Project Finance 2025 Comparisons

Recent years have seen the largest number of project finance deals in the energy space, especially renewable energy (solar, onshore/offshore wind, biomass, geothermal) and battery energy storage system (BESS) projects. Sponsors are typically the project owners or equity providers, often in the following categories.

• Japanese trading houses (sōgō shōsha), which have a longstanding experience in overseas and domestic energy and infrastructure projects.

• Independent developers: Since the introduction of the feed-in tariff (FIT) subsidy programme for renewable energy in 2012, there have been a growing number of independent developers focusing on the development of renewable energy projects. Such developers are sometimes acquired by large energy groups such as Japanese oil majors.

• Foreign sponsors: Many large foreign sponsors with advanced know-how and experience, particularly in renewable energy (solar, onshore/offshore wind) and typically from Europe or North America, have invested in Japanese projects – by themselves or by teaming up with Japanese partners.

• Construction and engineering companies: These companies are usually involved in project finance deals as EPC contractors, but in recent years they have sometimes taken equity stakes in projects they help build.

• Private equity and infrastructure funds: In recent years, large private equity and infrastructure funds have invested in energy and infrastructure assets in Japan.

On the debt side, financing is usually provided by:

• Japanese megabanks – MUFG, SMBC, Mizuho (plus DBJ and SMTB) are the dominant arrangers and lenders in Japanese project finance;

• regional banks – particularly in renewable energy projects, local banks often participate in syndicates;
• the Japan Bank for International Cooperation (JBIC) – active in financing for overseas projects with a Japanese angle; and

• life insurers and institutional investors – increasingly active in providing long-term debt for stable energy and infrastructure assets.

A substantial proportion of the existing Japanese social infrastructure was constructed during the 1960s to 1980s. To meet the need to restore or replace these facilities in the coming decades, the Japanese government is facilitating the use of public-private partnership (PPP) and private finance initiative (PFI) structures.

Since the enactment of the PFI Act of Japan back in 1999, there has been a constant flow of projects to develop or restore public buildings such as municipal offices, public schools, libraries, parks, museums, etc. Also, since the introduction of a “concession” scheme in 2011, a considerable number of “concession” projects with large-scale project financing have been seen in various sectors, including airports, toll roads and water services. One of the biggest obstacles in these sectors is the fact that it is not necessarily easy to privatise aging public infrastructure assets in an economically attractive way for private investors and financers.

Also, in 2024, the largest-ever project financing (debt amount of over JPY500 billion) was arranged for the first-ever casino complex (“integrated resort”) project in Japan, developed by a consortium of a US-based casino operator, MGM Resorts and a major Japanese financial services group, Orix Corporation, in partnership with Osaka city and Osaka prefecture.

Structuring project finance in Japan requires careful attention to regulatory compliance, risk allocation, lender protections and appropriate funding techniques. While bank debt remains dominant, hybrid structures (eg, mezzanine and shareholder loans) and capital markets instruments (eg, green bonds and infrastructure funds) are gradually being used to optimise financing and align with ESG and policy shifts. There has been greater participation of institutional investors (life insurers and pension funds) in refinancing operational assets via project bonds and infrastructure funds. Typical techniques for equity funding in Japan are as follows:

• sponsor equity – direct shareholding in the special-purpose company (SPC) to be incorporated in the form of Kabushiki Kaisha (KK; normal stock company) or Good Kaisha (GK; equivalent to a limited liability company, or LLC);

• shareholder loans – often subordinated, and treated as quasi-equity for leverage purposes; and

• silent partnership (tokumei kumiai) – a contractual equity-like contribution commonly used in real estate, solar and BESS projects.

Typical techniques for debt funding in Japan are as follows:

• commercial bank loans – the mainstay of project finance, typically arranged by megabanks (Mizuho, MUFG, SMBC) and often syndicated to a wider group of smaller banks, including regional banks;

• project bonds (including trust beneficial interests repackaging project finance loans) – less common but gradually growing, especially in solar projects, though credit enhancement may be required;

• green financing – increasingly common and often structured as green loans or green bonds aligned with international principles; and

• mezzanine finance – subordinated loans or preferred equity to bridge equity gaps.

Japanese project finance structures often use 70–80% debt and 20–30% equity, though this depends on the project type, sponsor creditworthiness, project-specific risks in construction and operation, and revenue certainty. Sponsors must commit sufficient upfront equity (common equity or subordinated shareholder loans) to demonstrate commitment and absorb risks. Also, lenders typically require strong lender control via cash waterfalls, reserve accounts (debt service and major maintenance reserves) and distribution tests (debt service coverage ratio (DSCR) and loan life coverage ratio (LLCR)). Another feature of the Japanese project finance is its long tenor, typically around 15 to 20 years, and the use of mini-perm loans is not common in this market – although a gradual change in the landscape is starting to be seen.

Solar Power and Corporate Power Purchase Agreements (PPAs)

Since the feed-in-tariff (FIT) subsidy programme for renewable energy was introduced in 2012 immediately after a major earthquake in 2011, the development of renewable power plants (especially solar power plants) has boomed, with numerous project finance deals for solar power projects. Since the Japanese government newly introduced the feed-in premium (FIP; based on the contract-for-difference (CfD) concept) subsidy programme in 2022, a growing number of project finance deals have been seen based on revenues from private offtake contracts (corporate PPAs).

Offshore Wind

In recent years, offshore wind has been the hottest sector in the Japanese renewable energy market, where developers typically need to arrange large-scale project finance (several hundred billion JPY) to cover the massive project costs. In early 2020, the first commercial offshore wind project in Japan, with a total capacity of approximately 140 MW and led by Marubeni Corporation, reached financial close, with a total project cost of approximately JPY100 billion. In the coming years, even greater project financing is expected to be arranged for offshore wind projects in deep water areas. The Japanese government has already publicised its goal of developing offshore wind projects with a total production capacity of up to 30–45 GW by 2040. Offshore wind is expected to become the most stable source of large-scale project financing deals in the near future.

BESS

Rapid growth of project finance deals for BESS projects in Japan has also been seen in recent years. Here, a driving force is a new auction scheme, the “Long-Term Decarbonised Power Auction” (LTDA), introduced in 2023, by which developers can receive guaranteed payment to cover the total capital expenditure (Capex) plus certain profits. BESS is one of the decarbonised power sources applicable to the LTDA, and a growing number of project finance deals for BESS projects developed based on this new LTDA scheme have been seen.

Hydrogen and Ammonia

Under growing pressure to move towards carbon neutrality, like many other countries, hydrogen and ammonia use has been one of the hottest topics in the energy sector in Japan. The Japanese government enacted the Hydrogen Society Promotion Act (the “Hydrogen Act”) in late 2024. One of the subsidy schemes under the Hydrogen Act is a supply-side subsidy structured on the basis of a CfD, providing financial support to bridge the price gap between the sourcing of low-carbon hydrogen/ammonia as compared to conventional fuels such as liquid natural gas (LNG) and coal. Through this subsidy programme, the Japanese government intends to select attractive hydrogen and ammonia projects considered to contribute sufficiently to the development and expansion of new supply chains in Japan towards 2030. In this context, there will be a growing number of project finance deals for hydrogen and ammonia projects (especially power plants wholly or partly fuelled by hydrogen or ammonia) in the near future.

Real Estate

Among the forms of security available under Japanese law (ie, mortgage, pledge and security assignments), a mortgage is typically used for real estate. A mortgage is perfected by registration at the legal affairs bureau with jurisdiction over the location of the property.

Movables

Security assignment (also known as security by way of assignment or assignment for the purpose of security) can be used to create security interests over movable properties. Subject properties can be individual properties or a pool of properties. The pool needs to be sufficiently identified by specifying the type of asset, location and other necessary criteria. This method enables lenders to capture future (after-acquired) movable properties as collateral. To perfect a security assignment of movable property, actual or constructive delivery of the subject property (such as an occupant’s manifestation of its intent to occupy the subject assets for the benefit of the secured parties) is required. Alternatively, registration of the transfer can also perfect the security assignment.

Receivables

Pledge and security assignments are the most typical forms of security for receivables. Future (after-acquired) receivables can be subject to a pledge or security assignment, provided that the target receivables are sufficiently identified. Lenders can perfect the pledge or security assignment by giving notice to, or obtaining acknowledgement from, the obligor in written form with a notarised date certificate. Alternatively, registration of the pledge or assignment can also perfect the pledge or security assignment. In either case, receivables cannot be collateralised without obtaining the obligor’s consent if the underlying contract has a transfer restriction clause.

Cash Deposits

Security over cash deposits is usually included in a typical security package for project finance in Japan. The borrower’s receivables from the depository bank can be pledged for the benefit of the lenders in the same way as other types of receivables. Such pledge is perfected by the written acknowledgement by the depositary bank with a notarised date certificate.

Shares

Pledge is the most typical form of security for shares of the project SPC. The method for perfection depends on the type of shares (the corporate form of the issuer). Unless the issuer is a listed company, the share pledge is normally perfected by the delivery of the share certificates representing the pledged shares. If share certificates are not issued pursuant to the articles of incorporation of the issuer, then the share pledge is perfected by recording the pledge in the shareholder ledger.

Security Trust

Traditionally, it has been a generally accepted principle in Japan that security must be held by the creditors to whom secured obligations are owed by an obligor. Therefore, each lender is named as a secured party in most syndicated loan transactions in Japan, which could be burdensome when there is a transfer of loans or a collective enforcement of security interests.

In 2007, the Trust Act of Japan was amended, and the concept of a security trust was introduced, but as a matter of practice, security trusts have not been frequently used to date due to a number of drawbacks. One hurdle is a substantial increase in transaction costs, which results from fees payable to a trust bank or a trust company acting as the trustee of a security trust and also from the additional mortgage registration fees required for the perfection of mortgages held by a security trust.

“Floating charge” or “blanket lien” (ie, a lien that gives a creditor the entitlement to take possession of any or all of the debtor’s property to cover a loan) is not available for bank loans in Japan. Therefore, it is necessary to individually create security interests over each type of asset. Only with respect to movable assets and receivables is it legally possible to create security interests over current and future (after-acquired) assets that may change from time to time, to the extent that the scope of the security can be identified by location, type of asset or underlying agreements.

Alternatively, a mortgage on a factory foundation (special statutory mortgage on facilities and rights to use underlying land) can be granted in favour of lenders. The reason for granting such a mortgage in project finance relates to the legal nature of some types of equipment. Specifically, it is not necessarily clear whether equipment directly and firmly attached to the land (eg, mounting structures, fences, transmission line towers and underground cables) could be categorised as a part of either real estate or movables under Japanese law. Thus, lenders are sometime concerned about which security interest (real estate mortgage or pledge/assignment of movables) is truly suitable for such equipment. In this context, there is an advantage in using a mortgage over a factory foundation because a factory foundation can capture both real estate and movables, as long as the scope of mortgage is duly identified and registered.

Registration Fee for Real Estate Mortgage

The registration fee for a real estate mortgage is 0.4% of the amount of the secured obligation. To reduce the upfront cost, some lenders permit the security provider to make a provisional registration only, on day one, which costs JPY1,000 per property. Once the mortgage is provisionally registered, the priority is reserved for the mortgage over subsequent competing parties, such as other mortgagees. To upgrade from a provisional to a formal registration, documents (some of which must be provided by the security provider) must be submitted, and registration fees (which are typically borne by the security provider or the borrower) must be paid.

Registration Fee for Security Assignment of Movables

To perfect a security assignment of movable property, actual or constructive delivery of the subject property (such as an occupant’s manifestation of its intent to occupy the subject assets for the benefit of the secured parties) is required. Alternatively, registration of the assignment can also perfect the security assignment. The registration fee is JPY7,500 per filing, in addition to the professional fees of the judicial scrivener.

Registration Fee for Security Assignment of Receivables

Lenders can perfect the pledge or security assignment by giving notice to, or obtaining acknowledgement from, the obligor in written form with a notarised date certificate. Alternatively, registration of the pledge or assignment can also perfect the pledge or security assignment. In most cases, the registration fee is JPY7,500 per filing, in addition to the professional fees of the judicial scrivener. The cost of a notarised date certificate is even lower.

Under Japanese law, the general principle is that each item of collateral needs to be individually identified in the security document to grant a valid security interest in that item. Having said that, as mentioned in 2.1 Assets Available as Collateral to Lenders, it is possible to create security assignment over a pool of movable properties. The scope of the pool needs to be sufficiently identified by specifying the type of asset, location and other necessary criteria. This method enables lenders to capture future (after-acquired) movable properties as collateral.

Likewise, as mentioned in 2.1 Assets Available as Collateral to Lenders, a pool of receivables, including future (after-acquired) receivables, can be subject to a pledge or security assignment, provided that the scope of the pool is sufficiently identified.

Granting a security interest over some assets (eg, receivables and contractual rights or status) may require consent (acknowledgement) from a third party (the counterparty of such receivable or contract), but regulatory or similar consents are not required with respect to major assets that are normally included in the security package for project finance in Japan.

For liens subject to public registration such as a real estate mortgage, security assignment of a pool of movable assets and receivables, it is possible for lenders to confirm the absence of other liens by checking the registration database.

However, for liens not publicly registered – such as pledge and security assignments of individual movable assets, receivables, cash deposits and shares – there is no public database by which lenders can firmly confirm the absence of other liens. Instead, lenders usually conduct a sufficient legal due diligence in the process of arranging the finance, and also typically require representations and warranties pertaining to the absence of encumbrances over the borrower’s collateral assets.

In the case of ordinary security interests, the security is extinguished by operation of law once the secured obligation has been discharged. Accordingly, no release agreement or letter is legally required. However, in practice, it is common for the borrower to request a release letter for evidentiary or administrative purposes, and lenders often provide such confirmation upon request.

By contrast, revolving or continuing security interests (such as revolving security over obligations under a revolving facility) do not automatically terminate upon the repayment of the underlying obligations. In these cases, a formal release is typically required, either through the issuance of a release letter or by providing – in the security agreement – that the security shall be deemed released upon the occurrence of certain trigger events (for example, the expiry of the commitment period under a revolving facility).

When Enforcement Is Available

A secured lender may enforce its collateral when the secured obligations are due and unpaid (typically after an event of default and acceleration under the finance documents). In judicial foreclosures, the secured party generally needs only to evidence the existence and perfection of the security interest; the debtor bears the burden to show the debt is not due or otherwise not payable.

Judicial Vs Out-of-Court Enforcement

Japanese law recognises both in-court and out-of-court enforcement. In-court foreclosure is not available for collateral assignments (jouto-tampo); such interests are enforced privately. Security documents typically provide (i) a power to dispose of the secured property and apply proceeds to the debt, and/or (ii) appropriation at the appraised value. For mortgages, any private sale requires the mortgagor’s co-operation (as the seller), so court auction is often the practical route. By contrast, pledges and collateral assignments can be enforced directly by the secured party if so agreed in the security agreement.

Insolvency Overlay

The commencement of insolvency does not generally bar a secured creditor from enforcing outside the proceeding – except in corporate reorganisation (kaisha kosei), where separate enforcement is stayed and recoveries are channelled through the plan; civil rehabilitation may involve court suspension orders. Importantly, corporate reorganisation is available only to KK and does not apply to Godo Kaisha (GK). This is one reason why GKs are frequently used as project companies for bankruptcy-remoteness.

Can a Security Agent Enforce Directly?

As a principle under Japanese law, the holder of the security must be the same person as the secured creditor; therefore, a typical “security agent” cannot hold or enforce security for the syndicate. As mentioned in 2.1 Assets Available as Collateral to Lenders, the recognised exception is a security trust under the Trust Act: the trustee holds and enforces the security for the benefit of the lenders (as beneficiaries). Parallel-debt constructs have been discussed in Japan but are not used in project finance practice.

Governing Law

Japanese conflict-of-laws rules recognise party autonomy. A contract may be governed by a foreign law, and Japanese courts generally uphold a duly expressed choice-of-law clause (Act on General Rules for Application of Laws (GRAL), Article 7). Application of the chosen law could possibly be limited by mandatory Japanese rules and the public-policy (public order) exception.

Matters That Remain Governed by Japanese Law

Irrespective of a foreign governing law for the finance documents, issues characterised as rights in rem and other registerable rights over assets located in Japan are governed by the law of the place where the property is situated (lex rei sitae) (GRAL, Article 13). In addition, the effectiveness of an assignment of receivables against debtors and third parties is governed by the law applicable to the assigned receivables (GRAL, Article 23).

Submission to Foreign Jurisdiction

Japanese law also recognises agreements on jurisdiction. Parties may agree in writing to submit disputes to a specified foreign court in relation to a specific legal relationship.

Foreign Court Judgments

A final and binding judgment rendered by a foreign court is recognisable in Japan if the requirements in Article 118 of the Code of Civil Procedure are met (jurisdiction accepted, proper service or voluntary appearance, no violation of Japanese public policy, and reciprocity). Enforcement then requires an execution judgment from a Japanese district court under the Civil Execution Act; the court does not review the merits when issuing that execution judgment.

Arbitral Awards

Japan is a party to the New York Convention. Under the Arbitration Act, an arbitral award (domestic or foreign) has the same effect as a final judgment and is enforceable in Japan upon obtaining an execution order; refusal is limited to the Convention-aligned grounds (eg, invalid arbitration agreement, lack of due process, excess scope, non-binding/set-aside, non-arbitrability or public policy). No merits review is undertaken.

Foreign and domestic lenders are treated equally in Japanese courts; there are no substantive restrictions uniquely limiting a foreign lender’s enforcement of loan or security rights. Court proceedings are conducted in Japanese, so filings and key identity documents must be in Japanese or accompanied by Japanese translations.

Where enforcement leads to acquiring shares or certain assets, prior notification or other filings may be required by the regulations on foreign direct investment under the Foreign Exchange and Foreign Trade Act (FEFTA) – especially for “designated industries” – which can affect timing and execution strategy.

There are no nationality-based prohibitions uniquely restricting foreign lenders. The key overlay is licensing: engaging in a money-lending business in Japan requires either a licence/registration under the Money Lending Business Act (MLBA) or lending through a licensed foreign bank branch under the Banking Act. Whether an activity constitutes a “business” is fact-specific.

The MLBA framework exempts certain intra-group loans (eg, lending to subsidiaries where the lender holds >50% of voting rights, or 40–50% with additional control factors) and loans to a joint venture (JV) company by a JV partner holding ≥20% with the consent of all other partners. Sponsors often consider these routes when structuring shareholder funding.

There are no material restrictions uniquely limiting the grant of security or guarantees to foreign lenders; foreign lenders can take security and guarantees in the same manner as Japanese lenders, subject to the usual perfection formalities under Japanese law.

That said, foreign investment/FX rules may impose filings: cross-border loans/guarantees can trigger post-transaction reports to the Bank of Japan under FEFTA’s reporting system, and prior notification for foreign direct investment may be required where enforcement would result in acquiring shares or other interests in designated sectors. These are procedural overlays rather than substantive prohibitions.

Japan screens foreign direct investment under FEFTA. Prior notification is required when a foreign investor invests in a company engaged in designated business sectors (including “core” sectors). For listed companies, acquiring 1% or more of voting rights triggers notification (subject to exemptions); for unlisted companies in designated sectors, prior notification generally applies regardless of the percentage. Certain shareholder actions (eg, appointing a related director) and business/asset acquisitions are also captured. After closing, post-transaction reports may be required. FEFTA permits exemptions from prior notification (eg, a blanket exemption for foreign financial institutions and a general exemption for other investors) if certain conditions are met.

Following a filing, the statutory waiting period is 30 days, typically shortened to about two weeks, but it can be extended up to five months if any national security concern arises. The Ministry of Finance also maintains and periodically updates the classification list to help investors assess filing needs.

The Japanese government imposes no general foreign exchange (FX) controls on outbound payments or repatriation (eg, dividends, interest, principal, fees); however, post-transaction reporting via the FEFTA system may apply depending on the nature/method of the cross-border payment. Payments are restricted where Japanese sanctions under FEFTA apply (eg, listed parties, certain countries/uses).

Outbound dividends to non-resident shareholders are, as a matter of domestic law, subject to 20.42% withholding (20% national income tax + 2.1% reconstruction surtax), commonly reduced under an applicable tax treaty upon proper filings.

A project company may maintain offshore foreign currency accounts; there is no general prohibition under Japanese law.

In practice, facility documents often require onshore collection/controlled accounts for the cash waterfall. If offshore accounts are used, perfection/control will follow the law of the account location and may require local law security or account control arrangements.

Generally, there is no need to register or file financing or project agreements with any governmental authority or comply with legal formalities in order for such documents to be valid and enforceable. However, the following points warrant attention.

• A fixed-term land leasehold agreement for business purposes needs to be executed in the form of a notarised deed (kosei shousho).
• As a security agreement, registration or other formalities might need to be perfected (see 2 Guarantees and Security).
• There may be certain requirements in relation to the agreements, such as stamp duties (see 8.2 Other Taxes, Duties, Charges) and making the filings under FEFTA (see 4 Foreign Investment). However, these are not conditions to the formation or validity of the agreements.

Generally, owning land in Japan does not require any licence. Foreign entities may own land both directly and indirectly (through a Japanese corporation). However, various laws and regulations may be applicable to their acquisition and development of land, depending on the type of activity. For example, ownership of natural resources generally requires permission as follows.

• Mining certain minerals requires a mining right under the Mining Act. Mining rights can only be acquired by Japanese nationals or Japanese corporations; however, foreign ownership of mining rights through a Japanese corporation is allowed under the Mining Act.
• To use river water, permission must be obtained from the central or local government under the River Act. Permission can be obtained by a foreign entity.

Furthermore, while land ownership per se is not directly prohibited, attention should be paid to the following regulations:

• under the Act on the Review and Regulation of the Use of Real Estate Surrounding Important Facilities and on Remote Territorial Islands, prior notification may be required when acquiring ownership of land surrounding important facilities (eg, defence-related facilities) or on remote territorial islands; and
• where a silent partnership (tokumei kumiai) acquires ownership of land, the arrangement may fall within the scope of a specified joint real estate business (a sort of real estate fund business) and require a licence under the Act on Specified Joint Real Estate Ventures.

In Japan, the concepts of agency and trust are recognised. However, as noted in 2.1 Assets Available as Collateral to Lenders, security trusts have not, to date, been widely used in project finance due to various practical drawbacks.

As an alternative to a trust structure, a parallel-debt structure – under which a security agent holds security to secure a separate “parallel debt” owed to it by the borrower, rather than to secure the lenders’ claims directly – may be considered. That said, parallel-debt structures likewise have not been adopted in Japanese project finance practice.

While the current situation is as described in the foregoing, where an enterprise value charge (kigyo kachi tampo ken; a sort of floating charge) is to be created under the Act on the Promotion of Cash Flow-Based Lending, which is scheduled to come into force in 2026, the use of a security trust is mandatory. Following the Act’s commencement, it will be important to monitor the extent to which the enterprise value charge will be adopted in actual project finance practice.

As a general rule under Japanese law, the priority among competing security interests is determined by the order in which perfection has been completed. The relevant sequence differs depending on the type of collateral – for instance, the priority of security over receivables is determined by the order in which acknowledgments bearing a certified date (kakutei hizuke) are obtained from the third-party obligor whilst the priority of real estate mortgage is determined by the order in which the creation of the security interest is registered.

In terms of priority among secured creditors, Japanese law allows transaction parties to create and perfect most types of security interests in different priorities for the benefit of multiple creditors pursuant to certain procedures provided in the Civil Code and other relevant regulations. In addition, the second-ranking secured creditors will typically be requested by the senior lenders to enter into an intercreditor agreement in which they covenant not to enforce their security interests without the approval of the first-ranking secured creditors.

Under Japanese law, there is no requirement that, in order to obtain funding by project finance, the project company be organised under the laws of Japan. However, as a matter of general practice, it is not a realistic option for developers to establish the project company under any laws other than Japanese law for the following reasons.

• Many Japanese financial institutions that act as project finance lenders hold banking or moneylending licences only in Japan. Accordingly, if the borrower (ie, the project company) is organised outside Japan, then – unless the lender also holds any licence required to make loans in the relevant foreign jurisdiction – the contemplated lending would fall outside the scope of the lender’s Japanese licence because it would constitute lending to a non-resident.
• In case where the project company is organised under laws other than Japanese law, the share pledge will need to be created under such foreign law, which is not normally a realistic option for project finance lenders in Japan.
• In case of projects subject to public tender by national or local governments, a request for proposals issued by procuring authorities for PPP and private PFI projects typically requires that the project company be a corporation incorporated under the laws of Japan.

There are four major statutory insolvency proceedings, namely, bankruptcy (hasan), special liquidation (tokubetsu seisan), civil rehabilitation (minji saisei) and corporate reorganisation (kaisha kousei). Bankruptcy and special liquidation proceedings result in the liquidation of the borrower’s business, while the other two proceedings allow the debtor’s business to continue once substantial changes have been made to its assets, liabilities and equity pursuant to a rehabilitation or reorganisation plan. Special liquidation and corporate reorganisation are only available to a KK, not to GK.

Generally, in the course of bankruptcy proceedings (hasan), special liquidation (tokubetsu seisan) and civil rehabilitation proceedings (minji saisei), security interests are outside the scope of the control or supervision of the court-appointed administrator (receiver). The commencement of such proceedings does not affect any security interest in place over the debtor’s property. Therefore, such security interests could be enforced even during the bankruptcy proceedings and civil rehabilitation proceedings.

On the other hand, if corporate reorganisation proceedings (kaisha kousei) are commenced, secured creditors will be required to suspend security enforcement (an automatic stay), and their claims may be subject to reduction in accordance with the reorganisation plan. In other words, the court-appointed administrator may reduce the amount covered by a certain security interest if it approves such reduction. Therefore, under corporate reorganisation proceedings, security interests might not be enforced pursuant to the original terms and conditions thereof.

In the context of project finance, it should be noted that Japanese LLCs (GK) cannot be the subject of corporate reorganisation proceedings, unlike ordinary stock companies (KK), which means that the lender to a GK can enforce its security interests outside the insolvency proceedings commenced with respect to a GK. In practice, a GK is often used as a project company, especially in solar power projects in Japan.

Secured creditors can enforce against their collateral outside insolvency proceedings other than corporate reorganisation proceedings (see 6.2 Impact of Insolvency Process); any shortfall drops into the unsecured pool.

Unsecured claims are usually treated as general claims in Japanese insolvency proceedings, and are subordinated by law to the following two senior claims: common benefit claims (such as costs and expenses arising from insolvency proceedings and certain other types of claims having common benefit for creditors overall) and preferred general claims (such as wages for employees and certain tax claims). Also, general claims are satisfied in priority to certain subordinated derivative or incidental claims (such as accrued interest, damages or penalties for contractual breach, and delinquent taxes arising after the commencement of insolvency proceedings) pursuant to the relevant insolvency laws.

One of the notable risk areas for lenders in statutory insolvency proceedings is the risk of avoidance. As discussed in 6.2 Impact of Insolvency Process and 6.3 Priority of Creditors, a security interest, unless avoided, may be afforded priority treatment even in insolvency proceedings. However, where a security interest is created or perfected by an already-insolvent debtor or a debtor who has suspended payment of debts that are due and payable, the related security interest or perfection may be avoided if bankruptcy proceedings (hasan), civil rehabilitation proceedings (minji saisei) or corporate reorganisation proceedings (kaisha kousei) have commenced thereafter.

As discussed in 6.1 Company Reorganisation Procedures and 6.2 Impact of Insolvency Process, special liquidation and corporate reorganisation are only available to a KK, not to a GK.

Foreign insurance companies are generally required to obtain an insurance business licence under the Insurance Business Act to provide insurance policies over project assets in Japan.

As a matter of law, it is not permitted under the Insurance Act to establish pledge over the right to claim insurance benefits under a liability insurance contract. Consequently, when structuring project finance, it is necessary to ensure that such rights are not pledged for the lenders.

There is no specific restriction on the payment of insurance proceeds to foreign creditors.

Dividends and interest paid to foreign entities by a Japanese entity are subject to withholding income tax at a rate of 20.42% (this may be reduced or exempted by treaty). Also, if the proceeds of a claim under a guarantee or security enforcement are treated as income from a domestic source, they will be subject to withholding income tax.

Stamp duties will be imposed on certain types of agreements, such as EPC contracts, land lease agreements, service agreements and loan agreements. For instance, in case of loan agreements, the amount of stamp duty may vary depending on the principal amount of the loan (the maximum amount of stamp duty is JPY600,000). Stamp duty is only imposed on the hard copies of signed/sealed contracts, and thus, stamp duty is not imposed on contracts executed electronically.

The interest rate cannot exceed the statutory cap (15% to 20% per annum) under the Interest Rate Restriction Act.

The Interest Rate Restriction Act also stipulates that, with respect to monetary loans, any funds received by the creditor beyond the principal amount – excluding expenses related to contract execution and debt repayment – are deemed to be a part of interest, regardless of their designation, such as gratuities, discounts, fees, investigation charges, etc. Under such provisions, there have been various arguments regarding whether commitment fees, which are charged based on the unused portion of a credit line, should be subject to the regulations of the Interest Rate Restriction Act. Subsequently, the Act on Specified Commitment Line Contract was enacted, and if certain conditions are satisfied (such as the borrower being a stock company (KK) with stated capital exceeding JPY300 million, or its subsidiary), commitment fees are exempt from the deemed interest provisions of the Interest Rate Restriction Act.

In contract, when imposing commitment fees on borrowers not covered by the Act on Specified Commitment Line Contract, adjustments are implemented to avoid potential violations of the Interest Rate Restriction Act such as including provisions that reduce the commitment fee so that the interest rate remains within the range accepted under the relevant law.

For projects and assets located in Japan, project agreements are typically governed by Japanese law. It is not impossible for transaction parties to choose another governing law, especially in cases where a contractor is a foreign entity, but as long as the project site and assets are located in Japan, lenders strongly prefer to have project agreements governed by Japanese law from a bankability perspective (including the ease of creating security interests under Japanese law).

For projects and assets located in Japan, financing agreements are typically governed by Japanese law. Except for security agreements where the collateral assets are located in Japan or shares/equity interests of an entity incorporated under Japanese law, it is not impossible for transaction parties to choose another governing law, but as long as the project site and assets are located in Japan, lenders strongly prefer to have finance agreements governed by Japanese law from a bankability perspective (including the ease of creating security interests under Japanese law).

In general, both project agreements and financing agreements are typically governed by Japanese law. Please also see 9.1 Project Agreements and 9.2 Financing Agreements.