Acquiring and valuing unlisted (private) shares, and the tax on deemed gifts
When you acquire shares of an owner-managed company or unlisted (private) shares, the biggest trap is "how the price is set." For unlisted shares that have no market price, if you trade at a price far removed from the tax fair market value (an appropriate share price), the difference can trigger gift tax or income tax in unexpected ways. This article organizes, based on primary sources from the National Tax Agency, the valuation methods for unlisted shares (inheritance-tax valuation vs. the income-tax and corporate-tax fair market value) and the mechanism of the "deemed gift" under which gift tax falls on the buyer when shares are acquired cheaply. It is also an important point in business succession, and when an overseas buyer acquires shares from a founding family.
・The fair market value of unlisted shares changes its valuation method depending on "who acquires them and for what purpose" (the inheritance-tax valuation and the income-tax/corporate-tax fair market value are different things)
・If you acquire shares more cheaply than the fair market value, that difference is a deemed gift to the buyer and subject to gift tax
・If an individual transfers to a corporation at less than 1/2 of the fair market value, the seller faces taxation that treats the sale as made at fair market value (a deemed transfer)
The three "valuation methods" for unlisted shares (inheritance-tax valuation)
The valuation of unlisted shares used in calculating inheritance and gift tax is based on the Property Valuation Basic Guidelines, and the method changes depending on whether the acquirer is a controlling shareholder (a member of the controlling family group, etc.) or a minority shareholder[NTA No.4638 (in Japanese)].
| Valuation method | Content | Mainly used by |
|---|---|---|
| Comparable-industry method | Calculated by comparing dividends, profits, and net assets against the share prices of listed companies in the same industry (the NTA publishes share prices by industry) | Controlling shareholders (leaning toward large companies) |
| Net asset value method | The company's assets are re-examined at inheritance-tax valuation, and the "liquidation value" is calculated after deducting the corporate-tax equivalent on unrealized gains | Controlling shareholders (leaning toward small companies) |
| Dividend discount method | A simplified method that produces a lower figure based on the amount of dividends received | Minority shareholders (outside the controlling family) |
Depending on the company's size (large, medium, or small), the blending ratio of the comparable-industry method and the net asset value method is fixed. A distinctive feature of unlisted shares is that, even for shares of the same company, the valuation can vary many times over depending on the acquirer's position.
A tricky point: "inheritance-tax valuation" and the "income-tax/corporate-tax fair market value" are different
The three methods above are valuations for inheritance and gift. On the other hand, the "fair market value" for income-tax and corporate-tax purposes used in a sale (transfer) follows a different concept (such as Income Tax Basic Circular 59-6), differing in matters like the timing of judging a controlling shareholder and the calculation of the net asset value (not deducting the corporate-tax equivalent, etc.)[NTA Income Tax Basic Circular 59-6 (in Japanese)]. Because "the inheritance-tax valuation ≠ the appropriate price for a sale," it is important to use the fair market value that fits the purpose of the transaction.
The biggest trap: buying cheaply triggers a "deemed gift" taxed on the buyer
If an individual acquires property (including unlisted shares) at a markedly low price compared with the fair market value, the difference between the fair market value and the amount paid is deemed a gift received from the transferor, and gift tax falls on the buyer[NTA No.4423 (in Japanese)]. For example, if you acquire private shares with a fair market value of ¥100M from the founding family for ¥20M, the ¥80M difference may be taxed as a deemed gift to the buyer. Pricing such as "cheap because we know each other" or "at par value" can generate a large gift tax.
・Individual → individual, transferred below fair market value: the difference is a deemed gift to the buyer (gift tax)
・Individual → corporation, transferred at less than 1/2 of fair market value: the seller is deemed to have sold at fair market value and faces capital gains taxation (a deemed transfer)[NTA No.3162 (in Japanese)]. Furthermore, on the buying corporation's side, the difference from the fair market value can become a gain on receipt
Moving shares without properly calculating the fair market value creates unexpected taxation for both the seller and the buyer.
Tax after acquisition and at the time of sale
If you sell unlisted shares at a profit, an individual is taxed at 20.315% under separate self-assessment taxation (income tax and reconstruction tax 15.315% + residence tax 5%) (non-residents are not subject to residence tax, so 15.315%). Unlike listed shares, note that the treatment differs — for example, a loss on the transfer of unlisted shares cannot be offset against gains or dividends on listed shares[NTA No.1463 (in Japanese)]. Withholding when receiving dividends, and taxation where non-residents or foreign corporations are involved, add international considerations as well.
Practice in overseas buyers and business succession
In business succession from a founding family, or when an overseas investor or fund acquires shares of an unlisted owner-managed company, ①calculating the appropriate fair market value (third-party valuation), ②avoiding a deemed gift or deemed transfer, and ③taxation of non-residents and foreign corporations (shares similar to a business transfer, and real-estate-heavy shares) overlap. For the taxation of an M&A that acquires the whole company, see M&A of Japanese companies and the taxation of non-residents; for the valuation and basic deduction of inheritance tax, see The basic deduction and tax-saving measures for inheritance tax; and for inheritance involving overseas relatives, see Foreigners and inheritance tax. Because share valuation is prone to differing judgments and the amounts are large, it is safest to obtain a valuation from a tax accountant or certified public accountant before the transaction.
Summary
FAQ
Is it okay to acquire private shares at par or a cheap price?
It is risky. If you acquire unlisted shares at a markedly low price compared with the fair market value, the difference from the fair market value can be taxed on the buyer as a "deemed gift." If you acquire shares with a fair market value of ¥100M for ¥20M, the ¥80M difference can become taxable. Before the transaction, it is important to confirm the appropriate fair market value (a third-party share valuation).
How is the price of unlisted shares determined?
For inheritance and gift, based on the Property Valuation Basic Guidelines, the comparable-industry method, the net asset value method, and the dividend discount method are used differently depending on whether the acquirer is a controlling shareholder (a member of the controlling family group, etc.) or a minority shareholder. Even for shares of the same company, the valuation varies greatly with your position. Because the income-tax and corporate-tax fair market value used in a sale is calculated on a different concept, a valuation that fits the purpose is required.
What should I watch out for when an individual sells shares they hold to their own company (a corporation)?
If an individual transfers shares to a corporation at less than one-half of the fair market value, the seller is "deemed to have sold at fair market value" and faces capital gains taxation (a deemed transfer). Furthermore, on the buying corporation's side, the difference from the fair market value can be taxed as a gain on receipt. Setting a price that ignores the fair market value creates unexpected tax burdens for both the seller and the buyer.
What is the tax rate if I sell unlisted shares at a profit?
For an individual, it is 20.315% under separate self-assessment taxation (income tax and special reconstruction income tax 15.315% + residence tax 5%). Non-residents are not subject to residence tax, so 15.315%. Note also that, unlike listed shares, a loss on the transfer of unlisted shares cannot be offset against gains or dividends on listed shares, and the treatment differs.
Reference links (sources)
This article is based on the following official materials (neutral, primary sources).
- National Tax Agency — Tax Answer No.4638 Valuation of shares with no market price (in Japanese)
- National Tax Agency — Tax Answer No.4423 When you acquire property at a markedly low price (deemed gift) (in Japanese)
- National Tax Agency — Tax Answer No.3162 Outline of capital gains (deemed transfer) (in Japanese)
- National Tax Agency — Tax Answer No.1463 Taxation when transferring shares, etc. (in Japanese)
* This article is general information, not tax advice. The fair market value of unlisted shares is highly case-specific and judgments can differ, and the rules are also revised. For specific transactions and valuations, please confirm with a professional such as a tax accountant or certified public accountant.