For a foreign-owned subsidiary in Japan, the first dividend usually comes at a good moment. After several years of start-up losses, the business has turned profitable, and group treasury would like to start bringing cash home. The natural approach is to take the year’s net income from the reporting package and apply the group’s payout ratio.

Under Japanese law, that approach can produce an unlawful dividend — one the parent may have to pay back, and for which the directors of the Japanese entity can be held personally liable. This article explains why, drawing on a recent case involving a listed Japanese company, and sets out what a parent-company CFO should check before approving the first distribution from Japan.

Chapter 1: A Recent Case Involving a Listed, Audited Company

What happened

In November 2024, Chikaranomoto Holdings — the company behind the Ippudo ramen chain — declared an interim dividend of ¥9 per share, roughly ¥270 million in total, and paid it in December. It also began a share buyback the same month. Its external auditor then pointed out that both the dividend and the buyback exceeded the company’s distributable amount under the Companies Act, and the company disclosed the breach on December 30, 2024 (disclosure, Japanese). A third-party committee was appointed and published its findings and remedial measures in February 2025 (report summary, Japanese).

According to the disclosure, the company was aware that its standalone retained earnings were declining and had arranged a dividend from a subsidiary beforehand to increase its distributable amount. It was not enough.

The lesson: the test applies to the paying entity, on its own accounts

The case illustrates a point that matters for any group with a Japanese subsidiary: the distributable amount is calculated for the entity paying the dividend, on its own standalone statutory accounts. How strong the group looks on a consolidated basis is irrelevant. If the paying entity’s own balance sheet does not support the distribution, the dividend cannot lawfully be paid.

Chapter 2: Why the First Dividend Is the Risky One

Companies that pay a dividend every year rarely get the calculation wrong. The process is part of the annual close, last year’s workings are rolled forward, and the auditor reviews the same schedule each year.

The risk sits with the company that has had accumulated losses and is paying for the first time. For foreign-owned subsidiaries, the pattern is familiar: losses during the build-up phase, a turn to profit, and a request from headquarters to begin distributions. There is no established procedure, the local team may never have calculated a distributable amount, and the amount and timing expected by headquarters are often fixed before anyone in Japan has checked whether they work.

Chapter 3: Pitfall One — Using the Group Reporting Numbers

The statutory accounts must be prepared under Japanese GAAP

Many Japanese subsidiaries keep their day-to-day books under US GAAP or IFRS for group reporting, and convert to Japanese GAAP only at year-end to prepare the statutory financial statements. The first common error is to calculate the dividend capacity from the US GAAP or IFRS figures, simply because those are the numbers on hand.

The Companies Act calculation is based on the standalone statutory accounts prepared under Japanese accounting standards. Whatever retained earnings figure appears in the group reporting package, it is not the number that determines how much can be paid.

The GAAP differences accumulate in retained earnings

Differences between group GAAP and Japanese GAAP are not limited to the current year’s profit; they build up in retained earnings from the date of incorporation. Whether impairment losses can be reversed, how leases are accounted for, the timing of revenue and provisions, and deferred tax are individually modest differences, but over several years they can move the distributable amount materially in either direction.

The problem is most acute for mid-year dividends. A company that converts to Japanese GAAP only at year-end has nothing but group GAAP figures available when a mid-year distribution is discussed. The calculation has to go back to the last Japanese GAAP year-end balance sheet.

Chapter 4: Pitfall Two — Distributing This Year’s Profit

Japan has no “nimble dividend”

The second error is to size the dividend by reference to the year’s net income rather than the retained earnings on the balance sheet. Group dividend policies are often framed as a percentage of net income, so the request to Japan tends to arrive as “distribute this year’s profit.”

For a US-based CFO, this instinct is understandable. Delaware law, for example, permits a corporation with no surplus to pay dividends out of net profits for the current or preceding fiscal year — the so-called nimble dividend. Japan has no equivalent. Its approach is closer in spirit to the UK’s requirement that realized losses be made good before profits can be distributed: until accumulated losses have been eliminated, current-year profit does not create capacity to pay.

A worked example

Consider a Japanese subsidiary that closed last year with accumulated losses of ¥500 million and earns net income of ¥300 million this year. At the end of this year, it still has accumulated losses of ¥200 million. Unless it has other distributable reserves, such as capital surplus, its distributable amount is zero, and the full ¥300 million — the amount headquarters may have penciled in — would be an unlawful dividend.

Returning to profit and being able to pay a dividend are two different things.

Mid-year dividends are based on last year’s balance sheet

A Japanese company with a board of directors may, if its articles permit, pay one interim dividend per year by board resolution. Many foreign-owned subsidiaries without a board can declare a dividend by shareholder resolution at any time, often by a written resolution signed by the parent. In either case, the cap is derived from the most recent approved year-end balance sheet, adjusted for certain movements since then. Profit earned during the current year counts only if the company prepares and approves interim financial statements for that purpose.

Further checks after recovering from losses

A company that has only just recovered from accumulated losses should also confirm the following. No dividend can be paid if net assets are below ¥3 million, regardless of the distributable amount calculation. Where retained earnings remain negative but there is capital surplus, a distribution out of capital surplus may be an option. And where a dividend is paid outside the annual shareholders’ meeting that approves the year-end accounts — a mid-year dividend, for example — and the company ends that financial year with a deficit, the executives involved can be required to make good the shortfall, up to the amount distributed, unless they can show they exercised due care. A mid-year dividend paid when the second-half outlook is uncertain carries that exposure.

Chapter 5: Who Is Liable When It Goes Wrong

When a dividend exceeds the distributable amount, the Companies Act makes the shareholders who received it and the directors responsible for it jointly and severally liable to pay the amount back to the company. Directors can avoid liability only by demonstrating that they were not negligent in performing their duties.

In the listed company case, the company announced that it would not seek repayment from its shareholders — a practical decision when there are thousands of them. For a wholly owned subsidiary, the recipient is the parent itself. The question of whether the parent returns the cash or the directors bear the liability becomes a matter between headquarters and the Japanese board. Since those directors are frequently senior executives of the parent, this is rarely an abstract point for the people reading the board minutes.

Chapter 6: Withholding Tax — File the Treaty Form Before Payment

20.42% unless the treaty form is filed in advance

The second item that tends to be missed in a first dividend is the tax treaty application. Dividends paid by a Japanese company to a non-resident parent are subject to withholding tax at the domestic rate of 20.42%. If the parent is resident in a country that has a tax treaty with Japan, that rate can be reduced, or eliminated, depending on the treaty and the shareholding.

The reduction is not automatic. The treaty application form must be filed with the tax office through the Japanese subsidiary, as payer, by the day before the dividend is paid. Where the treaty contains a limitation on benefits article, an additional attachment and a certificate of residence from the parent’s tax authority are required, and obtaining the certificate can take weeks. The dividend timetable should therefore be built backwards from the treaty filing, not just from the board or shareholder resolution date.

If the form is not filed

If the dividend is paid without the form, tax is withheld at 20.42% and the parent must apply for a refund afterwards. The refund is generally available, but the process takes time, and until it is completed the cash sits with the Japanese tax authority rather than with group treasury. Because dividends are typically among the largest single payments a subsidiary makes, the amount involved is significant.

Conclusion

A Japanese subsidiary that pays a dividend every year is unlikely to get the calculation wrong. The risk is concentrated in the first distribution after a period of accumulated losses.

The two common errors are calculating capacity from the group reporting numbers rather than the Japanese GAAP statutory accounts, and sizing the dividend by reference to the year’s net income rather than the balance sheet. The distributable amount is determined by the standalone Japanese GAAP balance sheet of the paying entity. Where the parent is resident in a treaty country, the treaty form needs to be filed before the payment date.

Perspective as a Certified Public Accountant

The errors described here share a common root: looking at the wrong number. Consolidated or standalone, group GAAP or Japanese GAAP, profit and loss or balance sheet. None of the calculations is difficult once the right figure is in front of you.

Headquarters will naturally think about dividends in terms of net income under its own accounting framework. That figure and the amount a Japanese company may lawfully distribute do not always match. Explaining the difference to headquarters, and proposing a lawful amount and a realistic timetable, is one of the more valuable things a Japanese finance function can do for its parent.

Planning a Dividend from Your Japan Entity?

If your Japanese subsidiary is preparing its first distribution, or you would like the distributable amount and treaty filing reviewed before the payment date, we would be glad to help.