Quick Review

Comparative Research

Opening an office in Japan is the first step of a long-term commitment to the Japanese market. Firstly, you will conduct comparative research to decide whether to form a representative office, branch or company.  Here is our quick review for you to make a comparison study.

Representative Office:   

Foreign corporations who are keen on conducting market research and feasibility study in Japan may wish to set up a representative office before deciding to set up a branch or a company to do business. A representative office is a temporary facility which is not allowed to engage in sales activities. As a representative office is intended as a non-profitable facility, it has no obligations to file tax returns and financial accounts with tax authority.

Branch:   

The simplest mode for a foreign corporation to start business operation in Japan is to set up a branch office. A branch is an extension of parent company, not a separate legal entity. The parent company is implicitly liable for all the debts and liabilities of its branch office, which may assure potential Japanese business partners and contractors. A branch office must have at least one representative officer who is an ordinary resident with an address in Japan. 
Branch’s profits will be taxed in Japan in almost the same manner as company’s profits. However, no withholding tax is imposed on the repatriation of branch profits to the home country unlike dividends from subsidiary company. Generally, branch’s profits will be taxed in the home country as well, and foreign tax credit can be applicable. Some countries exempt overseas income.

 

Subsidiary company:   
A company is a separate legal entity from its parent company. Company Act provides 4 types of company. Goshi-Kaisha and Gomei-Kaisha are barely chosen because they are partnership entity with their members bearing unlimited liability. 

Kabushiki-Kaisha: KK   

Kabushiki-Kaisha or KK is the most common and popular type of company in Japan. The form of KK has prestige in Japan due to its historical background, it used to be required to have capital amount of JPY 10 million or more, and three (3) directors at least, so it was not suitable for small businesses. 
Since a new Company law was enacted in 2006, KK can be started with capital as low as ¥1 and one (1) director. Besides, a residential director is no longer required since 2015. Due to its historical reputation, KK might be seen as a more stable entity than GK by potential customers and employees in Japan market. Withholding tax of 20.42% applies to dividends from Japan subsidiary company unless tax treaty between your country and Japan has concession rate. Your country’s domestic taxation is another consideration. Some countries exempt dividends from overseas.

Godo-Kaisha: GK   

A new Company law enacted in 2006 brought a new concept of company, Godo-Kaisha. GK is designed as a hybrid between a corporation and a partnership. GK has greater freedom of self-government through their articles of incorporation. For examples, it is not required to have annual general meetings, and dividends can be distributed disproportionately from the investment ratio of GK member. A member of GK who invested a small amount but contributed the vital intellectual property or the human resources can be distributed more than the investment ratio based on appraisal of the intellectual property or the human resources contributing to the earnings. Although it has similar features to LLC in US, GK is not a pass-through entity in terms of Japan domestic taxation, which means that GK’s profits will be taxed at corporation level in the same manner as KK. Although there are no special tax benefits and less recognition, small businesses may choose GK because its minimum registration fee payable to the government is only JPY60,000 (KK’s JPY150,000). 
You may notice that some Major organizations from US choose GK for its presence in Japan. GK can be treated as pass-through with the 'check the box' rule in terms of US domestic tax laws, allowing to offset deficits incurred in GK against the parent company’s profits. Huge corporations whose great international reputation has already reached at Japan may not need to show strong form of corporation by using KK.

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