https://t.co/hRgQcPFGzM [Keita Kiri] Succession Planning for Owner-Operators! A Tax Professional Explains Valuation and Transfer of Company Shares, and the Effectiveness of Asset Management Companies! Nakamura Jin’s Investment Academy / Blue Mo Securities #AISummary Revised Valuation of Non-Listed Shares and Its Impact on Business Succession and Asset Management Companies 🔳 Three Methods for Business Succession Three methods were introduced for small and medium-sized enterprise owners to transfer shares to successors: inheritance, lifetime gifting, and family-member sales. Each has distinct implications for taxation and estate division, requiring selection based on family dynamics and company circumstances. 🔳 Challenges of Succession via Inheritance Inheritance cannot be timed, so if it occurs during a period of high share prices, tax liabilities may become substantial. Additionally, successors may inherit shares without adequate preparation, making inheritance less suitable for planned succession. 🔳 Lifetime Gifting Recommended for Harmonious Family Relationships When family relationships are positive, lifetime gifting is recommended as a planned method to transfer shares to successors. Under certain conditions, the business succession tax system can be utilized to reduce gift tax burdens while facilitating succession. 🔳 Gift Transfers May Lead to Estate Division Disputes If shares are gifted to a son who will manage the business while a daughter remains uninvolved, future disputes over equitable estate division may arise. If the successor’s efforts increase the company’s value, this could complicate adjustments during inheritance. 🔳 Family Member Sales as an Alternative When family disputes over future estate division are likely, selling shares directly to the successor—rather than gifting them—was proposed as an alternative. If the successor lacks sufficient funds, installment payments or establishing a new company to secure financing from financial institutions were suggested as solutions. 🔳 Two Primary Valuation Methods for Non-Listed Shares Two main methods were explained for valuing non-listed shares: the Comparable Industry Method and the Net Asset Value Method. The Comparable Industry Method calculates share price by comparing with listed companies in the same industry, while the Net Asset Value Method deducts liabilities from total assets. 🔳 Comparable Industry Method Often Results in Lower Valuations The Comparable Industry Method can significantly undervalue shares compared to the Net Asset Value Method. For example, a company valued at ¥1 billion under the Net Asset Value Method might be valued at only ¥240 million under the Comparable Industry Method. 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For example, increasing executive retirement allowances to reduce net income in the current year was used to lower share valuations in the following year. 🔳 Major Revisions to Non-Listed Share Valuation Methods Significant revisions to long-standing non-listed share valuation methods are under discussion, including potential abolition of the Comparable Industry Method. Companies that previously benefited from substantial valuation compression under the old system may face disproportionately large impacts. 🔳 New Approach May Base Valuation on Book Value Net Assets A proposed new method suggests evaluating shares by adding excess earnings power to book value net assets. For instance, even if land purchased for ¥100 million is now worth ¥500 million, its book value of ¥100 million may still serve as the valuation basis. 🔳 Some Companies May See Lower Valuations Under Reforms Revised valuation methods will not necessarily increase taxes for all companies. Firms with low-book-value assets or low profitability may actually see lower valuations than under current rules. 🔳 Large Companies May Face Significant Valuation Increases Companies with over 70 employees often have their shares undervalued relative to net assets under the current Comparable Industry Method. Transitioning to the new method could result in substantial valuation increases for such firms. 🔳 Leveraging Business Succession Tax Benefits Is Critical Even if share valuations rise, the business succession tax system can still enable tax-efficient transfer of shares to successors. However, current special provisions expire on December 31, 2027; future extensions or reforms are crucial. 🔳 Concerns Over Additional Conditions for Business Succession Tax Benefits There is concern that future reforms may introduce conditions such as wage increases, making the tax benefit less accessible depending on individual company circumstances. Some argue that business succession and wage increases should be treated as separate management issues. 🔳 Stricter Treatment of Asset Management Companies Asset management companies lacking operational substance may be evaluated based on market value net assets rather than book value, unlike operating companies. This aims to reduce tax disparities between holding assets personally versus through a corporate entity. 🔳 Reevaluation of Complex Strategies to Reduce Share PricesIt was introduced that there are methods to reduce stock valuations, such as adjusting ownership percentages in assets like stocks and real estate, or purchasing other assets using borrowed funds. However, it was suggested that valuation-reduction strategies that deviate from the intent of the system may become harder to use in the future. 🔳 Asset management companies are effective for real estate owners For landlords who own large amounts of inherited real estate and receive substantial rental income, it was noted that continuing to use an asset management company will remain advantageous. This is due to differences in tax rates between individual income and resident taxes versus corporate taxes, as well as the ability to pay salaries to family members. 🔳 Simplifying asset succession through incorporation By holding real estate under a corporate name, there is no longer a need to change ownership titles for each individual property upon inheritance; instead, succession can occur through corporate shares. Additionally, it was suggested that accumulating rental income within the corporation rather than personally can help limit the growth of personal assets. 🔳 Simpler succession over complex tax planning It was pointed out that overly complex corporate structures or stock valuation-reduction strategies risk becoming incomprehensible to the next generation. Moving forward, it was concluded that focusing on simpler succession methods—such as utilizing business succession tax systems and transferring assets early—is more important than artificially lowering asset valuations.