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#3 Choose the legal form of your Japanese subsidiary

Updated: Feb 7

Typical business forms in Japan include representative offices (駐在員事務所), branch offices (支店), and subsidiaries (子会社). You must establish a branch office or a subsidiary to engage in full-scale sales activities. Here are some points to consider when deciding on the form of business entry into Japan for a foreign company. The details of whether to establish a joint stock company ((Kabushiki Kaisha, aka KK: 株式会社), a limited liability company (Godo Kaisha, aka GK: 合同会社), and other methods of incorporation are described below. For details, please click here (STEP2-Determine the Corporate Structure)



Typical types of business in Japan for foreign companies


Consult with experts regarding the establishment

The professionals you can consult regarding establishing a branch or company include certified public accountants, certified tax accountants, labor and social security attorneys, and attorneys at law. You can ask these professionals to prepare various documents (e.g., documents related to the establishment of a branch or subsidiary, transfer of location, change of directors, change of business purpose, capital increase, reorganization, merger, dissolution, etc.). In addition, the representation of clients in applying for commercial registration with the Legal Affairs Bureau (法務局) is the specialty of judicial scriveners (司法書士) and attorneys (弁護士).


The following explains the characteristics and differences between a representative office, a branch office, and a subsidiary.

Representative office (駐在員事務所)

A representative office is suitable if the purpose is to conduct preparatory or supplementary activities (market research, information gathering, etc.). It can conduct market research, information gathering, purchasing goods, and advertising. However, sales activities that generate income are not allowed. The establishment of a representative office does not require registration; hence a representative office cannot open a bank account or lease real estate. Therefore, it is necessary to open a bank account or lease real estate in the name of the individual expatriate or a business partner in Japan.


You can establish a representative office with minimum cost; It is not subject to corporate income tax (法人税) since it does not engage in business activities in Japan. It is not even required to register with the tax office (税務署). However, as an exception, financial institutions (banks, insurance companies, securities firms, etc.) must submit a prior notification to the Financial Services Agency (金融庁) when establishing a representative office. These are stipulated in the Banking Act (銀行法), the Financial Instruments and Exchange Act (金融商品取引法), and others.


Since you cannot open a bank account in the name of a representative office, you must open it in the name of headquarters in your home country or the name of the representative (individual) of the representative office. When a representative of a representative office opens an account, you may describe both the office's name and the individual's name. (ex. ×××× Company Japan Representative Office, ○○ ○○ (Representative's personal name))


Branch office (支店)

A foreign company must be registered in Japan (see Article 818 of the Companies Act) if it conducts ongoing transactions in Japan.


Registration of the establishment of a branch office is the most convenient way for a foreign company to establish a base for business activities in Japan. You can begin business activities once you establish a branch office, appoint a representative, and register the necessary matters. A branch office does not have its legal personality but is treated as a part of the legal personality of the foreign parent company. Generally, the foreign parent entity is ultimately responsible for all debts and credits generated by the branch's activities. A Japanese branch office may open bank accounts and lease real estate in its name.


In addition, at least one or more of the representatives in Japan in the case of establishing a branch office must have a domicile and residence in Japan. In contrast, the address requirement does not apply to the representative director (or a representative executive officer) of a KK and the representative member (a person performing duties of such member, if such representative is a corporation) of a GK.


Subsidiary (Japanese corporation)

A foreign company establishing a subsidiary in Japan must choose to establish the subsidiary company as a KK, GK, or similar entity stipulated by Japan's Companies Act. Although general partnership company (合名会社) and limited partnership company (合同会社) are also recognized under the Companies Act, they are rarely chosen in practice because the equity participants bear an unlimited rather than a limited liability. You can establish a subsidiary by completing the required procedures stipulated by law and then registering the corporation.


Since a subsidiary is a separate entity from a foreign parent company, the foreign parent company will bear the liability for all debts and credits generated by the subsidiary's activities.


There is another way for a foreign parent company to invest in Japan using a Japanese corporation, which is to establish a joint venture with a Japanese company or investment company and to make equity participation in a Japanese company.


Although KK and GK are similar insofar, liability in them is limited to the assets contributed by the equity participants. Compared with joint stock companies, however, limited liability companies have greater freedom of self-government through their articles of association. Unlike joint stock companies, limited liability companies may stipulate the procedures for preparing and approving their financial statements in their articles of association. Also, there are no laws and regulations relating to finalizing annual financial statements, and they do not have to publish their financial results. In addition, although their members are required to execute business operations, the articles of incorporation can specify the members who can conduct business operations.


The following table summarizes the differences in the legal nature of the general form in which foreign companies conduct business activities in Japan, either by establishing a branch office or a subsidiary.

Types of the legal form

Branch office

Subsidiary (Japanese corporation) - KK

Subsidiary (Japanese corporation) - GK

Capital stock

​No capital stock

1 yen or more

1 yen or more

​Number of investors

-

1 or more

​One or more

Liability of equity participants/parent company toward creditors

Unlimited

Limited to the amount of equity participation

Limited to the amount of equity participation

Transfer of equity participation share

No equity participation share

May be transferred freely in principle. May be stipulated in the articles of incorporation that approval of the Board of Directors is needed for transfer of shares.

Unanimous approval of equity participants (members) required

Number of executives required

Representative in Japan. One or more

Varies depending on the type of organization

No legally stipulated minimum number of board members. In principle, all members are executive officers but may be stipulated otherwise in the Articles of Incorporation.

Legally stipulated term of office for executives

No legally stipulated term

Varies depending on the type of organization

No legally stipulated term

Regular general meeting of shareholders (members)

Not required

In principle, it must be held every year

Not required

Possibility of the public offer of stock (equity participation share)

No equity participation share

Possible

Not possible

Possibility of reorganization into KK

Not possible. Need to separately close the branch office and, register the resignation of all representatives in Japan, and establish KK.

- (A KK may be reorganized into a limited liability company.)

Possible

Distribution of profits and losses

-

Allocated according to the equity participation ratio

May be allocated at a different rate from the equity participation rate if specified in articles of association

Taxation of profits

Income arising within Japan is, in principle, taxed

Taxed according to profits of KK and profits allocated to shareholders

Taxed according to profits of a limited liability company and profits allocated to participants

Summary


As we have seen, there are three typical business forms in Japan: representative offices, branch offices, and subsidiaries. The most common way foreign companies conduct business activities in Japan is by establishing a branch office or a subsidiary. This article presents some key points for foreign companies when deciding on the form of their business form in Japan. The details of incorporation methods, whether to establish a KK, a GK, or more, are described below.

Please refer to the article. Click here. Determine the Corporate Structure


Citation


JETRO section 1.2 Comparison of types of business operation

 

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.


Please contact us for further information from here.





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