The Astro Group holds its interests in the properties in Japan via a Japanese investment structure known as a Tokumei Kumiai structure, which is outlined below.
The Tokumei Kumiai (“TK”) Structure
Under Japanese commercial law a TK is not a legal entity but a contractual relationship or a series of contractual relationships between one or more investors and a TK Operator (which is a Japanese special purpose company).
In a TK arrangement the investors provide capital to a business which is conducted by a TK Operator entirely in its own name and under its sole control in accordance with the terms of a TK Agreement. The investors have no right to make any business decisions with respect to a TK Operator or the TK business, rather, there is only a contractual relationship between a TK Operator and the investors.
The investors are entitled to a proportional share (based on their equity contribution to the TK) of the profits and losses of the TK business. Depending on the terms of the TK Agreement, liability of the investors can be limited to the amount of their initial investment or the investors can be subject to additional capital calls.
The net effect of these contractual arrangements under Japanese tax law is that the investors are taxed in Japan on their share of TK income (by the TK Operator withholding Japanese tax from TK distributions to the investors) even though the business is conducted and relevant assets are held in the name of the TK Operator. A TK Operator reports the amount of profits to which the investors are entitled as a deduction in respect of its taxable income.
The Astro Group’s TK Arrangements
All of the Astro Group’s interests in properties are held through TK structures. The Responsible Entity has entered into a number of TK Agreements, each with a Japanese special purpose company (“TK Operator”). Under most of the TK Agreements, the Astro Group has contributed all of the equity in the TK and is entitled to 100% of the investor capital account of each TK and 99% of the profits and losses of the TK business. The TK Operators are entitled to the remaining 1% of the profits and losses of the TK business. Each TK’s defined business is to obtain profits from purchasing, holding and selling the properties held by the respective TK Operator in accordance with the provisions of the respective TK Agreement (each, a “TK Business”). In cases where the Astro Group contributes a share of the equity in the TK, the Astro Group is entitled to a proportional share of the profits and losses of the TK business.
The Astro Group does not own any of the equity in the TK Operators and does not have any voting rights in relation to the TK Operators or the TK Businesses, rather, the Astro Group has a contractual claim against the TK Operators under the TK Agreement.
The TK Operators are Japanese limited liability companies (Tokurei Yugengaisha or Godogaisha) established specifically for the purpose of operating the respective TK Businesses. The voting stock of the TK Operators that are Tokurei Yugengaisha is held by a Cayman Islands company, established specifically for that purpose, as nominee of Spring Investment Co., Ltd. (the “Japan Asset Manager”), and the voting stock of the Cayman Islands company is generally held by a Cayman Islands charitable trust. Whereas the voting stock of the TK Operators that are Godogaisha is generally held by a general incorporated association (Ippan Shadan Houjin). These arrangements are commonly used in Japan to assist in achieving bankruptcy remoteness as required by non-recourse loan lenders.
Each of the TK Operators has an Asset Management Agreement with the Japan Asset Manager. The asset management services are provided by the Japan Asset Manager to the TK Operators, to assist the TK Operators in conducting the TK Businesses.
In accordance with the Japanese Financial Instruments and Exchange Law (“FIEL”) real estate asset management companies in Japan must be registered and hold certain licenses to conduct various business activities. The Japan Asset Manager is registered as a financial instruments firm and is fully compliant with the FIEL in respect of its business activities, and the TK Operators are also in compliance with the FIEL.
Trust Bank(s) and Trust Beneficiary Interests
The TK Operators generally hold the beneficial interest in the properties in the form of a trust beneficiary certificate issued by a trust bank licensed in Japan, and the trust bank holds legal title to the properties. It is common practice in Japan for a TK Operator to hold its investment in property through a trust beneficiary interest (“TBI”). Certain transaction levies are substantially reduced or eliminated in the case of the acquisition of a TBI rather than the acquisition of real property.
In the case where the TK Operator holds a TBI rather than direct legal interest, the TK Operator effectively has the same economic rights and obligations as if it were the legal owner of the property the subject of the TBI.
The following diagram sets out the structure of the Astro Group’s interests in its Japanese investments and the management arrangements for the Astro Group and the Japanese investments.