Charitable Trusts and Taxation in Japan
Takeshi Fujitani（The University of Tokyo）

Charitable trusts have been used as vehicle for private initiatives
in promoting public benefits, but in Japan its scope has been strictly
limited to grant-making-type activities. This is because the tax rule,
which grants preferencial treatments to charitable trusts, at thesame time prohibits them from accepting non-cash property, andfrom holding assets other than cash-equivalent financial instruments.
Such limitation is not applicable to the charitable trusts’ rival form
– charitable corporations. This tax rule has been criticized by thepractitioners as hindering the charitable trust’s innovative uses for
public benefit activities, such as national trusts for environmentalconservation.
This apparently unreasonable limitation by the tax law is rooted
in the ambiguity in the legal nature of charitable trusts for the tax law
purpose. Japanese tax law traditionally treats charitable trusts as“taxtransparent”, and sees trust property as if it still stays in the settlor’shand, based on the doctrine that a trust is not a legal entity, thus thetransfer of the property thereto cannot be taxable events（for thepurpose of capital gain, gift tax, etc.）. On the one hand, this admittedly
ossified legislative approach helps to keep the tax regulations forcharitable trusts rather simple and less expensive for benefactors tocomply with; on the other hand, it has allowed the tax lawmaker toavoid facing difficult tax questions otherwise concerning the integrityof tax system, such as the transfer of non-cash property to charitabletrusts（i.e., potentially escaping from the capital gain tax）, and the― 155 ―信託法研究第37号（2012）business income earned by trusts property（which must be taxable,but to whom?）.
One obvious solution to this tax ambiguity is to deem charitable
trusts as corporations for the tax purpose, which in fact has been
persuasively advocated by commentators. It would treat charitable
trusts in the same manner as charitable corporations, whose tax rules
are clear and allow more flexibilities to charitable operations. Sucha proposal appears reasonable in most dimensions, but two points
should be noted.（1）Such“deemed charitable corporation”provision
shall remove the doctrinal ambiguity and achieve the equal footing
between charitable trusts and corporations, yet it is most likely to beaccompanied by the complex tax regulations that currently apply tocharitable corporations; it might burden the traditional, simple grantmaking activities.（2）Doctrinal ambiguity might still persist under
this proposed rule concerning the tax treatments of reversion interestor the“gift over”provision in the charitable trust instrument, whichhave been recently discussed by the U.S. legal scholars as potentiallyeffective legal devices to hold charitable trustees accountable.
After all, there are some genuine legal differences between
charitable trusts and corporations, for good reasons. The tax legislativetechnique of deemed charitable corporation can solve some problems,
but it might introduce yet other difficulties. Proposals for tax reform
should be accompanied with the careful examination of their trust law
implications.

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