Japan 2026: FEFTA Amendment & FY2026 Tax Reforms, Compliance Checklist for Gps & Lps

The FEFTA amendment bill submitted to Japan’s Diet on March 17, 2026, together with the FY2026 tax reform package, has reshaped the compliance landscape for every investment fund with exposure to Japanese assets. For general partners structuring new vehicles and foreign limited partners evaluating co-investment commitments, the combined effect of broadened foreign direct investment screening powers and revised permanent-establishment attribution rules creates filing obligations, structuring constraints and tax exposures that did not exist twelve months ago. This guide provides a practical, fund-specific compliance checklist covering the FEFTA amendment investment funds Japan regime and the parallel FY2026 tax reform, with entity-level mapping, sample LPA clauses and a step-by-step timeline designed for GPs, LPs and their advisors.

Key Takeaways

• New call-in power. The FEFTA amendment bill introduces a post-closing “call-in” mechanism allowing the Ministry of Finance (MOF) and competent ministers to order mitigation measures for FDI, including divestiture, even after an acquisition has closed, and creates risk-based monitoring for “specified foreign investors.”
• Broader indirect-acquisition scope. The bill widens the definition of indirect acquisition, increasing the likelihood that offshore fund structures acquiring Japanese targets through SPCs or intermediate vehicles will trigger FEFTA prior notification obligations.
• FY2026 PE rule clarification. Revisions to the permanent establishment rules tighten the conditions under which foreign LPs may rely on the so-called “25/5 rule” safe harbour, potentially exposing passive limited partners to Japanese corporate or income tax on fund profits.
• Immediate GP action required. Fund managers should run investor-identity screening, review GP authority provisions, update LPA clauses for FEFTA cooperation and PE mitigation, and prepare filing playbooks, all before the next closing.

Quick Summary of the FEFTA 2026 Amendment: What Changed and Who Is Covered

Japan’s Foreign Exchange and Foreign Trade Act (FEFTA) has governed inward foreign direct investment screening since 1949, requiring prior notification for acquisitions of shares in companies operating in designated sensitive sectors. The MOF’s official FEFTA framework already lists sectors including defence, aerospace, nuclear energy, critical infrastructure (electricity, telecommunications, water) and certain advanced technologies. The 2019–2020 reforms lowered the prior-notification threshold from 10 % to 1 % for listed companies in those sectors and introduced exemptions for passive portfolio investors who meet specified conditions.

The March 17, 2026 amendment bill, as analysed by White & Case in its April 2026 alert and by Clifford Chance in its February 2026 technical briefing, extends this regime in three principal ways.

Post-Closing Call-In Power

Under the existing FEFTA regime, enforcement is primarily ex ante: a foreign investor must notify before completing an acquisition, and the authorities may impose conditions or prohibit the transaction during a review period. The 2026 bill adds a post-closing call-in power, enabling the MOF and the relevant competent minister to order a foreign investor, or fund, to take specified mitigation measures after a transaction has already closed. Industry observers expect this mechanism to be used sparingly, but the practical effect will be to create ongoing compliance obligations for funds that have already deployed capital into sensitive-sector targets.

Specified Foreign Investors and Risk-Based Monitoring

The amendment introduces the concept of “specified foreign investors”, entities or individuals flagged for risk-based monitoring based on factors such as nationality, state ownership, prior regulatory conduct and proximity to governments of concern. Where a foreign LP or its ultimate beneficial owner falls within this designation, the fund vehicle itself may become subject to enhanced scrutiny and reporting, even if the LP’s commitment is below customary notification thresholds.

Broadened Indirect Acquisition Definition

AILaw’s March 2026 commentary highlights that the bill clarifies and broadens what constitutes an “indirect acquisition” for FEFTA purposes. An offshore fund acquiring a Japanese target through a chain of intermediate holding vehicles or SPCs will more readily be treated as the functional acquirer, requiring FEFTA prior notification where the underlying target operates in a sensitive sector. The Clifford Chance briefing notes that the amendment is designed to close structuring gaps that allowed certain offshore PE and VC funds to avoid notification by interposing non-Japanese entities between the fund and the Japanese target.

The bill was subject to committee deliberation at the time of this publication. Anderson Mori & Tomotsune’s May 2026 bulletin indicates that Diet passage is widely expected by mid-2026, with implementing regulations to follow within several months thereafter.

Does FEFTA Apply to Funds? Prior Notification vs Call-In, Entity Matrix

A threshold question for any GP structuring a Japan-focused or Japan-exposed fund is whether, and at which level, FEFTA prior notification is required. The answer depends on the entity type, the nature of the acquisition and whether the target operates in a designated sensitive sector. Below is a comparison table mapping the most common fund structures to their FEFTA filing obligations under both the existing regime and the 2026 amendment bill.

Examples and Worked Scenarios

Scenario 1, PE buyout fund. A Cayman-domiciled buyout fund with predominantly non-Japanese LPs proposes to acquire 100 % of a Japanese defence electronics manufacturer through a Singapore SPC. Under the broadened indirect acquisition rules in the FEFTA amendment, this transaction almost certainly requires prior notification. The GP should file prior notification on behalf of the acquiring entity, prepare mitigation undertakings (e.g., technology-access restrictions, appointment of a government-approved compliance officer) and build a review-period buffer of at least 30 days into the transaction timetable.

Scenario 2, VC minority stake. A Japanese GP manages a domestically structured toshi jigyo yugen sekinin kumiai with several foreign LPs holding passive, sub-10 % interests. The fund takes a 5 % stake in a listed semiconductor equipment company. The foreign LPs are not seeking board seats or technology access. Under existing exemptions, this is likely not subject to prior notification, but if any individual LP is designated a “specified foreign investor,” the GP should be prepared for enhanced scrutiny. A defensive step is to include a FEFTA cooperation covenant in the LPA and conduct KYC that captures beneficial ownership data sufficient for FEFTA purposes.

FY2026 Tax Reforms and Permanent Establishment Risk for Foreign LPs

Separately from the FEFTA amendment, the FY2026 tax reform package, enacted through the annual tax reform legislation, introduces changes that directly affect the tax position of foreign investors participating in Japanese investment funds. As analysed by DLA Piper in its March 2026 publication on the taxation of foreign investors in Japan through Japanese investment funds, the reforms refine the conditions under which a foreign LP may be deemed to have a permanent establishment in Japan through its participation in a fund, thereby becoming subject to Japanese corporate or income tax on its share of the fund’s Japan-source profits.

The 25/5 Rule Explained

Japan’s tax law provides a safe harbour, commonly referred to as the “25/5 rule”, under which a foreign investor participating in a Japanese investment partnership (kumiai) will not be treated as having a permanent establishment in Japan if two conditions are met: (1) the foreign investor’s share in the partnership does not exceed 25 %, and (2) the foreign investor does not engage in the partnership’s business activities beyond contributing capital and receiving distributions. The “5” element refers to the maximum percentage of voting rights the foreign investor may hold in any single investee company through the partnership.

The FY2026 tax reform clarifies and tightens the application of this safe harbour. Early indications suggest the practical consequence will be threefold:

• Substance test strengthened. A foreign LP that participates in investment committee calls, approves specific transactions beyond standard LP consent rights, or seconds personnel to the GP may no longer qualify for the safe harbour, even if the 25 % capital threshold is met.
• Carried interest attribution. Where a foreign LP also receives carried interest or performance-based compensation from the fund (as is common in co-invest and GP-led structures), the reform clarifies that such income may be attributed to a deemed PE in Japan.
• Disclosure obligations. Funds and their GPs may be required to report the identity, residency and participation level of foreign LPs to the National Tax Agency as part of the annual partnership return, enabling more effective PE risk assessment by the tax authorities.

Practical Compliance Checklist for GPs: FEFTA Amendment and FY2026 Tax Reforms

The following step-by-step checklist is designed for GPs managing Japan-focused funds or funds with Japan-exposed portfolios. It covers the lifecycle from pre-deal diligence through post-closing monitoring, incorporating obligations arising from both the FEFTA amendment and the FY2026 tax reform.

Step 1, Pre-Deal: Investor Identity and Sector Sensitivity Review

• Compile a full register of foreign LPs and their ultimate beneficial owners, with sufficient detail to determine nationality, state-ownership links and prior regulatory history.
• Screen each foreign LP against the “specified foreign investor” criteria anticipated by the FEFTA amendment bill.
• Identify whether the proposed target operates in a FEFTA-designated sensitive sector. Use the MOF’s official sector list as the baseline and monitor for updates to the expanded list expected in implementing regulations.
• Assess each foreign LP’s capital commitment against the 25 % safe-harbour threshold and confirm that no LP will hold voting rights exceeding 5 % in any single investee through the fund.

Step 2, Pre-Closing: Structure Review and GP Authority Limitations

• Review the fund’s organisational structure: onshore vs offshore vehicles, intermediate SPCs, parallel funds and co-invest vehicles. Determine whether any structure constitutes an “indirect acquisition” under the broadened FEFTA definition.
• Evaluate the GP’s powers under the existing LPA. If the GP is non-Japanese and exercises control-level authority over investee companies (director appointments, technology-access rights, disposal of core business), consider appointing a local co-GP or restricting delegated authority to avoid triggering FEFTA prior notification at the GP level.
• Where FEFTA prior notification is required, build a minimum 30-day review period (potentially longer if extension is anticipated) into the transaction timetable.

Step 3, Documentation: LPA Clauses, KYC and Transfer Restrictions

• Draft or amend the LPA to include a FEFTA regulatory cooperation covenant (see sample clauses below).
• Add KYC and beneficial-ownership disclosure obligations for LPs, with ongoing update requirements and consequences for non-compliance (e.g., suspension of distributions, forced transfer).
• Insert transfer restrictions that require GP consent and FEFTA assessment before any LP may transfer or pledge its interest.
• Include indemnity provisions covering filing costs, advisor fees and any adverse consequences of mitigation measures imposed on the fund.
• For a broader discussion of common elements of a term sheet, see our dedicated guide.

Step 4, Filing and Timelines

• File prior notification with the Bank of Japan (as agent for the MOF) before closing where required. The standard review period is 30 days, subject to extension.
• Consider voluntary pre-filing consultation with the MOF’s Investment Screening Office for complex structures (e.g., multi-tier offshore vehicles, mixed sovereign and private LP bases).
• Prepare a call-in response playbook: designate internal and external counsel, establish document-hold procedures, and pre-agree mitigation undertakings (such as technology firewalls or independent compliance monitors) that the fund would accept if ordered.
• Retain all filing records, correspondence with the MOF and KYC documentation for a minimum period consistent with FEFTA record-retention requirements.

Step 5, Post-Closing Monitoring and Remedial Playbook

• Monitor for call-in orders from the MOF or competent ministers. Under the 2026 amendment, these may arrive at any time after closing.
• Maintain ongoing compliance with any conditions imposed at the prior-notification stage (e.g., restrictions on board participation, technology access or information sharing with foreign LPs).
• Update investor KYC at least annually and upon any change in LP composition, beneficial ownership or “specified foreign investor” status.
• Report foreign LP identity and participation data to the National Tax Agency as required under the FY2026 partnership reporting rules.

Quick Wins for GPs

• Limit GP powers proactively. Draft GP authority provisions narrowly to avoid triggering FEFTA “control” thresholds, particularly regarding director appointments and access to non-public technical information at investee companies.
• Add LP activity covenants. Require LPs to refrain from active managerial involvement in the fund’s business beyond standard consent rights, preserving the PE safe harbour under the 25/5 rule.
• Allocate costs upfront. Include a clear expense-allocation provision covering FEFTA filing fees, external counsel costs for regulatory notifications and any expenses arising from mitigation measures imposed by the authorities.
• Use fund formation resources. Review our comprehensive guide to starting your own investment fund for foundational structuring and LPA drafting considerations.

Sample LPA and GP Governance Amendments: Clause Bank for FEFTA and FY2026 Compliance

The following sample clauses are provided as starting-point language for practitioners. They should be adapted to the specific fund structure and reviewed by local counsel before adoption. All clause numbering is illustrative.

• Clause A, FEFTA Regulatory Cooperation Covenant. “Each Limited Partner shall, promptly upon request by the General Partner, provide such information, documents and representations as the General Partner reasonably determines are necessary to comply with the Foreign Exchange and Foreign Trade Act and any regulations, orders or guidance issued thereunder, including information regarding the Limited Partner’s identity, nationality, beneficial ownership, state-ownership links and prior regulatory history.”
• Clause B, GP KYC and Transfer Restriction. “No Limited Partner may Transfer, assign, pledge or otherwise dispose of all or any part of its Interest without the prior written consent of the General Partner, which consent may be withheld if, in the General Partner’s reasonable opinion, such Transfer would cause the Partnership or any Investee Company to be in breach of, or would trigger a notification obligation under, the Foreign Exchange and Foreign Trade Act.”
• Clause C, Tax Representation and PE Mitigation (LP Covenant). “Each Limited Partner represents and covenants that it shall not engage in activities of the Partnership beyond contributing capital and receiving distributions, and shall not participate in the management, operations or investment decisions of the Partnership or any Investee Company, so as to cause the Partnership, the General Partner or any other Limited Partner to be treated as having a permanent establishment in Japan.”
• Clause D, Indemnity for Regulatory Filing Costs. “The Partnership shall bear all reasonable costs and expenses (including external legal and advisory fees) incurred by the General Partner in connection with FEFTA notifications, consultations, call-in responses and compliance with any mitigation measures imposed by the Ministry of Finance or any competent minister. Such costs shall be treated as Partnership Expenses and allocated among the Limited Partners pro rata.”
• Clause E, Forced Transfer upon Regulatory Non-Compliance. “If any Limited Partner fails to provide information requested under [Clause A] within [30] days, or if the continued participation of any Limited Partner would, in the General Partner’s reasonable opinion, cause the Partnership to be in material breach of the Foreign Exchange and Foreign Trade Act, the General Partner may require such Limited Partner to transfer its Interest to a third party approved by the General Partner, at a price equal to the most recent Net Asset Value attributable to such Interest.”
• Clause F, Advisory Committee Limitation. “For the avoidance of doubt, the Advisory Committee shall have no authority to approve, disapprove or direct any specific investment or divestment decision of the Partnership. The Advisory Committee’s role shall be limited to non-binding consultation on matters of conflicts of interest, valuation methodology and GP reporting, and no Limited Partner’s participation on the Advisory Committee shall be construed as participation in the business activities of the Partnership for the purposes of Japanese tax law or the Foreign Exchange and Foreign Trade Act.”

Note: These clauses are samples only and do not constitute legal advice. They should be reviewed and tailored by qualified Japanese counsel in the context of each fund’s specific structure, investor base and target investment strategy. For more on shareholder-level governance mechanisms, see our article on deadlock provisions in shareholders agreements.

Timeline and Reporting Flowchart: Key Dates for the FEFTA Amendment and FY2026 Tax Reforms

Flowchart summary: Pre-deal assessment (investor screening + sector review) → filing decision (prior notification required? voluntary consultation advisable?) → review period (30 days, extendable) → closing → post-closing monitoring (call-in response readiness, ongoing LP reporting, annual KYC update). For funds investing in adjacent regulated sectors in Japan, the Japan Payment Services Act 2026 guide provides additional context on regulatory compliance for financial services.

Conclusion: Recommended Next Steps for GPs and LPs Under the FEFTA Amendment and FY2026 Reforms

The convergence of the FEFTA amendment investment funds Japan regime and the FY2026 tax reforms means that both GPs and foreign LPs must act now, not after enactment. Funds that wait until implementing regulations are published risk closing transactions without required notifications, operating with LPA provisions that are insufficient for the new regime, or exposing foreign LPs to unexpected Japanese tax liabilities through deemed permanent establishments.

Industry observers expect the combined impact to be particularly acute for mid-market PE and VC funds with mixed domestic-foreign LP bases investing in Japan’s technology, infrastructure and defence-adjacent sectors. The likely practical effect will be a material increase in pre-deal compliance costs and transaction timelines.

Immediate recommended actions:

• Run a full investor-identity and beneficial-ownership screening against anticipated “specified foreign investor” criteria.
• Amend LPAs for new funds, and side letters for existing funds, to incorporate FEFTA cooperation, KYC, PE mitigation and indemnity provisions.
• Engage Japan-qualified fund formation and regulatory counsel before the next closing.
• Visit the Global Law Experts lawyer directory to connect with specialists in Japanese investment fund compliance, FEFTA regulatory filings and cross-border tax structuring.

Sources

1. Ministry of Finance (Japan), FEFTA Rules and Regulations
2. White & Case, FEFTA Amendment Bill Submitted to Japan’s Diet
3. Clifford Chance, Proposed Amendments to Japan’s Inward Direct Investment Screening Regime
4. DLA Piper, Taxation of Foreign Investors in Japan Through Japanese Investment Funds and the FY2026 Tax Reform
5. Anderson Mori & Tomotsune, FEFTA Amendment Bulletin (May 2026)
6. Mori Hamada & Matsumoto, Implications of the FEFTA Amendment Bill
7. Funds-Axis, FEFTA Pre-Notification Requirements FAQs
8. AILaw, Japan FEFTA Amendment 2026: Indirect Acquisition
9. Lexology, Japan FDI Screening Update