Ordinarily, a foreign enterprise enters the Japanese market using one of the following 3 corporate structures:
- Representative office
In general, the foreign enterprise is free to establish a representative office in Japan for the purpose of collecting and providing information. As such, no permission, notification or registration is required for the establishment of such an office under the Foreign Exchange and Foreign Trade Control Law. Since the representative office can not conduct business activities under the Foreign Exchange and Foreign Trade Control Law, it is not regarded as permanent establishment (“PE”), and therefore not subject to Japanese corporate tax.
Chart1
Ordinary Activities of a Representative office
If any representative office in Japan intends to conduct activities other than those listed in the above chart, it must, regardless of its title, implement the procedures necessary to establish a branch.
- Branch office
To establish a branch office in Japan by a foreign enterprise as its base for business is considered to be a “Direct Domestic Investment” under the Foreign Exchange and Foreign Trade Control Law. As such, the branch office is required, in principle, to report to the Minister of Finance and occasionally to other relevant Minister(s) after its commencement, and to register as a foreign company under the provisions of the Corporate law.
Under the Foreign Exchange and Foreign Trade Control Law, it is necessary to report the commencement of branch office by filing a “Report Concerning the Commencement of Branch, etc.” shortly after its commencement.
Once the branch office receives the approval for its commencement report, both the office and its legal representative in Japan (the branch manager) are considered to be registered with the corporate registry authorities. At this point, the branch formally comes into effect. The registered branch manager then becomes authorized under the Japanese law to represent the branch office in all capacities, and to conclude contracts with third parties without any additional internal corporate authorization. You must register each change of branch manager.
Under the corporate law, the branch office may engage in any approved corporate activity. It is used primarily for liaison, technical servicing, purchasing, and less frequently for importation and sales.
- Corporation (Subsidiary)
If the foreign enterprise incorporates a Japanese corporation, it is treated as a “Direct Domestic Investment” under the Foreign Exchange and Foreign Trade Control Law, as is the “establishment of branch”. The enterprise must notify its incorporation shortly after the establishment (prior notification may also be required in some instances).
A new law entitled the “Corporate law” (Kaisha Ho) passed the Diet on June 2005 and become effective on May 1, 2006, which replace and significantly modify the current provisions of the Commercial Code.
Under the new Corporate law, the company is broadly classified into two types according to the shareholders’ responsibility and governance. One is Kabushiki Kaisha (joint-stock company) and the other is Equity Companies (joint-name company/ joint-fund company/ limited partnership company).
- A joint-stock company (Kabushiki Kaisha, KK) consists of shareholders whose liabilities to creditors of the company are limited to the amount of stock purchased in the company.
- A joint-name company (Gomei Kaisha) consists of partners whose liabilities to creditors of the company are unlimited.
- A joint-fund company (Goshi Kaisha) consists of limited and unlimited partners. Limited partners’ liabilities to the creditors of the company are limited to the amount of their contribution to the company.
- A limited partnership company (Godo Kaisha, GK), which is newly introduced, consists of partners whose liabilities to creditors of the company are limited. A GK
is similar to an LLC in the US as it combines limited liabilities for its members with flexible management structure.
Limited liability company (Yugen Kaisha, YK), which is a simplified joint-stock company used for small businesses, is abolished and no new YKs can be established under the new Corporate law. All existing YKs have two choices (i) automatically becoming an ordinary KK or (ii) continuously existing as a so-called Special YK (Tokurei Yugen Kaisha) keeping almost all of the characteristics of a YK.
- Kabushiki Kaisha (KK)
Factors such as limited liability, management participation and other relevant matters mean that a Kabushiki Kaisha is usually the most suitable structure for foreign enterprises to adopt when establishing an operation in Japan. Indeed, nearly all the subsidiaries and joint ventures set up in Japan by foreign businesses have taken the form of Kabushiki Kaisha.
The steps which a foreign corporation establishing a Kabushiki Kaisha must take are as follows:
(1)
|
The articles of incorporation of the Kabushiki Kaisha should be prepared. |
| (2) |
A “Report on the Acquisition of Shares” should be filed with the Minister of Finance and other Ministers to obtain approval, as required by the Japanese Foreign Exchange Control Law. |
| (3) |
The articles of incorporation should be notarized. |
| (4) |
The shares should be purchased up by the promoters and subscribers. |
| (5) |
A constituent general meeting must be held to elect directors and the statutory auditors. The directors elect a representative director(s) at the directors’ meeting. |
| (6) |
The formation of a Kabushiki Kaisha must be registered with the local office of the Legal Affairs Bureau of the Ministry of Justice no more than two weeks after the constituent general meeting. |
Because of the legal issues associated with the formation and registration of a Kabushiki Kaisha, legal advice and assistance should be sought.
The new Corporate law does not require minimum capital for a KK at the time of incorporation. Accordingly, KK can be established even at ¥1 capital. On the other hand, new Corporate law prohibits dividends distribution unless its net assets are more than ¥3,000,000.
A KK is classified into Large/Small-Medium company and Open / Closed company by its amount of capital and liability and transferability of stock
| Large Company (LC) |
: The capital is ¥500 million or more
Or total liability is ¥20 billion or more |
| Small-Medium Company (SMC) |
: Other than Large Company |
| Open Company |
: The shares are, in principle, transferable without the company’s consent despite some restrictions. |
| Closed Company |
: Transfer of every-class of share requires the company’s consent |
Under the new Corporate law, the internal organization structure such as director/representative director, board of directors, statutory auditors and accounting counselor can be more flexibly designed depending upon a type of KK
Image projected by a “Branch” versus a “Corporation” is as follows:
| Image Comparison |
|
Branch Office |
Corporation |
Image |
Small
Temporary
Short sighted
Weak
Negative
Untrustworthy
Not independent
Tough employment terms
Employment insecurity
Tough bank borrowing |
Large
Permanent
Long sighted
Strong
Positive
Trustworthy
Independent
Reasonable terms
Employment security
Easy bank borrowing |
| Capital |
No |
Yes |
| Retained earnings |
No |
Yes |
| Dividend |
No |
Yes |
| Nationality |
Foreign company |
Japanese company |
| Top management |
Branch manager |
President |
