In Japan, a limited liability company (Godo Kaisha, aka GK: 合同会社) is a taxable entity similar to a joint stock company (Kabushiki Kaisha, aka KK: 株式会社). GK files tax returns and pays taxes as a GK as well. However, if the parent company is a U.S. corporation, the Japanese subsidiary GK can pass through its income and report it as part of the U.S. parent company's income for U.S. tax purposes based on the check-the-box election under U.S. tax law.
Under U.S. tax laws, only KK meets the definition of a corporation under IRS reg. Section 301.7701-2(b)(8), and therefore, GK is not considered a corporation for U.S. federal tax purposes.
According to section 301.7701-3, GK can elect its classification for federal tax purposes and can be disregarded as an entity separate from its owner if it has a single owner that does not have limited liability. As a result, GK's profit and loss can be passed through to the U.S. parent company (You should consult your U.S. tax advisor for actual tax consequences for the U.S. parent entity).
Again, GK must file a tax return in Japan, so GK's profits and losses are TAXED in Japan. The advantage of this scheme is that if the Japanese subsidiary GK has a loss, such as due to the startup of operation, it can be offset against the U.S. parent company's profit.
The same is true for the branch, but it is subject to the Per Capita Basis (均等割) of the Corporate Inhabitant Tax (法人住民税), which can potentially be significant because it is assessed based on the equity of the U.S. parent company.
The GK allows a pass-through of profits and losses while avoiding the risk of the Per Capita Basis of the Corporate Inhabitant Tax.
If you are considering expanding your business to Japan, please contact Quantum Accounting Inc. for a free consultation during the planning phase or general consultation (available in both English and Japanese). Quantum Accounting's professionals are experts in accounting, tax, legal, and labor issues. Our goal is to provide you with a one-stop professional firm for all the services you need to expand your business into Japan. We are confident that we can help you.