Establishing and Operating a Business in Japan: Structures, Procedures, and Compliance

TL;DR
Guides U.S. companies through entity selection (rep-office, branch, KK, GK), registration procedures, tax & labor compliance, and ongoing governance essentials for running a legally sound business in Japan.

Table of Contents

• I. Choosing the Right Form of Business Presence
  • A. Representative Office
  • B. Branch Office
  • C. Subsidiary Company
• II. Establishment Procedures
  • A. Registering a Branch Office
  • B. Incorporating a Subsidiary (KK or GK)
• III. Key Operational Considerations
  • A. Taxation
  • B. Labor and Employment
  • C. Banking and Finance
  • D. Intellectual Property
• IV. Ongoing Corporate Compliance
  • A. Corporate Governance
  • B. Record Keeping and Financial Reporting
  • C. Internal Controls and Ethical Conduct
• Conclusion

For US companies looking to tap into Japan's large and sophisticated market, establishing a direct business presence is often a crucial step. Whether for sales, manufacturing, research, or providing services, setting up operations requires careful consideration of the appropriate legal structure, registration procedures, and ongoing compliance obligations under Japanese law. This article provides an overview of the common options for establishing a presence and key operational considerations for foreign businesses entering Japan.

I. Choosing the Right Form of Business Presence

Foreign companies typically choose one of three main forms to establish a presence in Japan, each with distinct characteristics and legal implications:

A. Representative Office (駐在員事務所 - Chūzaiin Jimusho)

• Function: Primarily intended for preliminary and auxiliary activities such as market research, information gathering, liaison activities, advertising, and purchasing goods for the foreign parent company. A representative office cannot engage in direct business operations or sales activities in Japan and cannot generate revenue.
• Legal Status: Not considered a legal entity under Japanese law and does not require corporate registration with the Legal Affairs Bureau (法務局 - Hōmukyoku).
• Setup: Relatively simple; involves securing office space and appointing a representative. No minimum capital required.
• Limitations: Cannot open a bank account or lease real estate in its own name. These contracts must typically be concluded by the foreign parent company or the resident representative personally. Cannot sponsor work visas directly (employees usually remain employed/paid by the parent).
• Use Case: Suitable for initial market exploration or liaison functions where no direct sales or profit-generating activities are planned in Japan.

B. Branch Office (支店 - Shiten)

• Function: Can engage in full business operations in Japan, including sales and generating revenue.
• Legal Status: Considered an extension of the foreign parent company, not a separate legal entity in Japan. The foreign parent company is directly liable for all debts and obligations incurred by the Japanese branch.
• Setup: Requires appointing at least one representative based in Japan, securing an office address, and registering the branch with the Legal Affairs Bureau. Specific documents from the parent company (e.g., affidavit confirming parent's existence and appointed representative's authority, potentially articles of incorporation) are needed for registration.
• Taxation: Taxed only on income generated within Japan (Japan-source income).
• Use Case: Can be simpler and faster to set up than a subsidiary for initiating full business operations. However, the direct liability exposure for the parent company is a significant drawback. Converting a branch to a subsidiary later requires establishing a new subsidiary and transferring assets/operations, as a direct legal conversion is not possible.

C. Subsidiary Company (子会社 - Kogaisha)

• Function: Can engage in full business operations.
• Legal Status: A separate legal entity incorporated under Japanese law (either as a Kabushiki Kaisha or Godo Kaisha, see below). Its liabilities are distinct from the foreign parent company, whose liability is generally limited to its equity investment.
• Setup: Involves incorporation procedures under the Japanese Companies Act, including preparing articles of incorporation, appointing officers, contributing capital, and registering with the Legal Affairs Bureau.
• Advantages: Limited liability for the parent company is the primary advantage. Perceived as a more permanent and committed presence in the Japanese market. Can build its own credit history, enter contracts, lease property, and open bank accounts in its own name. Can directly sponsor work visas for employees.
• Taxation: Taxed on its worldwide income as a Japanese domestic corporation, though foreign tax credits may apply.
• Use Case: The most common and generally recommended structure for foreign companies planning long-term, substantial business operations in Japan.

Choosing Between Subsidiary Forms: KK vs. GK

If establishing a subsidiary, foreign companies typically choose between two main forms under the Companies Act:

1. Kabushiki Kaisha (KK - 株式会社):
   • Structure: The traditional joint-stock corporation, similar to a US C-corp or S-corp. Ownership is represented by shares (株式 - kabushiki).
   • Governance: Requires at least one director (取締役 - torishimariyaku). If establishing a board of directors (取締役会 - torishimariyaku-kai, mandatory in some cases like public companies, optional otherwise), at least three directors are needed. A Representative Director (代表取締役 - daihyō torishimariyaku) must be appointed to legally represent the company. Depending on the structure chosen in the articles of incorporation, it may also require statutory auditors (監査役 - kansayaku) or an audit & supervisory committee (監査等委員会 - kansa-tō iinkai). Shareholder meetings (株主総会 - kabunushi sōkai) are required (at least annually).
   • Public Perception: Generally viewed as the most credible and traditional corporate form in Japan. Essential if planning an IPO in Japan.
   • Setup Cost: Higher than a GK due to mandatory notary fees for the articles of incorporation (approx. JPY 50,000) and higher registration tax (minimum JPY 150,000 or 0.7% of capital, whichever is higher).
2. Godo Kaisha (GK - 合同会社):
   • Structure: Introduced in 2006, similar to a US Limited Liability Company (LLC). Ownership is represented by equity interests held by "members" (社員 - shain). All members have limited liability.
   • Governance: More flexible. Does not require directors or shareholder meetings by default. Managed by "executive managers" (業務執行社員 - gyōmu shikkō shain) appointed from among the members (or a non-member manager can be appointed if specified in the articles). Decision-making procedures and profit distribution can be flexibly determined in the articles of incorporation, potentially deviating from equity contribution ratios.
   • Public Perception: Gaining acceptance, particularly as subsidiaries of well-known foreign companies (e.g., Apple Japan, Google Japan operate as GKs). However, may still be perceived as less traditional than a KK by some Japanese businesses. Not suitable for IPO.
   • Setup Cost: Lower than a KK. No notary fee required for articles of incorporation. Registration tax is lower (minimum JPY 60,000 or 0.7% of capital, whichever is higher).
   • Tax Treatment: Treated as a corporation for Japanese tax purposes. However, under US "check-the-box" regulations, a GK subsidiary owned by a US parent can often elect to be treated as a disregarded entity or partnership for US tax purposes, offering potential tax advantages.

The choice between KK and GK depends on factors like desired governance structure, public image requirements, plans for future fundraising or IPO, setup costs, and US tax planning considerations.

II. Establishment Procedures

The specific steps vary depending on the chosen structure.

A. Registering a Branch Office

1. Appoint Representative(s) in Japan: At least one representative must be a resident of Japan.
2. Secure Office Space: A physical address in Japan is required for registration.
3. Determine Registration Details: Decide on the branch name, business scope, etc.
4. Prepare Required Documents: This typically involves obtaining an affidavit from the parent company (often notarized and apostilled/legalized in the home country) confirming its existence, head office details, business purpose, capital, directors, and the appointment of the Japan representative(s) with their authority. Translated versions may be needed.
5. File Registration: Submit the application and supporting documents to the competent Legal Affairs Bureau (Hōmukyoku) governing the branch's location.
6. Post-Registration Notifications: Notify tax authorities and social insurance offices.

B. Incorporating a Subsidiary (KK or GK)

1. Determine Basic Corporate Matters: Decide on the company name (must be checked for availability), registered head office address in Japan, business objectives, fiscal year, amount of capital (minimum JPY 1 legally, but a practical amount is needed for operations and credibility), and initial officers (directors for KK, members/managers for GK). At least one Representative Director (for KK) or Representative Member/Manager (for GK) must be a resident of Japan for practical banking purposes, though legally non-residents can hold positions.
2. Prepare Articles of Incorporation (定款 - Teikan): Draft the company's constitutional document outlining its structure, governance, and rules. This is a critical document defining internal operations.
3. Notarization (KK only): For a KK, the articles of incorporation must be notarized by a Japanese notary public (公証人 - kōshōnin). This step is not required for a GK.
4. Capital Contribution: The initial capital must be paid in, typically to a promoter's personal bank account before the company's own bank account can be opened post-registration. Evidence of payment (bank passbook copies or statements) is required for registration.
5. Appoint Officers: Formally appoint the initial directors, auditors (if applicable for KK), or managers (for GK).
6. Prepare Registration Documents: Compile the registration application form, articles of incorporation, proof of capital contribution, officer acceptance letters, company seal registration form, etc.
7. File Registration: Submit the application package to the competent Legal Affairs Bureau. The date of filing is generally the date of incorporation.
8. Post-Registration Steps: Obtain the corporate registration certificate and company seal certificate. Open a corporate bank account (can be time-consuming). File notifications with tax authorities, social insurance offices, and labor standards offices.

The entire process from planning to completing registration typically takes 1-2 months, assuming all documents are prepared correctly and decisions are made promptly. Using local legal or administrative professionals (司法書士 - shihō shoshi or 行政書士 - gyōsei shoshi) is highly recommended to navigate the procedures efficiently.

III. Key Operational Considerations

Once established, several ongoing operational aspects require careful management.

A. Taxation

• Corporate Income Tax (法人税等 - Hōjinzei-tō): Japanese subsidiaries (KK/GK) are subject to national corporate tax, local inhabitant tax, and local enterprise tax on their taxable income. The combined effective tax rate is typically around 30-34%, varying slightly based on location and company size/income. Branches are taxed similarly but only on Japan-source income.
• Consumption Tax (消費税 - Shōhizei): Japan's value-added tax, currently at 10% for most goods and services (with a reduced rate of 8% for certain necessities). Businesses generally need to register for consumption tax purposes if their taxable sales exceed JPY 10 million in a base period (usually two fiscal years prior). Complex rules apply to cross-border transactions and potential input tax credits/refunds.
• Withholding Tax (源泉所得税 - Gensen Shotokuzei): Payments like dividends, interest, royalties, and certain service fees made from Japan to foreign entities (including the parent company) may be subject to Japanese withholding tax. Rates vary depending on the type of income and the applicable tax treaty (e.g., the US-Japan tax treaty significantly reduces or eliminates withholding tax on many payments between the two countries).
• Tax Filings: Corporations must file tax returns and pay taxes generally within two months after the end of their fiscal year. Regular compliance with consumption tax and withholding tax obligations is also required.

Navigating Japanese tax requires professional advice from local tax accountants (税理士 - zeirishi).

B. Labor and Employment

• Hiring: Employing staff in Japan requires adherence to comprehensive labor laws, including the Labor Standards Act (労働基準法 - Rōdō Kijun Hō), which governs working hours, wages, overtime, leave, and termination procedures. Lifetime employment concepts are less rigid than in the past but stable employment is still highly valued.
• Work Rules (就業規則 - Shūgyō Kisoku): Companies regularly employing 10 or more workers must establish detailed work rules covering employment conditions and file them with the local Labor Standards Inspection Office.
• Social Insurance: Employers must enroll eligible employees (including expatriates meeting certain criteria) in the mandatory social insurance system, which includes health insurance (健康保険 - kenkō hoken), welfare pension insurance (厚生年金保険 - kōsei nenkin hoken), unemployment insurance (雇用保険 - koyō hoken), and workers' accident compensation insurance (労災保険 - rōsai hoken). Both employer and employee contribute premiums, which can be a significant cost.
• Visas for Expatriates: Foreign nationals working in Japan require appropriate work visas (e.g., Engineer/Specialist in Humanities/International Services, Intra-company Transferee, Business Manager). The application process involves demonstrating the applicant's qualifications and the company's stability. Subsidiaries can generally sponsor visas more easily than representative offices.

C. Banking and Finance

Opening a corporate bank account in Japan can be a hurdle for newly established foreign subsidiaries or branches. Banks often require extensive documentation and may initially be cautious due to anti-money laundering regulations. Having a resident representative is usually essential. Establishing relationships with banks early is advisable.

D. Intellectual Property

Trademarks, patents, and designs should be registered locally in Japan through the Japan Patent Office (JPO) to ensure protection within the Japanese market, even if protected in the US.

IV. Ongoing Corporate Compliance

Operating a company in Japan involves continuous compliance obligations beyond tax and labor.

A. Corporate Governance

• Meetings: Companies must hold shareholder meetings (at least annually for KKs to approve financial statements) and board meetings (frequency depends on KK structure and articles; GKs have more flexibility) as required by the Companies Act and their articles of incorporation. Proper minutes must be kept.
• Director Duties: Directors (in KKs) and managers (in GKs) owe duties of care and loyalty to the company and must comply with legal requirements regarding decision-making and oversight.
• Filings: Annual filings with the Legal Affairs Bureau may be required to update director information or other registered matters.

B. Record Keeping and Financial Reporting

• Accounting Records: Companies must maintain accurate books and records in accordance with Japanese accounting principles.
• Financial Statements: Annual financial statements must be prepared. Statutory audits by external auditors (会計監査人 - kaikei kansanin) are required for large companies (based on capital or liability thresholds) and certain other entities.

C. Internal Controls and Ethical Conduct

• Compliance Culture: Establishing a strong compliance culture is increasingly important. This involves setting a clear corporate philosophy and code of conduct covering legal and ethical standards (anti-bribery, data privacy, fair competition, prevention of harassment, etc.).
• Internal Rules (社内規程 - Shanai Kitei): Developing and implementing clear internal rules and procedures related to key risk areas.
• Training: Regularly training employees on legal requirements and company policies is crucial to prevent violations. Recent examples of compliance failures in Japan often involve issues like misuse of personal information or improper labor practices, highlighting the need for robust internal controls and awareness.
• Reporting Mechanisms: Consider establishing confidential internal reporting channels (hotlines) for employees to raise concerns.

Conclusion

Establishing a business presence in Japan offers significant opportunities but requires careful navigation of legal structures, procedures, and ongoing operational requirements. Whether choosing a representative office for initial exploration, a branch for direct operations with parent liability, or a subsidiary (KK or GK) for a long-term, limited-liability presence, understanding the implications of each choice is key. Compliance with the Companies Act, FEFTA, tax laws, labor regulations, and broader ethical standards is not just a legal obligation but fundamental to building a sustainable and reputable business in Japan. Thorough planning and engagement with experienced local legal, tax, and accounting professionals are essential ingredients for a successful market entry and continued operation.

• Mergers & Acquisitions in Japan: A Legal and Practical Guide for US Businesses
• Minority Shareholder Squeeze-Outs in Japan: Navigating Fairness, Procedure, and Legal Challenges
• Corporate Governance Reform in Japan: What Foreign Investors Need to Know
• JETRO – Setting Up Business in Japan