Taxation of Medical Corporation Equity Transfer: Tax on Capital Gains and Refund Claims

Transferring equity in a medical corporation with equity interests requires a unique tax treatment distinct from general stock transfers. In particular, the tax burden can fluctuate significantly depending on how the transfer consideration is received, making specialized knowledge essential. For chairpersons, directors, and professionals considering M&A or business succession for medical institutions, understanding this is crucial for minimizing tax risks and achieving a smooth succession. This article, explained by experts in medical M&A, covers everything from the basics of capital gains tax on equity transfers to comparisons with refund claims and practical points for tax optimization.

1. Options for Taxation Methods in Equity Transfers

When transferring equity interests in a medical corporation with equity interests (established before the 2007 medical law revision), there are several options for how the transfer consideration is received, each with different taxation methods. The choice of method can lead to significant differences in the final net amount received, necessitating careful consideration.

Generally, the following three taxation methods are considered:

1. Capital Gains (Equity Transfer): This is often the most tax-advantageous option. A separate taxation system is applied to the amount remaining after deducting acquisition costs and transfer expenses from the transfer consideration. The tax rate is 20.315% (15.315% income tax + 5% resident tax), and since it is calculated separately from other income, the tax rate increase can be suppressed even for high-income earners.
2. Retirement Income (Retirement Allowance): This involves transferring (returning) the equity interest to the corporation upon retirement and receiving the consideration as a retirement allowance. Retirement income benefits from preferential treatment such as 1/2 taxation and retirement income deductions, but depending on the years of service, the tax burden may be greater than capital gains. Particularly for those with over 20 years of service, the deduction amount is significantly reduced, making the assessment of advantage or disadvantage crucial.
3. Dividend Income / Salary Income: This applies when the transfer consideration for equity interests is received in the form of dividends or executive bonuses. These incomes are subject to comprehensive taxation and are calculated by aggregating them with other income. Due to the progressive tax rate system, the income tax rate can reach up to 55%, generally resulting in a significantly disadvantageous tax burden compared to other taxation methods.

【Important】The difference in taxation methods based on how the transfer consideration is received directly impacts the final net amount. Consulting with experts and selecting the method best suited to your situation is key to avoiding tax risks and ensuring a smooth business succession.

Item	Capital Gains (Equity Transfer)	Retirement Income (Retirement Allowance)	Dividend Income / Salary Income
Taxation Method	Separate Taxation System	Retirement Income Taxation	Comprehensive Taxation
Estimated Tax Rate	20.315%	1/2 Taxation, Retirement Income Deduction Available	Up to 55%
Advantageous/Disadvantageous	★Often Advantageous	Depends on Years of Service, etc.	×Often Disadvantageous

2. What is Equity Interest? Its Nature and Difficulty in Valuation

Shareholders of a medical corporation with equity interests hold “equity interests” corresponding to the amount they have invested in the corporation. While similar in nature to shares in a stock company, medical corporations have several unique characteristics.

Specifically, upon retirement, shareholders have a “right to claim a refund” corresponding to their equity interest. Furthermore, upon inheritance, this equity interest is valued as inherited property and becomes subject to inheritance tax. The valuation of this equity interest is a particularly important factor in M&A of medical institutions.

The following methods are generally used for valuing equity interests:

• Net Asset Value Method: A method of valuation based on the net asset value, which is the total assets minus liabilities held by the corporation. This is the most commonly used method for valuing medical corporations.
• Comparable Industry Method: A method of valuation that references the stock prices of listed companies in similar industries. However, its application to medical corporations is limited.
• Dividend Capitalization Method: A method of valuation based on past dividend performance, mainly used for valuing minority equity interests.
• DCF (Discounted Cash Flow) Method: A method of valuing a company’s current worth based on future cash flow projections. In M&A practice, this method tends to be emphasized as it can also consider future potential.

The valuation of equity interests can vary significantly depending on which of these valuation methods is adopted or used in combination. Proper valuation at fair market value is essential to avoid the tax risks discussed later.

3. Tax Treatment of Equity Transfer: Calculation of Capital Gains

When equity interests are transferred, the amount remaining after deducting acquisition costs and transfer expenses from the transfer consideration is considered “capital gains” and is generally subject to separate taxation. As mentioned above, the tax rate is 20.315%.

Acquisition costs refer to the original amount invested (principal). However, since many medical corporations with equity interests have been in existence for many years, the original investment amount is often significantly lower than the current market value. In particular, if the equity interest was acquired through inheritance, the valuation amount at the time of inheritance becomes the acquisition cost. The larger the difference between this acquisition cost and the transfer price, the greater the capital gains, and consequently, the heavier the tax burden.

Transfer expenses include M&A brokerage fees, remuneration paid to judicial scriveners and lawyers, and registration fees. These expenses can be added to the acquisition costs and deducted when calculating capital gains.

4. Comparison with Refund Claims: Tax Advantages and Disadvantages

As an alternative to transferring equity interests, there is also the option of retiring from the medical corporation, exercising the “right to claim a refund,” and receiving a refund payment. The tax treatment in this case differs significantly from capital gains.

When receiving a refund payment, the portion exceeding the invested amount (paid-in capital) is treated as a “deemed dividend” for tax purposes. Deemed dividends are generally subject to comprehensive taxation and are calculated by aggregating them with other income. The income tax rate can reach up to 55% due to the progressive tax system, and compared to the separate taxation system for capital gains (20.315%), the tax burden is generally significantly heavier.

However, if certain conditions are met, a “dividend deduction” may apply, potentially reducing the tax burden. Nevertheless, the applicability and effect of the dividend deduction vary greatly depending on the individual case, so hasty decisions should be avoided.

In general, in many cases, transferring equity interests to a third party offers greater tax benefits. However, the final advantage or disadvantage must be determined by comprehensively considering the amount of transfer consideration, the individual’s income situation, and the possibility of applying dividend deductions.

Item	Equity Interest Transfer	Refund (Deemed Dividend)
Taxation Method	Separate Taxation System	Comprehensive Taxation (Deemed Dividend Portion)
Estimated Tax Rate	20.315%	Up to 55% (Dividend Deduction May Apply)
Advantageous/Disadvantageous	Often Advantageous	Likely to be Disadvantageous

5. Setting Appropriate Transfer Value and Tax Risks

When transferring equity interests in a medical corporation, the transfer value must be set at “appropriate fair market value” for tax purposes. If the transfer is made at a price significantly lower than the market price or objective valuation, there is a risk that tax authorities may deem it a “deemed gift,” leading to gift tax liability. Conversely, if it is overvalued, problems may arise in the calculation of capital gains.

To ensure appropriate fair market value assessment, it is essential to appropriately combine methods such as the Net Asset Value Method and the DCF Method, and to obtain an objective valuation by experts. Especially in M&A, it is important to set a reasonable price that is acceptable to a third party, while also considering the intentions of both the transferor and the transferee.

6. Final Tax Return and Procedure Flow for Capital Gains

If an equity interest transfer is executed, a final tax return for capital gains must be filed by March 15th of the year following the transfer. This is calculated and declared as separate taxation, distinct from salary income or business income.

The procedure generally follows these steps:

1. 1
   Confirmation of Articles of Incorporation and General Meeting of Members: First, check if the articles of incorporation of the medical corporation have provisions for the approval of equity interest transfers, and if necessary, obtain a resolution at a general meeting of members.
2. 2
   Execution of Transfer Agreement: Conclude a contract stipulating the transfer price, payment method, delivery date, etc.
3. 3
   Notification to the Competent Authority: If necessary, such as for changes in directors, notify the competent authority (e.g., prefectural governor).
4. 4
   Registration Procedures: If necessary, carry out registration procedures such as changes in officers (for medical corporations, this is generally not required, but confirmation is necessary).
5. 5
   Final Tax Return: File a final tax return for capital gains by March 15th of the year following the transfer execution year.

These procedures are complex and require specialized knowledge. Especially for tax filings, it is necessary to proceed carefully to avoid omissions in the calculation of acquisition costs and the inclusion of transfer expenses.

7. Relationship with Transition to Non-Equity Medical Corporations

In recent years, there has been a trend towards transitioning to “non-equity medical corporations” where equity interests are not passed down through inheritance. When a medical corporation with equity interests transitions to a non-equity medical corporation, the treatment of equity interests at the time of transition becomes extremely important. Tax risks such as gift tax and deemed dividend taxation may arise during this transition process.

However, by utilizing systems such as the “Certified Medical Corporation System,” these tax risks can be avoided or mitigated in some cases. Transitioning to a non-equity medical corporation is an option that contributes to future business succession and stabilization of corporate operations, but it is crucial to fully understand the tax implications during the process and proceed in cooperation with experts.

【SVG Diagram Example: Image of Transition from Equity to Non-Equity Medical Corporation】

M&A and business succession of medical corporations are complex processes requiring extensive knowledge of medical law, tax law, company law, and more. Particularly in tax matters, various issues such as capital gains, deemed dividends, and gift tax are intertwined. At M&A Medical, we collaborate with a team of affiliated tax accountants and CPAs to provide meticulous support, from formulating optimal tax strategies for both transferors and transferees to their execution. To achieve a smooth and advantageous medical succession, please feel free to consult with us.