📖 Approx. 11 min read
An increasing number of medical corporation directors and clinic presidents are considering transitioning to a non-proprietary medical corporation to ensure future business succession and stabilize organizational operations. A non-proprietary medical corporation is one where the property rights do not belong to the members (shareholders), a system that further clarifies the non-profit and public nature of medical corporations. This article explains the merits and demerits to consider when transitioning to a non-proprietary medical corporation, tax considerations, and the specific steps for transition, as explained by experts in medical M&A and business succession.
What is Transitioning to a Non-Proprietary Medical Corporation?
Transitioning to a non-proprietary medical corporation refers to the procedure of stipulating in the articles of incorporation that upon dissolution of the medical corporation, any remaining assets will not be distributed to the members (shareholders) but will revert to the national government, local public bodies, or other medical corporations. Due to the revision of the Medical Care Act in 2007, newly established medical corporations are, in principle, non-proprietary medical corporations. For existing proprietary medical corporations to transition to a non-proprietary medical corporation, certain procedures such as amending the articles of incorporation and obtaining approval from the competent authority are required.
This transition can be an effective means to further enhance the non-profit and public nature of medical institutions and to facilitate smooth business succession. In particular, for medical corporations struggling with succession issues or those considering future M&A, transitioning to a non-proprietary medical corporation can be an important option to enhance organizational sustainability. It is essential to fully understand the advantages and disadvantages and proceed cautiously in collaboration with experts.
Advantages of Transitioning to a Non-Proprietary Medical Corporation
Transitioning to a non-proprietary medical corporation offers several significant advantages. These contribute to the stabilization of organizational operations, smoother business succession, and improved social credibility.
1. Smoother Business Succession and Reduced Burden on Successors
In proprietary medical corporations, the members’ (shareholders’) ownership interests are subject to inheritance, which can lead to inheritance tax issues for successors and challenges in securing funds for tax payment. Furthermore, if there are multiple heirs, there is a risk of disputes over the division and valuation of ownership interests. Transitioning to a non-proprietary medical corporation eliminates inheritance tax and ownership interest valuation issues, as property rights do not belong to the members, significantly reducing the financial and mental burden on successors. This is expected to lead to a smoother business succession process.
2. Clarification of Organizational Non-Profit and Public Nature, and Enhanced Social Credibility
The non-proprietary medical corporation system clarifies the inherent purpose of medical corporations: the public role of “providing medical care.” By ensuring that property rights do not belong to the members, it demonstrates that the organization prioritizes contributing to community healthcare over profit-making. This can positively impact trust from patients and the local community. Additionally, having a clear non-profit status can be advantageous when applying for loans from financial institutions or for subsidies and grants from government bodies.
3. Improved Sustainability of Medical Corporations
In the case of proprietary medical corporations, dissolution or transfer of ownership interests may be considered due to the aging of members or the absence of successors. However, it is not uncommon to find no buyers for the ownership interests or to fail to reach an agreement on the transfer price. By transitioning to a non-proprietary medical corporation, perpetual operation as an organization becomes possible, less influenced by the personal circumstances of its members. This can also facilitate decision-making and lead to smoother collaboration when considering future M&A (such as mergers or business transfers of medical corporations).
4. Benefits of Transitioning from a Fund Contribution Type
There are two types of non-proprietary medical corporations: “fund contribution type,” where members contribute funds that the corporation is obligated to repay, and “non-fund contribution type,” which has no repayment obligation and offers greater operational flexibility. In some cases, the repayment of funds may not be necessary during the transition process.
Disadvantages and Considerations for Transitioning to a Non-Proprietary Medical Corporation
While transitioning to a non-proprietary medical corporation offers many advantages, there are also several disadvantages and points to consider. It is important to fully understand these and implement measures for post-transition operations.
1. Occurrence of Initial Costs Associated with Transition
Transition procedures, such as amending the articles of incorporation, changing registration, and applying for approval from the competent authority, incur initial costs, including fees for professionals (tax accountants, judicial scriveners, administrative scriveners, etc.) and various administrative fees. These costs vary depending on the size of the medical corporation and the complexity of the transition, but can generally amount to several million yen. When considering a transition, it is necessary to estimate these costs in advance and establish a funding plan.
2. Limitations on Remuneration for Members (Directors/Auditors) After Transition
In proprietary medical corporations, members (shareholders) can receive profit distributions based on the value of their ownership interests or as dividends from the corporation. However, in non-proprietary medical corporations, since property rights do not belong to the members, such profit distributions are generally not permitted. Remuneration for members (directors/auditors) is paid solely as executive compensation for their duties, within a scope consistent with the actual business operations. This may lead those who expected returns as investors to feel a diminished benefit.
3. Fund Repayment Obligation (for Fund Contribution Type) and Tax Treatment
Non-proprietary medical corporations include “fund contribution type” and “non-fund contribution type.” In the fund contribution type, the corporation has an obligation to repay the funds contributed by the members. How these funds are handled during the transition (repayment, waiver, etc.) is a significant tax issue. For members receiving fund repayments, the repaid funds may be subject to taxation as miscellaneous income or deemed dividends. If the funds are waived, it may affect the corporation by not allowing the deduction of expenses for tax purposes. Tax treatment for these matters requires thorough consultation with experts.
4. Limited Direct Impact on Licenses and Medical Fee Structures
The transition to a non-proprietary legal entity for a medical corporation does not directly affect medical institution licenses, medical fee calculation requirements, or facility standards. These are determined by the medical corporation’s business activities, the medical services provided, and facility equipment, and are not changed by the type of legal entity (proprietary or non-proprietary). However, indirectly, an increase in organizational stability and future prospects may lead to advantages in fulfilling roles within regional medical plans and in collaborating with government authorities.
Steps for Transitioning to a Non-Proprietary Medical Corporation
It is important to plan the transition to a non-proprietary medical corporation systematically. Generally, the process proceeds in the following steps:
- Decision to Transition and Consultation with Experts: Solidify the intention to transition at a board meeting, etc., and consult with experts such as tax accountants, judicial scriveners, and administrative scriveners to grasp the merits, demerits, costs, and schedule of the transition in detail.
- Drafting of Articles of Incorporation Amendment Proposal and Approval at General Meeting of Members: In collaboration with experts, draft a proposal to amend the articles of incorporation to become a non-proprietary medical corporation. Subsequently, hold a general meeting of members (or equivalent meeting) to obtain approval for the proposed amendment.
- Application for Approval to the Competent Authority: Submit an application for approval to the competent authority (e.g., prefectural governor) along with the approved amendment proposal to the articles of incorporation. Approval requires a certain review period.
- Registration Amendment Procedures: Once approval is obtained from the competent authority, proceed with the registration amendment procedures related to the change in the articles of incorporation at the Legal Affairs Bureau.
- Completion of Transition and Commencement of Operations: Upon completion of the registration amendment, operations as a non-proprietary medical corporation will commence. Ensure proper arrangements for post-transition tax filings and operational structures in collaboration with experts.
This process generally takes several months to over half a year. In particular, expert advice is indispensable for tax treatment related to fund handling and profit distribution to members.
💡 Key Points for Considering Transition
Transitioning to a non-proprietary medical corporation is not merely a formal change but a strategic decision that looks towards the future vision of the medical corporation. It requires consideration from a long-term perspective, including post-transition organizational operations, succession to successors, and contribution to community healthcare.
Tax Considerations: Capital Gains Tax and Business Tax
Transitioning to a non-proprietary medical corporation involves abandoning the ownership interests held by members (shareholders), so sufficient attention must be paid to tax treatment. In particular, issues related to capital gains tax and business tax (corporate business tax) are important.
1. Capital Gains Tax Due to Waiver of Ownership Interests
When members of a proprietary medical corporation waive their ownership interests in conjunction with transitioning to a non-proprietary medical corporation, the value of the waived ownership interests may be taxed as a “deemed dividend” or “deemed transfer” to the members. If deemed a deemed dividend, income tax will be levied as dividend income. If deemed a deemed transfer, it will be taxed as capital gains. In either case, individual income tax liability will arise for the members, making this tax burden an important factor when considering the merits and demerits of the transition. The tax assessment methods and tax implications are complex, so always consult with tax professionals such as tax accountants.
2. Treatment of Corporate Business Tax
Non-proprietary medical corporations are generally treated as “tax-exempt corporations” for corporate business tax purposes due to their thorough non-profit nature. However, proprietary medical corporations that distributed profits (dividends) prior to the transition may be subject to corporate business tax. Transitioning to a non-proprietary medical corporation may reduce the burden of corporate business tax. However, depending on the nature of the medical corporation’s business, there may be cases where it is not tax-exempt, so individual circumstances must be confirmed.
3. Fund Repayment and Taxation
When transitioning from a fund contribution type to a non-proprietary medical corporation (non-fund contribution type), whether the funds contributed by members are repaid is a tax issue. If funds are repaid, members may be taxed as having miscellaneous income or deemed dividends. Conversely, if funds are waived, it leads to complex treatment, such as the corporation not being allowed to deduct expenses for tax purposes, while members may not be taxed (or different tax implications may arise). Close collaboration with experts is essential for tax treatment related to these funds.
4. Tax Issues for Transitioning to a Non-Proprietary Medical Corporation (Image)
| Issue | Proprietary Medical Corporation | Non-Proprietary Medical Corporation (After Transition) |
|---|---|---|
| Profit Distribution to Members | Possible (potential for dividend income, corporate business tax) | Generally not possible (only executive compensation) |
| Member Taxation upon Waiver of Ownership Interests | Not applicable | Potential for deemed dividend/capital gains tax |
| Corporate Business Tax | May be subject to tax depending on profit distribution, etc. | Generally tax-exempt (thorough non-profit status) |
| Fund Repayment | (For fund contribution type) Repayment obligation exists | (For transition to non-fund contribution type) No repayment obligation, or tax treatment required |
Role of Non-Proprietary Medical Corporations in Regional Medical Plans
Regional medical plans aim to secure future healthcare provision systems in each region, with the differentiation and collaboration of hospital bed functions and the securing and training of healthcare professionals being important issues. Transitioning to a non-proprietary medical corporation is considered to play a certain role in promoting these regional medical plans.
1. Contribution to Community Healthcare Through Organizational Stability
Becoming a non-proprietary medical corporation enhances organizational stability, making it less susceptible to succession issues or the personal circumstances of its members. This is crucial for maintaining a stable healthcare provision system in the long term and supporting the health of local residents. Medical corporations with a sustainable operational base can become driving forces in initiatives outlined in regional medical plans, such as maintaining/reorganizing bed functions according to local conditions and strengthening collaboration with home care and long-term care services.
2. Promotion of Collaboration and Reorganization
When considering collaboration or reorganization (including M&A) among medical institutions, being a non-proprietary medical corporation tends to facilitate smoother negotiations due to quicker decision-making and a clear non-profit and public nature. As collaboration among regional medical institutions and integration of management resources are expected to accelerate further to achieve regional medical plans, non-proprietary medical corporations can serve as suitable entities, either as recipients or as collaborating parties.
3. Responsiveness to Medical Fee Revisions and Healthcare Policies
The government promotes policies that support the achievement of regional medical plans through measures such as revisions to medical fees. By clarifying its non-profit and public nature as a non-proprietary medical corporation, it can facilitate collaboration with government bodies and related organizations, potentially improving its ability to participate in regional healthcare plans and respond to new healthcare policies. Furthermore, its transparency and public nature may be increasingly recognized in collaborations with public frameworks, such as facility standards and participation in regional healthcare collaboration promotion corporations.
✅ Transition Consideration Checklist (Simplified)
- Are succession issues occurring?
- Is the aging of members (shareholders) progressing?
- Are you considering future business succession or M&A possibilities?
- Do you wish to further clarify the organization’s non-profit and public nature?
- Have you grasped the costs associated with the transition (professional fees, taxes, etc.)?
- Do you understand the remuneration system for members (directors/auditors) after the transition?
- Do you understand the tax implications regarding the existence of funds and their repayment?
If you answer yes to multiple items, transitioning to a non-proprietary medical corporation may be a viable option. Please consult with an expert for details.
Conclusion: Transitioning to a Non-Proprietary Medical Corporation with Experts
Transitioning to a non-proprietary medical corporation is an effective means to facilitate business succession for medical corporations and enhance organizational sustainability. However, the transition requires specialized knowledge, and tax issues are complex. In particular, taxation of members, handling of funds, and corporate business tax are difficult to manage appropriately without the advice of experts (tax accountants, judicial scriveners, administrative scriveners, etc.). At M&A Medical (CentralMedience Inc.), experts well-versed in M&A and business succession for medical institutions offer free consultations to understand your corporation’s situation and discuss transitioning to a non-proprietary medical corporation. Please feel free to contact us.