Nurturing Civil Society

Legal Changes Affecting Not-for-Profits in Japan

The International Journal
of Not-for-Profit Law

Volume 7, Issue 1, November 2004

By Hana Heineken, University of Tokyo, and Robert Pekkanen, University of Washington

After a century of near-immobility, Japan’s regulatory framework for not-for-profits has lurched into a spate of legal reforms. The current basic law governing not-for-profits was promulgated in 1896 and put into effect in 1898, as a part of Article 34 of the Civil Code. For the next century, the only significant legal changes were Occupation-era reforms after World War II, when the Supreme Commander of Allied Powers imposed a series of Special Laws that were attached to Article 34. These Special Laws carved out subcategories of not-for-profits (Religious Legal Persons, Private School Legal Persons, and Medical Legal Persons) with a distinct, and much easier, course for gaining legal status. Then, in 1998, the Specified Nonprofit Activities Law (NPO Law) was promulgated in an attempt to liberalize the legal framework for not-for-profits. Now, the 21st century opens with a frenzy of legal activity.

After a short background discussion, this article will analyze the three most important current changes:

  1. Intermediary Legal Persons: A new type of not-for-profit legal person, the Intermediary Legal Person (chuukan houjin), applies to not-for-profits that are not explicitly in the public interest, such as clubs, alumni associations, and trade and business associations.
  2. Tax Reform of NPO Legal Persons: The taxation of NPO Legal Persons (a subset of not-for-profits) has changed twice in the last few years with regard to obtaining tax-deductible status.
  3. Reform of Article 34 of the Civil Code: The fundamental law governing not-for-profits in Japan is Article 34 of the Civil Code. For the first time, the government has created an advisory body charged with planning a fundamental reform of this law. Unlike the first two changes, this one is still under discussion, but it is expected to have a major impact on all not-for-profit organizations.


Each of these three changes represents an important liberalization in the regulation of not-for-profit organizations in Japan.

Article 21 of the Japanese Constitution provides for freedom of association. In practice, however, this seemingly broad guarantee has not been construed to mean that any group can obtain legal status. Instead, the constitutional guarantee is limited by Article 33 of the Civil Code, which requires that all legal persons be formed in accordance with its regulations. Article 33’s general provisions are followed by Articles 34 and 35, which further categorize the legal persons. These two general articles are supplemented in turn by a host of attached Special Laws, which often serve to create special categories within the general framework. While Article 35 of the code provides for establishment of for-profit organizations, or companies, Article 34 does not create a corresponding category of nonprofit organizations, but rather a much more restrictive category of Public Interest Legal Persons (PILPs).

In the Civil Code nation of Japan, legal status, or “houjinka,” is critical. However, under the Civil Code system, only a limited number of groups could gain legal status as nonprofit Public Interest Legal Persons. The application of Article 34 thus created a legal blind spot: most groups that were nonprofit but not in the “public interest” had no legal basis to form. Moreover, the Civil Code entrusted the authorization of a PILP to the “discretion of the competent ministry”–meaning that the bureaucracy decided whether or not a group was in the public interest.

In short, the basic law in Japan provided no legal basis for the existence of groups that were not-for-profit but not in the public interest (i.e., groups formed for private interest). They could exist without legal personality–which could pose a host of legal obstacles, such as difficulties in opening bank accounts in the group’s name–or form as corporations.

The NPO Law of 1998 took a step toward liberalizing this system. It created an entirely new not-for-profit category, NPO Legal Persons, and thereby expanded the eligibility for legal status and reduced the discretion bureaucrats possess in deciding whether to grant legal status to applicants. Criteria for eligibility included the performance of specified not-for-profit activities deemed to be in the public interest, such as welfare and education.  In other words, groups that were not-for-profit but clearly not in the public interest were excluded from this status.

Intermediary Legal Persons

Plans for establishing another not-for-profit category–the Intermediary Legal Person–were announced in 2000. Groups such as alumni associations, trade associations, mutual-aid associations, and neighborhood associations were envisioned as likely seekers of Intermediary Legal Personhood. This new category aimed to fill a void left by both the PILP Law and NPO Law, that is, by offering legal status to those groups that were not-for-profits but not advancing the public interest.  The Intermediary Legal Person Law was enacted as Law No. 49 in 2001 and enforced starting in 2002.

The law distinguishes two types of Intermediary Legal Persons: unlimited liability and limited liability. The following provides the gist of the distinctions:

  • On the organization’s relationship to its creditors, employees of the unlimited type bear a joint responsibility with the organization (Article 97), while employees of the limited type do not.
  • The unlimited type requires an employee assembly, director, and auditor (Articles 38, 45, 51); the limited type does not (Articles 102, 103).
  • Legal persons are permitted to become employees of the limited type (Article 10, Section 2) but not of the unlimited type (Article 96).
  • Employees of the limited type are not required to contribute to the organization’s funds.

Both types are required to have at least two employees (Article 81, Section 4, Title 4; Article 108, Title 4).

Requirements for Establishment

An Intermediary Legal Person must register (touki) and meet specific legal conditions, but registration does not entail authorization from the bureaucracy. Compared to other not-for-profit organizations, Intermediary Legal Persons face minimal regulatory involvement with public authorities, similar to that of joint-stock companies and limited liability companies.

A limited liability Intermediary Legal Person must do the following:

  • Create the articles of association and obtain approval from a notary (Article 10);
  • Appoint a director and an auditor (Article 13);
  • Follow the necessary procedures for collecting, allocating, and paying funds (Articles 14, 15, 16);
  • Conduct an examination of the necessary procedures for establishment (Article 18); and
  • Register the establishment of the organization at the Legal Affairs Bureau located in the same precinct as the main office (Article 19).

An unlimited liability Intermediary Legal Person must do the following:

  • Create the articles of association (Article 93); and
  • Register the establishment of the organization at the Legal Affairs Bureau located in the same precinct as the main office (Article 94).

The following items must appear in the articles of association for a limited liability Intermediary Legal Person; requirements that also apply to unlimited liability Intermediary Legal Persons are followed by asterisks:

  • Purpose,*
  • Title,*
  • Total amount of funds,
  • Regulations concerning the rights of contributors,
  • Procedures for the return of funds,
  • Methods for publicity,
  • Names of employees, or their title and address,*
  • Location of the primary office,*
  • Regulations concerning the gain and loss of a license, and
  • Business year.

At least 3,000,000 yen is required to establish a limited liability Intermediary Legal Person (Article 12). The unlimited type has no minimum funding requirement due to its joint liability. There are no rules on the minimum number of contributors.

Regulation of Funds

Surplus funds cannot be distributed to members or employees. If the employee assembly decides to return a portion of the funds, the organization must assemble equivalent funds, without interest, to compensate for the loss. The total amount of funds, in other words, must not change.

The organization must prepare a special reserve fund in order to compensate for losses. The reserve can only be used for deficits, and not as a resource for returning funds.


The following accounting requirements apply:

  • Under Article 9, based on commercial law, every Intermediary Legal Person must submit a list of assets and liabilities and a statement of profits and losses. A limited liability Intermediary Legal Person must also submit an activity report as well as measures concerning allocation of surplus funds and management of losses. Unlike PILPs and NPO Legal Persons, an Intermediary Legal Person does not have to submit a statement of income and expenditure or an inventory of property.
  • Limited liability Intermediary Legal Persons are obligated to open their accounts and statements to the public; unlimited liability Intermediary Legal Persons are not.
  • Because they are based on commercial law, Intermediary Legal Persons are not obligated to submit budget statements.
  • Limited liability Intermediary Legal Persons are required to have at least one auditor.


  • The rate of corporate tax is the same as that for small and medium-sized corporations (30%, and 22% for income under 8,000,000 yen). At the end of each business year, the total income of the Intermediary Legal Persons, which includes all activities, will be taxed accordingly.
  • On the registration license tax, limited liability Intermediary Legal Persons will be taxed at the same rate as limited liability companies, and unlimited liability Intermediary Legal Persons at the same rate as unlimited partnerships.
  • The rate of consumption tax is largely the same as that for PILPs. The transfer of taxable assets is subject to consumption tax. However, if the taxable sales volume of a standard term (two business years) is under 30,000,000 yen, then the organization is exempt. The consumption tax applied to membership fees is the same as that applied to cooperative societies.
  • There is no special tax applied to income for reserves.
  • An Intermediary Legal Person, as a legal body, is obligated to withhold income tax from payments. However, it must make a distinction between payment as income and payment as reward for services (such as volunteering).

Since enforcement of the law began in 2002, relatively few Intermediary Legal Persons have been created: only 966 (829 limited liability and 137 unlimited liability) as of April 2004. The current rate of formation is approximately 30 per month. Most have been trade and business associations; the number of alumni associations and clubs has been far fewer than anticipated during drafting of the law.

Tax Reform for Non-Profits

In 2001, as part of the Fiscal Year 2001 Tax Reforms, specially approved NPO Legal Persons were permitted to receive tax-deductible contributions. An NPO Legal Person could achieve tax-deductible status by applying to the National Tax Administration and satisfying several requirements, including a public-support test.

In conjunction with the Fiscal Year 2003 Tax Reforms, the government loosened the requirements to qualify for tax-deductible status. Most important, it lowered the threshold of the public support test from one-third to one-fifth of all revenues. In other words, NPOs receiving contributions equal to one-fifth of total revenue are now eligible for tax-deductible status. The definition of contributions has been revised to exclude contributions of less than 1,000 yen (previously 3,000 yen) and narrowed to exclude bequests that exceed the amount permitted per person, as well as grants-in-aid and commission fees from national and local public organizations and international organizations affiliated with the state. The contributions from one person cannot exceed 5% of the total contributions received, increased from the previous maximum of 2%. Moreover, in calculating the total revenue, the sum must exclude any amount of a contribution that exceeds the 5% criterion. The reforms have also removed the requirement for tax-deductible NPO Legal Persons to operate in multiple jurisdictions.

Overall, these reforms are commendable but fairly minor. Few groups have qualified for tax-deductible NPO Legal Person status. Of the 16,000 NPO Legal Persons, only 24 have met the criteria.

Reform of Article 34

As noted above, Article 34 is the core regulation covering not-for-profits in Japan, and so any significant reform of this Article holds the utmost importance for the legal framework of not-for-profit activity in Japan. Currently, the government is in the early stages of a process that will likely result in major changes to Article 34. Nothing is certain, and no laws are likely to be changed before 2005. However, the contours of the policy discussion can be distinguished through the workings of an advisory council, newspaper reports, and interviews.

A key change would be the transformation of Article 34 from a regulation allowing for the creation of Public Interest Legal Persons to one allowing for the creation of Nonprofit Legal Persons (hieiri houjin) (not to be confused with NPO Legal Persons). The new regulation would affect current PILPs and Intermediary Legal Persons, though not the groups created through Special Laws attached to Article 34 (including Religious Legal Persons, Medical Legal Persons, and Private School Legal Persons). Whether to include NPO Legal Persons is still under debate.

Another important change would be the shift in the standard by which legal personality is granted to groups, from a permission-based system to a registration-based system. Public Interest Legal Persons are currently granted legal personality by permission (kyoka), which gives the bureaucratic body substantial discretion. The standard of registration (touki), in contrast, confers nearly automatic legal personality. This change should make the process of gaining legal personality much simpler and more predictable, with applications no longer subject to rejection by the bureaucracy for unspecified reasons.

The third major change concerns taxation. As currently envisioned, the new system will have two or more tiers within the Nonprofit Legal Person category–much as tax-deductible NPO Legal Persons exist as a subcategory within NPO Legal Persons. All Nonprofit Legal Persons will probably enjoy some tax benefits; the precise nature and extent are not clear, but most likely their non-profit making activities will not be subject to taxation. Some Nonprofit Legal Persons will gain greater tax benefits, depending on their contribution to the public interest. Again, it is not certain what standards will apply or what body will determine which activities are in the public interest. Nor is it clear how many tiers will exist, though two or more seems likely. The greater tax benefits may include lower tax rates, fewer activities subject to taxation, and the ability to receive tax-deductible contributions.

Summary of Anticipated Changes

  • From Public Interest Legal Persons to Nonprofit Legal Persons
  • Including Intermediary Legal Persons
  • Possibly including NPO Legal Persons
  • Procedures for gaining legal personality will be drastically loosened from a discretionary, permission-based system to a less discretionary, registration-based system (touki).
  • Taxation changes remain under debate, but Nonprofit Legal Persons will probably gain various levels of tax benefits depending on their contribution to the public interest.

Although the final dimensions are unclear, these legal changes will be quite far-reaching and substantial. They will affect tens of thousands of groups immediately, and even more in the short term. In the long term, too, this fundamental rewriting of the regulatory framework will have an important effect on the development of Japan’s not-for-profit sector.