The Government Prevailed in a Case in Which the Land-to-Building Ratio Described in a Sales Contract Was Denied


When a company transferred land and a building together (as a lump sum amount), the government's argument that the ratio of the consideration paid for the land and the building was inappropriate was accepted, even though the payments for the land and the building were classified separately in the purchase agreement. When land and buildings are purchased or sold together, it is common practice to classify the land and building separately based on the purchase agreement, but please note that in extreme cases this may not be allowed.

The Sales Price and Consumption Tax Amount Had Been Stated in the Contract

Company A, the plaintiff, had adopted a business model in which it purchased previously-developed land with aged buildings, renovated the buildings so as to increase their value, and then sold them to customers.

As per the business model, in this case, the land and building were purchased together and sold together.

At the time of sale, Company A prepared a sales agreement with the customer, which stated the total sales price and the amount of consumption tax based on Company A's calculation method. Company A also claimed that the parties had agreed on the amount of consumption tax, etc.

The Government's Argument

Under consumption tax law, when a business transfers a taxable asset (e.g., a building) and a non-taxable asset (land) together, if the transfer price of these assets is "not reasonably classified (separated)," the overall transfer price is divided proportionally between the market value of the land and the building.

Company A had filed a tax return in which it prorated the land and building based on the amount of consumption tax stated in the sales contract.

The Japanese government, on the other hand, carried out revision procedures, claiming that the amounts for the land and the building were not reasonably classified, and that the increase in value due to the renovation was not reflected in the building’s sale amount.

Tokyo District Court "Judges that the National Government's Disposition Was Lawful"

The Tokyo District Court ruled that when land and buildings are transferred together, "it does not mean that the amounts for the land and buildings agreed upon between the parties must always be followed.”

If we assume that "the classification of the amount of consideration agreed upon between the parties must always be followed" in the case of a combined transfer, it would be possible to unjustly reduce the amount of consumption tax paid by intentionally manipulating the ratio of land and building.

This means that even if land and building are classified (separated) in a sales contract, it may be determined that they are "not reasonably classified".

Key Points in the Case

In this case, the sales contract prepared between Company A and its customer included the amount of consumption tax based on the method calculated by Company A, and it can be said that the parties had agreed on the amount of consumption tax.

However, the Tokyo District Court held that even an agreed amount of consideration does not always have to be followed in the case of a combined transfer of both assets subject to consumption tax and assets exempt from consumption tax, such as land and buildings.

The court concluded that the "when not reasonably classified" provision could be applied.

Another important point is that the "when not reasonably classified" rule requires consideration of circumstances such as whether the ratio of the building as a taxable asset is understated compared to the combined intrinsic value of the land and building, or the ratio of the amount of consideration paid when the building was purchased.

Dealing with Invoices for Non-Refundable Security Deposits


In the field of real estate leasing, a security deposit equivalent to several months' rent is sometimes paid at the time of contract. Under the invoice system, an invoice must be delivered and preserved when it is determined that the security deposit will not be returned to the lessee (tenant) after the contract is terminated.

When it is Confirmed that a Security Deposit Will Not be Refunded, a Taxable ‘Purchase’ Recorded

With regard to security deposits paid by tenants at the time of entering into lease contracts for offices, etc., such deposits that are returned when the lease contract, etc. terminates are not subject to consumption tax, while security deposits that are not returned to the tenant (i.e., are amortized) are subject to consumption tax.

The timing of the lessor's taxable ‘sale’ and the lessee’s taxable ‘purchase’ of a non-refundable security deposit are both sides’ taxable period(s) during which {it is determined that} the deposit is not to be returned.

In real estate lease contracts, the return of the security deposit paid by the tenant is sometimes stipulated as, “The amortized amount will be deducted at the end of the contract”.

If the contract stipulates from the start that a portion of the security deposit will not be refunded, the entire amount of the non-refundable security deposit is recorded as a taxable ‘sale’ of the lessor, and a taxable ‘purchase’ of the lessee in a lump sum in the taxable period when the contract is executed.

※The following is an image.

Monthly rent 500,000 yen (plus 10% consumption tax)
Security deposit 6 million yen
(= 12 months of monthly rent)
Usage Office
Amortization Amount equivalent to 10% of the security deposit
(10% consumption tax not included)
Upon termination of this agreement, the lessor shall deduct the above amortized amount before returning the security deposit to the lessee (tenant).

Dealing with an Invoice Required at Time of Contract

Currently, it is not common for the lessor to provide the lessee with a receipt for the amount of the non-refundable deposit at the time of signing the contract when the  lessor receives the full amount of the deposit from the lessee. It may be said that it is common in practice for a lessor to only issue a receipt for the full amount of the security deposit.

However, under the invoice system, the lessor, as the invoice-issuing entity, is obligated upon the request of the lessee to deliver an invoice for the non-refunded portion of the security deposit, at amortization of compensation.

Also, in order for the lessee to apply the purchase tax credit to the amount of the security deposit which isn’t refunded to them, it’s necessary for him/her to receive and preserve an invoice from the lessor.

If the case is like the previous example, the time when the contract is entered into is the time when the obligation to deliver an invoice arises.

Therefore, at the time the contract is entered into, the lessor is expected to take one of the following measures with respect to the amount of the security deposit that is not returned: "delivery of a receipt, etc., stating the lessor’s registration number and other items on the invoice" or "delivery of a contract with additional information on the invoice, including the lessor’s registration number”.

It appears that not many organizations in the real estate field have been informed about the invoicing for non-refunded deposits, so it is important for all businesses - both lessors and lessees - to be aware that invoices for non-refundable deposits must be issued at the time a contract is entered into, etc., and be prepared for the start of the new system.

Preparations Before Receiving a Loan


No matter how often your company applies for loans, it will be difficult to obtain a loan if you are in an industry that is not covered by the bank's loan policy, or if the bank suspects that your company is linked to anti-social forces. After applying for a loan, the bank will conduct an internal review of your application; however, you must be prepared beforehand, to avoid any suspicion from the bank.

Backgrounds of Your Corporation, Representatives, Board Members and Shareholders

There are certain points in the loan approval process that can prevent an individual or corporation applying for a loan from being considered - before the loan approval process has even begun. Those points concern the backgrounds of the company's representatives, officers, and shareholders.

So what exactly are those ‘backgrounds’?

The background of a company includes whether it is in an industry that banks can provide loans for, whether the company is involved with anti-social forces or not, and whether the company has defaulted on loans it has received in the past. If the company is in an industry to which the bank does not provide loans (this is decided by each individual bank), the company will not pass the initial screening for receiving a loan.

For example, credit guarantee associations state that businesses in agriculture, forestry, fishing, the sex industry, and finance are not eligible for credit guarantees.

Even if a type of business that is determined to be ineligible for a loan is not the business generating the most sales in the enterprise, but is rather the second-largest  division or even smaller, the enterprise may still be ineligible for a loan. For example, if a company operates a money lending business as one of its businesses, it may not be able to obtain a loan even if it does not generate much revenue from that lending business.

Even if a company is not actually engaged in a money lending business, it is possible that the company will not be able to obtain a loan simply because the business purpose listed on the corporate registration states that it is in the money lending business.

In order to obtain a bank loan, you must be careful that your company’s  industry is not considered by the bank to be ineligible for loans.

The Backgrounds of Representatives, Directors and Shareholders

The ‘backgrounds of representatives, officers, and shareholders’ means that companies that the representatives, etc. managed in the past did not default on loans to banks, have not been involved with anti-social forces, have not committed crimes in the past, etc.

If the representative(s) of the company had previously operated another company and it failed to repay a guaranteed loan which is now being paid by subrogation, or if their prior company defaulted on a proprietary loan, it will be difficult for them to obtain another loan from the bank victimized by the default, even for a newly-established company.

Some companies have a spouse or acquaintance as the firm’s representative, with the true manager being in the background. If the true manager is behind the scenes, the bank will investigate why the true manager is not the representative.

The bank may agree to a loan if the true manager of the company works for another company and cannot be the representative due to his/her relationship with that other company, but if the true manager has defaulted on loans in the past, it will be difficult for them to get another loan.

Thus, if there are problems with the background of the company, its representative(s), etc., it will be difficult to obtain a loan, even if there are no problems regarding other factors - for instance, having good financial statements. In order to receive a loan without a problem, it is important to find out what makes a bank suspicious, and eliminate any such factors.

  • Russell Bedford

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