Money Flow: Japanese KK → U.S. LLC Updated for OBBBA 2025 — NCTI rules effective Jan 1, 2026 click for overview How money flows from a Japanese KK Kabushiki Kaisha (株式会社) — the standard Japanese corporation type, similar to a US C-Corp. to you as a US person owning shares through a US LLC Limited Liability Company — a US entity that is "disregarded" for tax purposes if single-member, meaning the IRS looks through it and taxes you directly. . Three scenarios show what changes as you cross the 50% ownership threshold that triggers CFC Controlled Foreign Corporation — a foreign company where US shareholders collectively own more than 50%. Triggers mandatory US tax reporting and potential current taxation even without distributions. status. OBBBA The One Big Beautiful Bill Act Signed into law July 4, 2025 (Public Law 119-21). The most significant overhaul of US international tax rules since the 2017 TCJA. Renamed GILTI to NCTI, eliminated QBAI, and changed FTC haircut rules. (July 4, 2025) renamed GILTI to NCTI (Net CFC Tested Income), effective for tax years beginning after Dec 31, 2025. Reminder: Learning tool only. Confirm all numbers with your CPA and zeirishi. Year 1: 33% Year 2: 66% (CFC) Year 3: 100% (Full) Year 1: Non-CFC — Tax Deferral click to learn what this means Non-CFC status: At 33% ownership, US shareholders don't collectively own more than 50%, so the company is not a CFC Controlled Foreign Corporation. Only triggered when US shareholders own >50% of the foreign company's shares by vote or value. . Tax deferral: The US won't tax the company's earnings until it actually distributes money to you. The company can reinvest profits in Japan without triggering a US tax bill. This changes dramatically when you cross the 50% threshold. Gross Japanese Profit $100,000 click for details Gross profit = Revenue minus cost of goods sold, before expenses or taxes. This $100,000 represents the KK's pre-tax earnings from property management operations in Niseko. Currency note: Actual earnings are in yen (¥). Exchange rate fluctuations can meaningfully affect your US tax calculations. ↓ Japanese Corporate Tax −$30,000 click for details Combined national corporate tax, inhabitant tax, and enterprise tax at an effective rate The actual percentage of pre-tax profit you pay after combining all tax layers. Japan's effective corporate rate for SMEs is roughly 25–34% depending on income level and municipality. of ~30% for SMEs. Why it matters later: This JP tax generates foreign tax credits Credits you can claim on your US tax return for taxes paid to foreign governments, to avoid being taxed twice on the same income. that reduce your US tax bill once you become a CFC. ↓ Retained in Japan $70,000 click for details Retained earnings = After-tax profit that stays in the company for operations, expansion, or debt repayment. At 33% (non-CFC), these earnings are deferred — the US won't tax you until you receive a distribution. Your economic share: 33% × $70,000 = $23,100. The rest belongs to the other shareholders. ↓ U.S. Federal Tax $0 click for details No US tax event. Not a CFC, so no inclusion on your return. Tax is only triggered when the company pays you a dividend A distribution of company profits to shareholders. Dividends from foreign companies are generally taxed as ordinary income (not at the lower qualified dividend rate) unless a tax treaty provides otherwise. . Filing note: Even with $0 tax, you may still owe: • FBAR (FinCEN 114)Foreign Bank Account Report — required if you have signature authority over foreign accounts totaling >$10,000 at any point in the year. Filed separately from your tax return. Penalties for non-filing: $10,000+ per account per year.
if you sign on the company's JP bank accounts • Form 8938 (FATCA)Foreign Account Tax Compliance Act form — similar to FBAR but filed with your tax return. Different thresholds. Reports foreign financial assets.
if foreign assets exceed thresholds • Form 5471 depending on your filer category ↓ Alabama State Tax $0 click for details Alabama follows federal taxable income as its starting point. No CFC, no distribution = no state tax. Top rate: 5% (vs. California's 13.3%). Alabama also allows a deduction for federal income taxes paid Most states don't let you deduct federal taxes when calculating your state tax. Alabama does. This means your effective state rate is lower than the headline 5% rate. , reducing the effective rate further. ↓ Your Economic Share $23,100 (33% × $70,000 after-tax profit) click for details Your 33% of after-tax earnings = $23,100. This money is trapped in the company — when it's eventually distributed, you'll owe US tax on it. Global tax on your share: 33% × $30,000 = $9,900 (JP corporate tax only). Effective rate: ~30%. No US tax yet. Year 2: CFC Triggered — NCTI Net CFC Tested Income — the OBBBA replacement for GILTI (Global Intangible Low-Taxed Income), effective 2026. Despite the name change, it works similarly: CFC earnings are included on the US shareholder's return. Key difference: QBAI exclusion is eliminated and FTC haircut improved to 90%. + Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations. One of the most complex IRS forms. Penalty for non-filing: $10,000 per form per year. Your CPA must be experienced with this. click to learn what changed What changed: At 66% ownership, the company is now a Controlled Foreign Corporation (CFC) A foreign corporation where "US shareholders" (each owning ≥10%) collectively own more than 50% by vote or value. Triggers Subpart F, NCTI, and extensive reporting requirements. . The US now taxes you on earnings even if no money is distributed. The main income categories: • Subpart F incomeCertain "tainted" types of income (passive income like interest, dividends, rents, royalties, and related-party transactions) earned by a CFC that are taxed currently to US shareholders. Active business income is generally NOT Subpart F.
— passive/related-party income (likely minimal here) • NCTI (Net CFC Tested Income)Formerly called GILTI. Under the OBBBA (effective 2026), §951A now taxes ALL CFC tested income — the old 10% QBAI exclusion was eliminated. The name was changed to reflect that this is no longer limited to "intangible" income.
— taxes all CFC tested income (old QBAI exclusion eliminated) OBBBA vs. old GILTI: • GILTI → NCTI; QBAI exclusion eliminated • FTC haircut: 80% → 90%; §250 deduction: 50% → 40% • Ownership timing: taxed if shares held at any time during the year Planning tool: A Section 962 election IRC §962 lets an individual CFC shareholder elect to be taxed at corporate rates (21%) on CFC inclusions instead of individual rates (up to 37%). More importantly, it unlocks deemed-paid foreign tax credits. Under OBBBA, §962 electors can credit 90% of deemed-paid foreign taxes. — taxed at 21% corporate rate (not 37% individual), and you can claim credit for JP corporate tax paid. Gross Japanese Profit $100,000 click for details Same $100,000 pre-tax profit. Only your ownership percentage changed, triggering different US tax treatment. ↓ Japanese Corporate Tax −$30,000 click for details Same ~30% rate. Your 66% share ($19,800) becomes a deemed-paid foreign tax credit Under §960, when a CFC's income is included in a US shareholder's income, the shareholder is treated as if they paid a proportional share of the foreign taxes. Under OBBBA, 90% of this credit is allowed for NCTI (improved from the old 80% GILTI haircut). . Under OBBBA, 90% is creditable (up from 80%). ↓ LLC Share of Profit (66%) $46,200 click for details Calculation: $70,000 × 66% = $46,200. This is your NCTI inclusion The amount of CFC earnings included on your US tax return under the NCTI rules. Under OBBBA, ALL tested income is captured — the old QBAI exclusion (10% return on tangible assets) was eliminated. . OBBBA: No more QBAI Qualified Business Asset Investment — the adjusted tax basis of the CFC's tangible depreciable property. Under old GILTI, a 10% return on QBAI was excluded. The OBBBA eliminated this exclusion entirely, so ALL tested income is now captured as NCTI. offset — full amount is captured. Because the LLC is disregarded A single-member LLC is "disregarded" for federal tax purposes — the IRS ignores it and taxes the owner directly. The LLC provides legal liability protection but is invisible for income tax. , this flows directly to YOUR personal return. Phantom income: You owe US tax on $46,200 even if the company pays you nothing. ↓ NCTI + §962 Calculation OBBBA See the math click to expand Step-by-step §962 election calculation (OBBBA / NCTI rules): NCTI inclusion (your 66% share) $46,200 §250 deduction (40%) was 50% −$18,480 Taxable NCTI after §250 $27,720 × Corporate tax rate (§962) × 21% Pre-credit US tax $5,821 Your share of JP corporate tax (66% × $30,000) $19,800 × §960(d) NCTI haircut (90%) was 80% × 90% Usable foreign tax credit $17,820 Credit exceeds tax ($17,820 > $5,821) $0 owed Excess credit ($17,820 − $5,821) $11,999 unused Why $0: Under OBBBA, a CFC needs to pay at least ~14% foreign tax to fully offset US NCTI tax. Japan's ~30% far exceeds this. ASK YOUR CPA The excess $11,999 credit is generally not refundable or carryable under §962. ↓ U.S. Federal Tax (w/ §962) $0 click for details $0 federal tax — §962 + Japan's high rate = sufficient FTCs. Catch: When the company eventually distributes cash, you'll owe a "second layer" of tax Under §962, the NCTI inclusion was taxed at corporate rates. When the actual cash dividend arrives, you owe the difference between your individual rate and the corporate rate already deemed paid. OBBBA also introduced a 10% haircut on taxes deemed paid on PTEP distributions. . OBBBA adds a 10% PTEP distribution haircut — only 90% of deemed-paid taxes on distributions are creditable. ASK YOUR CPA Confirm §962 makes sense given the PTEP haircut impact. ↓ Alabama State Tax −$2,310 (estimated — needs CPA confirmation) click for details Estimate: $46,200 × 5% = $2,310. Alabama starts from federal AGI Adjusted Gross Income — your total income minus certain deductions. This is the starting point for calculating Alabama state tax. How CFC/NCTI income appears in your federal AGI depends on whether you made the §962 election. . Key question: Does Alabama conform to §962? If yes, state tax could be lower. If no, full $46,200 is taxed. Alabama's federal tax deduction doesn't help here since federal tax = $0. ASK YOUR CPA State conformity to §962/NCTI is unsettled law. ↓ Net Retained Value (Your Share) ~$43,890 click for details Calculation: $46,200 − $2,310 (Alabama) = $43,890 JP corporate tax (66% × $30,000) $19,800 US federal tax (§962 + FTC) $0 Alabama state tax (est.) $2,310 Total tax on your $66K share $22,110 Effective global rate 33.5% CRITICAL This is exactly why your US CPA and JP zeirishi need to coordinate (Workstream 05). The "retain vs. distribute" decision has major tax implications that neither advisor can optimize alone. Year 3: 100% Ownership — Full NCTI Exposure click to learn what's different at full ownership What changed: At 100% ownership, all tested income flows to you. §962 + FTC mechanics are identical to Year 2. What's different: • NCTI inclusion: $70,000 (vs. $46,200 at 66%) — FTCs scale proportionally • Larger state tax bill on full $70,000 inclusion • Full control: you decide dividend policy, compensation, reinvestment • Entire $70,000 is phantom income whether or not the company pays you OBBBA Timing: You're taxed if you held CFC shares at any point during the year. Acquiring remaining shares mid-year may trigger full-year inclusion. Gross Japanese Profit $100,000 click for details Same $100,000 pre-tax profit — but at 100%, every dollar of profit and tax obligation is yours. ↓ Japanese Corporate Tax −$30,000 click for details Same ~30% rate. At 100%, the full $30,000 is your deemed-paid FTC (× 90% = $27,000 creditable). Japan's high rate is your shield: If the company were in a low-tax jurisdiction (say 10%), you'd owe significant US NCTI tax. ↓ Your NCTI Inclusion (100%) $70,000 click for details Calculation: $70,000 × 100% = $70,000 NCTI inclusion. OBBBA No QBAI offset — full tested income is captured. Phantom income at full scale: You owe tax on $70,000 even if the company retains all cash in Japan. ASK YOUR CPA How does $70K NCTI interact with your $200K passive income for brackets and NIIT Net Investment Income Tax — a 3.8% surtax on investment income for individuals with modified AGI above $200K (single) or $250K (married). Your NCTI inclusion may push you above these thresholds. ? ↓ NCTI + §962 Calculation OBBBA Full ownership math click to expand Step-by-step §962 election at 100% ownership: NCTI inclusion (100% share) $70,000 §250 deduction (40%) −$28,000 Taxable NCTI after §250 $42,000 × Corporate tax rate (§962) × 21% Pre-credit US tax $8,820 Your share of JP corporate tax (100% × $30,000) $30,000 × §960(d) NCTI haircut (90%) × 90% Usable foreign tax credit $27,000 Credit exceeds tax ($27,000 > $8,820) $0 owed Excess credit ($27,000 − $8,820) $18,180 unused Without §962: You'd owe ~$25,900 at individual rates (up to 37%) with no deemed-paid FTCs. The §962 election saves ~$25,900/year at this level. ASK YOUR CPA Confirm §250 deduction availability for §962 electors — this is debated among practitioners. ↓ U.S. Federal Tax (w/ §962) $0 click for details $0 federal tax — same as Year 2. Japan's rate > 14% threshold. OBBBA PTEP Previously Taxed Earnings and Profits — income already included on your US return via NCTI but not yet distributed. OBBBA introduced a 10% haircut on deemed-paid taxes for PTEP distributions. warning: When you take money out, the new 10% PTEP distribution haircut could create some federal liability. ASK YOUR CPA Model total tax on a $70K dividend: JP withholding (10% treaty), PTEP haircut, and §962 "second layer." ↓ Alabama State Tax −$3,500 (estimated — needs CPA confirmation) click for details Estimate: $70,000 × 5% = $3,500. Same conformity questions as Year 2. vs. California: $70,000 × 13.3% = $9,310. Alabama saves $5,810/year. ASK YOUR CPA Does Alabama conform to §962/NCTI? ↓ Net Retained Value (Your Share) ~$66,500 click for full breakdown Calculation: $70,000 − $3,500 (Alabama) = $66,500 JP corporate tax (100% × $30,000) $30,000 US federal tax (§962 + FTC) $0 Alabama state tax (est.) $3,500 Total tax on $100K gross $33,500 Effective global rate 33.5% Year-over-year comparison: Year Own% Your Share Total Tax Net Year 1 33% $33,000 $9,900 $23,100 Year 2 66% $66,000 $22,110 $43,890 Year 3 100% $100,000 $33,500 $66,500 Key insight: Effective global rate stays ~30–33.5% across ownership levels. What changes is the absolute phantom income and compliance burden. CRITICAL These numbers exclude the "second layer" tax on distributions and JP dividend withholding. True cost of extracting cash will be higher — CPA + zeirishi must model this together (Workstream 05). Learning tool only — click for disclaimers, OBBBA summary, and advisor questions