DES (Debt Equity Swap) to capitalize the debt and to remove the capital deficit. In that case, the debt (only Long Term Borrowing ) could be reasonable to capitalize without considering the financial debt and commercial debt which are temporary current ones in business transaction. And if the DES is between a parent company and a subsidiary in 100% investment, the book value of debt can be admitted for the DES. However, in the case of cross border DES (i e. a foreign parent company and a Japanese subsidiary in 100% investment ), it should be fair value of debt. In that case, simply, it can be considered below account entry
Dr) Long Term Borrowing (Fair value) xxxx (ex 50) / Cr) Capital (Equity) xxxx (ex 50)
Dr) Long Term Borrowing (Book value) xxxx (ex 100) / Cr) Long Term Borrowing (Fair value) xxxx (ex 50)
Cr) Debt decreased profit xxxx (ex 50)
If the Long Term Borrowing debt is handled in different currency wth FX gain/loss, Fx gain/loss has to be considered additionally in above accounting entries. The decision of increase of capital depends on how to be described in AOI and the number of share authorized to be issued and shareholder’s role in AOI should be checked in advance.
If capital is more than JPY 100M, the company is handled as a big company in higher corporate tax rate rather than small and medium company. Japan KK with 100% investment parent company, which is more than JPY 500M as a capital is also handled as a big company for higher corporate tax rate 25,5% not 15% (not local tax here). Hence, it impact corporate tax according to the capital amount. It impact corporate inhabitant tax Per Capita which should be paid although is net loss in total taxable income.
