obligation to publish a Balance Sheet after the ordinary general meeting of shareholders. Thus, most companies reduce the amount of capital to avoid becoming a Large Company before the ending of fiscal year, unless it intentionally wants to become such Large Company.

What can be done to keep the amount of capital below 100 million or 500 million yen?

The main timing for an increase in capital is as follows.

(a) A the time of incorporation when the amount of stated capital is determined.　
(b) When a company issues shares for subscription and receives investment.
(c) When new shares are issued upon exercise of Share Options .

In this regard, the amount of capital contributed does not necessarily have to be fully recorded as stated capital. By stipulating the amount in advance in the Articles of Incorporation (at the time of incorporation) or when determining the subscription requirements (subscription shares and subscription Share Options), it is possible to record 50% of the said amount as Capital Reserves.
This can reduce the amount of capital and postpone the procedures for capital reduction.

For your information:
The registration tax is calculated by multiplying the amount of capital by 0.07 (amount of Stated Capital x 0.07). In the above example, the registration tax for a stated capital of 100 million yen is 700,000 yen, while for a stated capital of 5 million yen, the tax reduces up to 350,000 yen. As consequence, it is better to keep the amount of capital as low as possible to save on taxes.
*The amount of capital may be a requirement for visas and business permits, so please consult with an administrative scrivener before considering about reducing the stated capital.

MK @ 07/28/2022