Ownership Structure
The Trust's interest in the properties in Japan is achieved via an investment structure ("Japanese Investments"), as follows:
The TK ('tokumei kumiai') Structure
Under Japanese commercial law a TK is not a legal entity but a contractual relationship or a series of contractual relationships between one or more investors and a TK operator.
In a TK arrangement, the investors provide capital to a business which is defined by the contractual agreement and is to be conducted by the TK operator, which carries on the TK business entirely in its own name and under its sole control in accordance with the terms of the TK agreement. The investors have no right to make any business decisions with respect to the TK business. Investors in a TK do not own any equity in the TK operator and have no voting rights in relation to a TK operator or the TK business, rather there is only a contractual relationship between a TK operator and the investors. The investors are entitled to a proportional share (based on their equity contribution to the TK) of the profits and losses of the TK business. Depending on the terms of the TK agreement, liability of the investors can be limited to the amount of their initial investment or the investors can be subject to additional capital calls.
The net effect of these contractual arrangements under Japanese tax law is that the investors are taxed in Japan on their share of TK income (by the TK operator withholding Japanese tax from TK distributions to the investors) even though the business is conducted and relevant assets are held in the name of the TK operator.
A TK operator reports the amount of profits to which the investors are entitled as a deduction in respect of its taxable income.
The Trust's TK Investment
All the Trust's interests in properties are held through TK structures. The Responsible Entity has TK Agreements with JPT Co., Ltd., JPT Scarlett Co., Ltd., JPT Direct Co., Ltd., and JPT Corporate Co., Ltd., ("TK Operators") pursuant to which, in exchange for the Trust's contribution of all of the equity in the TK, the Trust is entitled to 100% of the investor capital account of each TK and 99% of the profits and losses of the TK business. The TK Operators are entitled to the remaining 1% of the profits and losses of the TK business. Each TK's defined business is to obtain profits from purchasing, holding and selling the properties held by the respective TK Operator in accordance with the provisions of the respective TK Agreement (each, a "TK Business").
The TK Operators have a TK Asset Management Agreement with Babcock & Brown Co., Ltd. ("the Japan Manager"). The asset management services provided by the Japan Manager to the TK Operators are to assist the TK Operators to conduct the TK Businesses.
The Trust does not own any of the equity of the TK Operators and does not have any voting rights in relation to the TK Operators or the TK Businesses, rather the Trust has a contractual claim against the TK Operators.
The TK Operators are Japanese limited liability companies established specifically for the purpose of operating the respective TK Businesses. In order for the TK Operators to be bankruptcy remote, their voting stock is held by Cayman Islands companies established specifically for that purpose as nominees for Babcock & Brown Co., Ltd. and, in turn, the voting stock of the Cayman Islands companies are held by Cayman Islands charitable trusts.
Trust Bank(s) and Trust Beneficiary Interests
The TK Operators hold the beneficial interest in the properties in the TKs under a trust beneficiary certificate issued by a trust bank licensed in Japan which holds legal title to the properties. It is common practice in Japan for a TK operator to hold its investment in property through Trust Beneficiary Interests (TBIs). Certain transaction levies are substantially reduced or eliminated in the case of the acquisition of a Trust Beneficiary Interest rather than the acquisition of real property.
The TK Operator in the case where the TK Operator holds TBIs rather than direct legal interest, effectively has the same economic rights and obligations as if it were the legal owner of the property the subject of the TBI.
The Financial Instruments and Exchange Law was introduced in Japan recently and requires the Trust's TK Operators who buy and sell TBIs and the Japan Manager, to obtain certain registrations that they have not previously been required to obtain.