#1 Check-the-Box Election for the Japanese Limited Liability Company (Godo Kaisha, GK)
- Masato Minamizuka
- Dec 6, 2022
- 3 min read
Updated: Feb 27
In Japan, a limited liability company (Godo Kaisha, or GK: 合同会社) is treated as a taxable entity, similar to a joint-stock company (Kabushiki Kaisha, or KK: 株式会社). Both GKs and KKs are taxed as corporations under Japanese law, paying taxes based on their profits.
However, differences arise under the U.S. tax reporting purposes between GKs and KKs. Based on the check-the-box election under U.S. tax law, a Japanese subsidiary GK owned by a U.S. corporation can elect to pass through its income and report it as part of the U.S. parent company's income.
This flexibility exists because a GK is not listed as a per se corporation in the Internal Revenue Service’s (IRS) classification of foreign business entities that are automatically treated as corporations for U.S. federal tax purposes (the per se corporation list) under Section 301.7701-2(b)(8). For Japanese business entities, only the KK is listed as a per se corporation. Since a GK is not on this listing, it is considered as an eligible entity and can elect its classification for federal tax purposes using Form 8832. With this election, a GK can be treated as a pass-through entity which can be in the form of an entity disregarded as separate from its owner (if it has a single owner) or a partnership (if it has multiple owners). With this classification, the GK’s profits and losses “flow through” to the U.S. parent company for tax reporting purposes in the U.S. This setup provides an advantage; if the Japanese subsidiary GK incurs losses (for example, during the startup phase), those losses can be offset against the U.S. parent company's profits, potentially reducing the overall tax payment.
Comparison between a GK and a Branch
Similarly, for a branch, its income and losses can flow directly to its U.S. parent company for U.S. tax purposes, as the branch is not a separate legal entity. However, since it is considered as an extension of the parent company, a branch is subject to the Per Capita Basis (均等割: Kintowari) of the Corporate Inhabitant Tax (法人住民税: Hojin Juminzei) in Japan. This tax can be significant because it is calculated based on the global equity of the U.S. parent company, regardless of the size of the branch's operations in Japan.
Advantages of Using a GK
A key advantage of using a GK over a KK is the ability to elect pass-through taxation for U.S. tax purposes, which allows profits and losses to flow directly to the U.S. parent company. Also, under the Japanese law, the GK is regarded as a separate legal entity. This means that its Corporate Inhabitant Tax (法人住民税: Hojin Juminzei) is based only on the paid-in capital of the GK, avoiding the potentially higher Per Capita Basis taxation tied to the equity of the U.S. parent company as compared to a branch.
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