PII-13 -- Direct investment verses custody accounts (?)

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Personal International Investor
Vol. 13
June 10, 2005

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-Feature - Direct investment verses custody accounts (?)
-From the Editor
-Yen Watch
-Job Watch
(Please scroll down below to read our disclaimer)

->Direct investment verses custody accounts (?)
(By Scott Asahina | Star Financial Management | June 10, 2005)

Over the coming weeks and months I hope to offer some valuable
insight and guidance covering a range of investment-related topics.
I will cover the subjects from a generic prospective and assume my
readers live in Japan. The subjects covered will be as followed.

1. How to choose an investment advisor
2. How to choose an investment fund
3. Risk management - How to build a balanced portfolio of funds
4. Tax deferral - Direct investment verses custody accounts (?)
5. Hedge & Futures funds! - What are Alternative Investments?
6. Not just for the rich and famous ・Investment options on a budget

As can be seen from the above list, the current article should cover
taxation-related issues with regards to investing. However, after
seeking legal advice prior to publishing the article, STAR Financial
Management has been advised not to discuss the tax
advantages/disadvantages with regards to investing through a public
platform such as this newsletter.

Click here to

Buying a Failed Company for Profit

Most people think of buying a Japanese company in order to gain
access to sales staff, customers, and other resources. However,
one resource which is significantly overlooked is that of tax
losses. While you are not supposed to buy a company purely for
its tax losses, this can be a big motivating factor in stepping
in to help a distressed business.

Last year, the government changed the tax code so that companies
could carry forward their tax losses, to apply against future
profits, from 5 years to 7 years. This change has made it viable
to pick up an operating company which has had time to go through
its boom and bust cycle (usually a minimum of 3-4 years) and yet
still have a couple of years of usable losses left. Given that
company profits tax in Japan can be as high as 50% (including
all national and local taxes), any residual tax losses in
a company you池e acquiring can have significant extra value.

When looking for a company to buy, it is really important that
you consider the tax office's position, which is that you
cannot do M&A strictly for the purpose of reducing your tax.
Therefore, your buying up long-dead shell companies with large
tax losses will probably not be accepted. Also, if there is no
obvious connection between your current business and the target
company ・then you may not be allowed to claim the losses.
However, for genuine takeovers of operating companies in like
or conceivably related industries, even if those companies have
only a few employees remaining, is generally acceptable.
For example, a real estate company might buy a software firm
because it plans to start up a systems division. Likewise,
an investment company might buy a media firm because it wants
access to research and marketing capabilities.

From what I've seen on the marketplace, companies (both YK's
and KK's) that are losing money but which have significant
(JPY50MM+) tax losses that can be carried forward more than 2-3
years, are worth about 5-10% of the tax impact that the acquirer
can gain. This means that JPY100MM of tax losses, would have
a nominal resale value of JPY5MM or so. However, since operating
companies also cost money to set up and run, it is more likely
that the bottom end price for such an entity will be around
JPY10-12MM. Compared with a tax saving of up to JPY50MM, this
acquisition is probably a reasonable bet.

The biggest problem with buying a failed or failing company is
that you really don稚 know what you池e getting. Many firms on
the market are 10-20 years old and when you dig down, you find
that the owners have tried every loan, lien, and liability
possible before going under. Instead, I suggest looking for
a source of reliable failing firms, such as less-than-5-years-old
dot.com and software ventures. Typically these are headed by
a group of young idealists who couldn稚 get the math right,
and were out most of the time selling or writing software.
Generally such companies are relatively clean and
unsophisticated, and most the problems are visible up front.

Important note: Like all tax structuring activities, you
should get the advice of a qualified accounting or taxation
firm before considering any ideas discussed here.

Terrie Lloyd
...Investor in Training/

Currency 5/30Mon 5/31Tue 6/1Wed 6/2Thu 6/3Fri
USD 108.89 109.06 109.25 109.67 109.06
GBP 199.25 199.48 199.68 199.50 199.14
EUR 136.77 136.19 134.88 134.23 134.29
CAD 87.33 87.42 87.82 88.59 88.24
HKD 14.28 14.30 14.32 14.37 14.29
SGD 65.88 65.93 65.81 65.72 65.60
AUD 84.09 83.92 83.81 83.42 83.61

(The above TTS Exchange Rates has been brought to you by the courtesy
of GoLloyds TSB)
The above rates were posted at 10:09 on Friday, June 3, 2005 and
are valid for funds received before 3:00 pm on Friday, June 3, 2005.
All funds received after 3:00 pm are remitted the following day at the
following day's exchange rates.The exchange rates provided are
intended only as a guide. The Bank reserves the right to apply a
different exchange rate if the market is particularly volatile.



The ICA presents

Speaker ・Crissman Loomis - Assistant VP, IT Dept,
Provider Management Group
Manulife Insurance Japan

Topic ・Vendors, Technology, and Japan!
RSVP required complete event details at http://www.icajapan.jp/
*Date: Thursday, June 16, 2005
*Time: 6:30 Doors open, dinner included
*Cost: 3,000 yen (members), 5,500 yen (non-members)

Open to all - Location is Foreign Correspondents' Club


Entrepreneur's Handbook Seminar

Terrie Lloyd, founder of over 12 start-up companies in
Japan will be giviing an English-language seminar and
Q&A on starting up a company in Japan. This is an ideal
opportunity to find out what is involved, and to ask
specific questions that are not normally answered in
business books. All materials is Japan-focused.

*Date: 16 July Sat 10:30 a.m.
*Location: Australian & New Zealand Chamber of Commerce in Japan
*Cost: 15,000 yen pay in advance, 20,000 yen at the door.
Email seminar@japaninc.com for details and to register



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Edited by Burritt Sabin (editors2@japaninc.com)

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