The Japanese government (Financial Services Agency) recently announced (on April 1st) a guidance about the treatment of carried interest under the Japanese tax rules. The purpose of the guidance was to clarify and (softly) authorize the practice that spread among the Japanese fund community in the past several years where the distribution to the general partner is treated as capital gain which may have tax advantage as compared to being treated as total business income.
In this guidance, the FSA referred to the concept of a “special limited partner”, who receives carried interest while being a limited partner. This is justified by the fact that members of the special limited partner are actually the managers of the fund. My understanding is that special limited partner is rarely used in current Japanese funds, and it is interesting that the FSA referred to such concept in a publicly announced document. While the context appears to imply that the special limited partner belonged to a non-Japanese fund, I predict that special limited partners will be more recognized in Japan fund community and be more broadly used by Japanese funds in a few years.