Policy Summary
Japan's FY2026 Tax Reform Outline (released December 26, 2025) introduces the most significant overhaul since 2009 of the tax framework for foreign investors investing through Japanese Investment Limited Partnerships (LPSs).
Background
Against the backdrop of Japan's efforts to promote startup investment and advance the "Tokyo as an International Financial Center" initiative, overseas investors are increasingly looking to invest in Japan as limited partners (LPs) in funds managed by Japanese general partners (GPs). Under current tax law, when a non-resident individual or foreign corporation (a foreign LP) invests in Japanese assets through an LPS managed by a Japanese GP, the foreign LP is, as a general rule, deemed to have a permanent establishment (PE) in Japan. As a result, income attributable to that PE — including dividends, interest, real estate income, and capital gains — may be subject to Japanese income tax or corporate tax.
The FY2009 tax reform introduced a special exemption allowing foreign LPs satisfying certain conditions to avoid PE taxation in Japan. However, the six requirements were criticized as overly strict, particularly the 25% ownership cap and "no other PE income" rule, which acted as significant barriers for foreign investors making co-investments or investing in multiple Japanese funds simultaneously.
Four Core Changes
① Ownership threshold raised from 25% to 50%
The LP's interest in partnership assets may now be up to "less than 50%" (previously "less than 25%"). The higher threshold is conditioned upon establishing an advisory committee (Advisory Board) within the partnership composed of limited partners. This meaningfully expands the range of investments — including co-investments and concentrated positions — that can benefit from the exemption.
② LP governance activities no longer constitute business execution
An LP's approval of conflict-of-interest transactions by the GP will no longer be treated as business execution, removing a significant practical friction and allowing foreign LPs to engage in customary governance activities without triggering PE risk.
③ Restriction on other PE income abolished
The requirement that the LP must not have other PE-attributable income in Japan has been abolished. Foreign LPs are no longer prevented from simultaneously investing in other Japanese funds or maintaining operating branches in Japan while relying on the PE special exemption for a given fund investment.
④ Filing procedure adjustments
Consequential amendments will be made to the form and content of the exemption application and related filings, in line with the substantive reforms.
