Japan Incorporation Services

Common benefits associated with incorporating in Japan include: a. Japan is the world’s third largest economy. Incorporating a company in Japan will help you to take advantage of this unparalleled market opportunity. b. Japan is a difficult market to exploit without a solid presence on the ground. Potential Japanese customers and partners will have more confidence in your ability to deliver if you operate via a Japanese company. c. It is vital to have a local Japanese entity if you wish to employ top quality people. If you do not have a local entity, potential Japanese employees will perceive that you lack commitment to the market. It is generally not possible to offer regular employee benefits (social insurance, labor insurance, etc.)if there is no Japan entity.

Kabushiki Kaisha (“KK”) is an important type of business corporation defined under Japanese law. The KK is a very well know form of doing business in Japan with the first KK having been established in 1873. Due to this long history, the KK has traditionally been the most utilized form of doing business by foreign companies in Japan. The most recent major changes to the law concerning KKs (the Commercial Code and new Company Law) took effect on 1 May 2006. These changes allow for single director KKs and also eliminate the previous requirement that KKs be established with a minimum of JPY10 million in paid in capital. For more information about Kabushiki Kaisha (“KK”) Download JTAX’s Kabushiki Kaisha (“KK”) Incorporation Guide.

Godo Kaisha (“GK”) is a type of business corporation defined under Japanese law. Unlike the Kabushiki Kaisha which enjoys a long history, the GK is a relatively new type entity having been first allowed by the Companies Act of 2005 (with effect from 1 May 2006.) GKs were put in place as a replacement for Yugen Gaisha (“YK”), which was a business structure utilized mainly by small / local businesses. GKs have gained popularity with US investors due to the possibility of utilizing the IRS’s “check the box” regulations for US tax purposes.However, it is important to note that a GK is not a “pass-through” entity for Japanese tax purposes. GKs may also allow more flexibility in management due to their partnership-like structure. For more information about Godo Kaisha (“GK”) Download JTAX’s Godo Kaisha (“GK”) Incorporation Guide.

A Japan Representative Office (sometimes called a Japan Liaison Office) is a mode of operating in Japan that does not involve utilizing a registered entity. Note that this is very different to situations in which a registered entity (i.e., a Kabushiki Kaisha, Godo Kaisha, or branch of a foreign company) is used. Some major advantages to utilizing a Representative Office structure in Japan include that a Representative Office is not subject to Japanese income taxes and does not require registration with the Japanese Legal Affairs Bureau. The general disadvantage of a Japan Representative Office is that the permitted activities in Japan can be very limited. In particular, sales activities are strictly prohibited. In addition, it may be difficult to obtain Japan work visas for foreign employees and Japanese employees may be reluctant to work for an entity that lacks a registered presence in Japan. JTAX has extensive experience assisting clients to establish Japan Representative Offices and then helping such operations to remain legally compliant.

JTAX spends time with each client to determine which entity will best meet their needs. Commercial considerations are generally paramount but there may also be important tax implications associated with different types of entity. The following are some of the most important issues that are relevant to choosing between establishing a Kabushiki Kaisha {‘KK”) or a Godo Kaisha (“GK”). a. Image In some industries, a KK is perceived as presenting a more prestigious corporate image. While this may not be as important as it once was, there are certain industries where a KK may be the only commercially realistic option. There are also certain licenses that can only be held by a KK. In some cases,Japanese employees may prefer to work for a KK b. Tax Both KK’s and GK’s are taxable entities for Japanese corporate tax purposes. Neither KKs nor GKs offer the option of being “disregarded” for Japanese tax purposes. However, for U.S. tax purposes only, the U.S. “check-the-box” regulations may allow a GK to be effectively treated as a branch of its U.S. shareholder. By contrast, for U.S. tax purposes, a KK is always treated as a “per se” corporation. In cases that involve U.S. shareholders, U.S.tax advisors should be consulted about these issues. c. Flexible Management An important difference between KKs and GKs is management structure. In general, GK’s can be significantly more flexible in terms of management structure and operation. For example, a KK is typically required to distribute dividends to shareholders on a pro-rata basis. A GK may be permitted to make distributions on any agreed basis permitted under its articles of incorporation. d. Ease of incorporation The incorporation procedures and ongoing requirements for a GK may be simpler than those applicable to a KK (though few foreign investors would make a decision based solely on this factor.)

Regardless of the type of entity that will be established in Japan, there are some basic decisions that need to be made prior to JTAX moving forward with the incorporation. These important pre-incorporation decisions include: a. Japan Resident Director / Representative Any Japan entity requires a Japan representative. This must be a natural person (i.e., not a corporate entity). The name given to the representative position depends on the entity involved: i. Representative Director in the case of a Kabushiki Kaisha (“KK”) ii. Executive Manager in the case of a Godo Kaisha (“GK”) iii. Branch Manager in the case of a Japan Branch of a Foreign Company iv. Japan Representative in the case of a Japan Representative Office / Liaison Office While it is no longer a legal requirement to have a Japan resident director, few companies will move forward without a Japan resident director. It should be noted that there may be adverse individual and / or corporate tax consequences associated with an individual acting as a director of a Japanese company. JTAX may be able to provide individuals to fill any of the above positions via its Japan Nominee Director Service. b. Shareholder / Head Office In the case of a KK or a GK, the shareholder can be either an individual or an incorporated entity. In the case of a Japan Branch of a foreign company or a Japan Representative Office / Liaison Office, a specific foreign corporation needs to be identified to act as the Head Office. c. Legal Registered Address Regardless of the type of Japan entity that is to be established, a legal registered address in Japan will be required. Three important issues need to be considered with respect to the Japan address: i. Legal registration issues As noted above, a Japan entity requires a legal registered address in Japan. Care should be taken in choosing this address since changes can be both costly (often several thousand USD) and time consuming (a month or more). ii. Business address to receive phone calls, mail, etc. Possibly separate to the legal registered address, a business address may be necessary. This function can be handled by the new Japan business entity’s “real” office. An alternative may be a serviced office or a virtual office service that is able to provide phone answering, mail collection, etc. iii. Visa issues Where visas for foreign employees may be required, a functioning business office will generally be needed. Virtual offices are usually not acceptable for this purpose but a serviced office may be a workable solution. JTAX can assist clients in meeting their office / address requirements via its Japan Office & Registered Address Service. d. Paid in Capital (“PIC”) Paid in capital is relevant to the establishment of Kabushiki Kaisha (“KK”) and Godo Kaisha (“GK”). It represents the amount of cash (and sometimes other assets) the owners / shareholders contribute to a company in exchange for shares in the company. Paid in capital can be used as working capital in the business. In addition to working capital requirements, there are four additional issues that should be considered: i. Commercial image The amount of paid in capital is available in the public record. Japanese customers and potential business partners may be reluctant to do business with a Japan entity that has low paid in capital. In addition, low paid in capital may cause difficulties when negotiating with landlords to enter an office lease. ii. Work visa issues Where the Japan entity will sponsor Japan work visas for foreign employees, the paid in capital must be high enough to demonstrate that the Japan operation is a viable business. iii. Japanese VAT (“consumption tax”) New companies with JPY10 million or more in paid in capital are generally automatically required to file a Japanese consumption tax (VAT) return. (In the case of a Japan branch it is the paid in capital of the foreign Head Office that is considered.) Paid in capital of less than JPY10 million may give rise to planning opportunities. iv. Tax based on the paid in capital One component (though typically small) of calculating a Japan entity’s tax liability is the level of paid in capital.

From 1 April 2015 the requirements were simplified such that the need for a Japan resident director was removed. However, most foreign investors will still appoint a Japan resident director. A Japan resident director will facilitate the establishment of a Japan bank account and also make it easier to enter agreements such as office leases. A decision to have no Japan resident should be carefully considered since it may render business difficult (if not impossible). JTAX may be able to provide Japan resident directors via its Japan Nominee Director Service.

Once the preliminary issues (registered address, directors, paid in capital, etc.) have been decided, the incorporation process can move forward. A typical incorporation will take between four and six weeks to complete.

Once the incorporation has been completed, there are critical (and time sensitive) post incorporation issues that need to be dealt with. One critical post-incorporation requirement is initial corporate tax filings. If these filings are submitted late, the Japan entity may suffer adverse tax consequences including losing the ability to carry forward losses. In addition, the basic revenue recognition model for the new entity should be decided and appropriate inter-company documentation put in place. Options include cost-plus and buy-sell models.