1. Establishing a Foreign Company in Japan: The Basics

(1) What is a foreign company?

establishment-of-Japan-corporation

Article 2-2 of the Companies Act defines a “foreign company” as “any corporation incorporated under the law of a foreign country or such other foreign organization that is of the same kind as the Company or is similar to a Company”. Although Japan recognizes that they are foreign companies, they are subject to the same regulations as domestic corporations when operating in Japan, as well as regulations that apply only to foreign companies. Under the Japanese law, foreign companies are considered as corporations.

(2) Three ways foreign companies can establish a business in Japan

When a foreign company wishes to operate in Japan, it must have a base of operations. There are three types of business operations in Japan: a subsidiary company, a branch office, and a representative office. Since these three types of offices are unique from each other, it is necessary for foreign companies to look at the advantages and disadvantages that each type of business operation offers in order to select the most suitable form for their business activities.

(3) What is a Japanese subsidiary company?

A Japanese subsidiary company is the Japanese corporation for a foreign company. It is also a company in which the foreign parent company or individuals with joint investments have invested in. The procedures for incorporating a Japanese subsidiary is the same as the procedure for a Japanese company establishing a joint stock company.

Japanese subsidiaries of foreign companies are often joint-stock companies (kabushiki-gaisha) or limited liability companies (goudou-gaisha). Kabushiki-gaisha are generally perceived as more reliable.

For a foreign parent company, a Japanese subsidiary is considered to be an independent legal entity operating in Japan. This means that the risk to the foreign head office is relatively low, both at the time of establishment and afterwards. A Japanese subsidiary is also easy to set up and more foreign companies prefer to establish this rather than a Japanese branch office.

(4) What is a Japanese branch office?

In Japan, a Japanese branch office is called a “business office” under Japanese law and it basically becomes one of the business offices of a foreign company. One advantage of a branch office is the lower legal fees during the establishment process.

However, it is difficult for foreign companies to gain public trust in Japan the same way they already have overseas. Also, having liabilities may have a negative effect on your home country and head office in the long-term.

(5) What is a representative office?

A representative office is very different from a Japanese subsidiary or branch office. Under the Japanese law, a representative office is considered as simply “similar to a company”. It is not recognized as an actual company or corporation. Therefore, the main activities of a representative office are limited to investigation and research of the Japanese market, advertising and promotion, providing information to the head office, and purchasing and storing assets for the head office. The main point is that representative offices are prohibited to engage in activities involving revenue.

To easier understand what a representative office is, you can think of it as a temporary office for a foreign company. This will help the company assess the feasibility of establishing a company and doing business in Japan. In many cases, representative offices prefer to rent a single room or unit in a building instead of large-scale areas.

2. What are the main points to consider when comparing a Japanese subsidiary, branch office, and representative office?

(1) Introduction

As mentioned above, these three forms of business operations have various differences. There are three important points to consider when deciding which type of office to choose based on these differences. These are: legal & registration, accounting & tax, and human resources & labor.

(2) Legal and registration perspective

legal-documents

First, let’s take a look at the legal and registration aspects. Here we discuss how different the permitted operating activities, the legal documents, and commercial registration with the Legal Affairs Bureau are. There are significant differences between a Japanese subsidiary, a Japanese branch office, and a representative office.

① Can they operate as a business entity?

It is important to be aware whether or not your company or entity in Japan can engage in revenue-earning activities, such as dealing with clients and customers. Without proper knowledge of what activities you can or cannot engage in, you run the risk of violating the law if you attempt to engage in sales activities despite restrictions on your company or entity.

② Are there limitations on what the entity name should be?

There are differences in how an entity’s name in Japan is determined. Among the many things to consider when selecting a name is whether to use the name of the foreign company in its home country. In some cases, you may want to use a company name that is easy to understand, such as “(Company Name) Japan”, which indicates that the company is limited to activities in Japan. On the other hand, one should be aware that not all companies can use names like that freely. In terms of restrictions, if the head company changes its name, the Japan entity must also change its name to match the head office.

③ What is the position of a legal business entity?

The position of the legal business entity is an important point that changes depending on its relationship with its foreign company. The legal status of the business entity in each location differs depending on whether it is a Japanese subsidiary, a Japanese branch office, or a representative office. It would be no exaggeration to say that the differences in the legal and registration aspects are due to the different positions of the business entities.

④ Where is the decision-making body of a business in Japan?

When conducting business, there is always a series of decision-making that is made regardless of whether the matter concerned is small or not, and it is very important to know what and where this decision-making body is. Although certain business decisions are left to the discretion of the decision-making body, in the case of a foreign corporation, the headquarters may be located overseas, while the base of its Japanese operations could be a Japanese subsidiary, branch office, etc. In this case, there are two entities capable of decision-making: the headquarters located overseas, and the base of operations in Japan.

If the decision-making body is located overseas, this can affect the speed at which business in Japan can be done due to the time it can take to relay information and approval. Having the decision-making body in Japan can make the process much faster and smoother.

⑤ Which entity bears the rights and obligations of their company’s activities in Japan?

The bearer of rights and obligations ― whether it is the Japanese subsidiary or the foreign company ― vary depending on the type of business operation in Japan. Though a complicated legal concept, it is important to consider where the juridical personality is located.

⑥ What is the liability of the investors and head office to its creditors?

When conducting business in Japan, the Japanese base of operations will have liabilities that arise in the course of its operations, which we refer to as “accounts payable,” “accrued liabilities” or “loans” in the accounting books. To what extent is the foreign company (which is both the investor and the parent company), or the head office of the foreign company (which is of same legal personality), responsible for these liabilities?

⑦ What is the extent of liability for lawsuits arising in Japan?

If the base of operations in Japan location is sued and becomes a defendant in a lawsuit in Japan, the extent of liability for the foreign entity that expanded into Japan as either a subsidiary, branch office, or representative office, is questioned. Depending on the form of business operations, the degree of liability of the foreign company’s head office, and that of the Japan entity, is different.

⑧ Can we open a bank account under the company/entity’s name?

Having a bank account is essential, regardless of whether you are a Japanese corporation or a foreign company. Japanese corporations can open an account under the name of your corporation, but can a foreign corporation open an account in the name of the foreign company?

⑨ Can equity interest be transferred? Is equity interest recognized?

Kabushiki-gaisha (joint-stock companies in Japan), for example, are able to perform equity interest transfers; however, there are also cases, such as medical corporations, where there is no equity interest to begin with. We will discuss how the Japanese base of operations of a foreign company should be treated in terms of equity interest. It is important to note that in some cases, equity interest is not recognized, and this has an important effect in relation to a corporation’s juridical personality.

⑩ Is it necessary to register with the Legal Affairs Bureau?

To be able to conduct business as a corporation, Japanese law states that registration with the Legal Affairs Bureau is required. However, depending on the type of business operation a foreign company takes in Japan, they may or may not be required to register in Japan. Commercial registration is a time-consuming and costly process, but for large and medium-sized companies, the registration process itself is not so complicated.

⑪ What about the appointment of a representative director and directors? Do they have representative directors and directors in Japan?

In the case of a kabushiki-gaisha (joint-stock company), the appointment of a representative director and directors are mandatory. Foreign companies establishing an entity in Japan question whether they also need to do the same. Since there are some types of entities that do not have the concept of a representative director, it is important to understand what positions are available and how they will be appointed.

⑫ What about the appointment of a company auditor? Do they have company auditors in Japan?

Under the Companies Act, a kabushiki-gaisha can voluntarily appoint a company auditor. In the case of a kabushiki-gaisha with a board of directors, etc., a company auditor must be appointed.

Regardless of the type of operations a foreign company chooses to have in Japan, having a company auditor is not required, and is actually quite uncommon. However, if a company wants additional ways to assure proper governance, it may choose to appoint a company auditor.

⑬ How is capital contribution done? Is there such a thing as capital in Japan?

Capital contribution (or the payment of capital) is a mandatory procedure in establishing a kabushiki-gaisha, etc. in Japan. Would this be the same case if it were a foreign company establishing a base of operations in Japan? In some cases, depending on the form of the foreign company in Japan, having a capital is not required, meaning, there is no concept of capital itself.

⑭ How much time do we need to establish (incorporate) a business in Japan?

Regardless of where you are in the world, establishing a company will undoubtedly take some time. The amount of time you need to establish a business in Japan will vary depending on the type of business operations you will use. If we were to count the length of time needed for the preparations alone, it would increase the time needed, but we provide here how long the establishment (incorporation) process takes in Japan.

⑮ What are the legal costs of establishment?

Just like other countries, not only does it take time to establish a business, but there are also costs associated with the process. In Japan, the legal fees alone can be very expensive, depending on the type of establishment and the amount of capital. There are no distinctions made between a Japanese company or a foreign company.

(3) Accounting and tax perspective

① Do we need to prepare financial statements as a business entity?

financial-statement

Financial statements, which include balance sheets and income statements, are prepared by companies so they can better understand their financial position and business performance, as well as provide insight for interested parties. Although foreign companies are required to prepare financial statements, the process of preparing financial statements and the documents that need to be prepared will differ depending on the type of their base of operations in Japan.

② What is the scope of corporate taxation on profits generated by activities conducted in Japan?

Corporate tax is imposed as long as the business activities are conducted in Japan. However, the scope of taxable income between foreign companies and Japanese companies often vary depending on the form of their base of operations and the type of transactions.

③ How do deficits and surpluses offset each other (aggregation of profits and losses)?

Aggregation of profits and losses refers to the process of calculating profit and loss by offsetting the deficits and the surpluses generated by business activities. Aggregating profits and losses can reduce taxable income and the amount of tax due, however, depending on how the foreign company operates in Japan, aggregating profits and losses may or may not be possible.

④ What will be the accounting period of the business entity?

Depending on the type of business expansion into Japan, the accounting period for preparing financial statements for business activities in Japan may differ. This is also related to whether or not profit and loss can be aggregated.

⑤ Can funds be transferred between Japan and the home country?

One of the things taken into consideration by foreign companies doing business is the ability to transfer funds between Japan and other countries. For example, funds may be transferred to the head office of the foreign company, funds may be sent to the Japanese office of the foreign company, or dividends and interest may be exchanged. When performing transactions related to overseas remittances, one of the issues to consider is whether or not tax will be levied. It is very important to understand when taxation will or will not be imposed on the transaction.

(4) Human resources and labor perspective

① Can I hire individuals in Japan as a business entity?

It is important to consider whether your business entity can hire people in Japan. It is important for both employers and employees to be aware of who is hiring and paying them.

② Can my hired workers be covered by Worker’s Accident Insurance?

In principle, a foreign company in Japan is obliged to enroll its workers under the Worker’s Accident Insurance, just like other companies based in Japan. If you employ workers in Japan, you are obliged to join the Worker’s Accident Insurance program. However, since non-workers are generally not allowed to enroll under the Worker’s Accident Insurance, it is necessary to consider what should be done in such cases.

③ Can my hired workers be covered by Employment Insurance?

The obligation to enroll workers under Employment Insurance is generally the same as that for the Worker’s Accident Insurance. However, like Worker’s Accident Insurance, there are some cases where you cannot enroll workers under this insurance.

④ Can my hired workers be covered by Social Insurance?

Regarding Japan’s social insurance (health insurance and welfare pension insurance), if your company is a corporation, you are obliged to join the social insurance system. Depending on the type of company operating in Japan, it is important to be aware that there are cases where it is not necessary to join the social insurance system.

⑤ What are the types of work visas that a representative can obtain?

If the representative is a foreign national, he or she must obtain a visa to enter to Japan. Japan currently has 27 kinds of visas (statuses of residence), and you must obtain a specific visa in order to engage in certain activities. Therefore, there are differences in the work visas that can be obtained depending on the base of operations in Japan.

3. Comparing a Japanese subsidiary, a Japanese branch office, and a representative office from a legal and registration perspective

Now, let’s take a look at the differences between these three. First of all, let’s compare the legal and registration aspects of a Japanese subsidiary, a Japanese branch office, and a representative office.

(1) Can they operate as a business entity?

① In the case of a Japanese subsidiary

foreign-business-in-Japan

First of all, in the case of a Japanese subsidiary, it is possible to conduct business activities in Japan. The activities of a Japanese subsidiary include doing business in Japan with the head office in a foreign country, or creating an entirely new business specifically for the Japanese market, which is why they can incorporate either a kabushiki-gaisha (joint-stock company) or a goudou-gaisha (limited liability company).

② In the case of a Japanese branch office

The case of a Japanese branch office is similar to that of a Japanese subsidiary. The activities of a Japanese branch office also include doing business in Japan with the head office in a foreign country or creating an entirely new business specifically for the Japanese market, but in this case, it acts more as a branch (sales offices).

③ In the case of a representative office

Representative offices cannot engage in sales activities in Japan. To begin with, the reason for establishing a representative office is to conduct market research in Japan. Starting as a representative office means that you cannot engage in income-generating business activities, including sales and marketing.

(2) Are there limitations on what the entity name should be?

① In the case of a Japanese subsidiary

In the case of a Japanese subsidiary, though they are a Japanese subsidiary (incorporated as a kabushiki-gaisha, goudou-gaisha, etc.), they are not limited to using the name of their parent or head company. Such companies often use the “(Company Name) Japan” pattern in naming their Japan entities to create a clear distinction between the foreign company located overseas and the Japanese subsidiary operating in Japan.

② In the case of a Japanese branch office

Japanese branch offices must use the same name as their foreign company. However, they can use names such as “〇〇 Bank, Tokyo Branch”. The name of the head office of the foreign company must be used in order for it to be treated as one of the business offices of the head office ― we will discuss this further below.

③ In the case of a representative office

A representative office can change its name and there are no restrictions. However, it is customary to use an easy-to-understand name such as “〇〇 Bank, Tokyo Representative Office”.

(3) What is the position of a legal business entity?

① In the case of a Japanese subsidiary

In the case of a Japanese subsidiary, it has parent-subsidiary relationship with the foreign company, meaning the Japanese subsidiary has its own juridical personality in Japan. Therefore, the Japanese subsidiary is regarded as a separate entity from the foreign company’s head office. In other words, there is a foreign company in the home country, and a separate Japanese corporation established by the foreign company in Japan.

② In the case of a Japanese branch office

As we have mentioned earlier, the Japanese branch office is simply considered as one of the foreign company’s business offices. Therefore, it is legally considered as the same entity as the foreign company and is always a part of the foreign company.

③ In the case of a representative office

Legally speaking, a representative office is not considered a business entity to begin with. As mentioned above, representative offices cannot engage in business activities (sales, etc.), and does not have juridical personality.

(4) Where is the decision-making body of a business in Japan?

① In the case of a Japanese subsidiary

The decision-making body is easier to understand if you think about how it is related to the position of the entity, as mentioned above. In the case of a Japanese subsidiary, since it is a separate entity from its parent foreign company, its decision-making body in principle is located in Japan.

② In the case of a Japanese branch office

On the other hand, a Japanese branch office is simply considered a part of the foreign company. Therefore, the decision-making body that decides on the activities of the Japanese branch office is generally located at the headquarters of the foreign company.

③ In the case of a representative office

The decision-making body of a representative office is also located in the home country of the foreign company. Since the representative office was established as a part of the foreign company tasked to see the feasibility of business before starting an actual business in Japan, it is unlikely for a Japanese representative office to have decision-making authority over its head company.

(5) Which entity bears the rights and obligations of their company’s activities in Japan?

① In the case of a Japanese subsidiary

This one is also easier to understand if you think about it in relation to its form. The rights and obligations belong to the corporation itself. Therefore, a Japanese subsidiary. a separate entity from the foreign company, holds its rights and obligations.

② In the case of a Japanese branch office

In the case of a Japanese branch office, as it is not a separate entity from the foreign company, but rather a business office of the foreign company, the rights and obligations will be attributed to the foreign company in the home country.

③ In the case of a representative office

The case for a representative office is a little more complicated. Fundamentally, the rights and obligations belong to the foreign corporation in the home company. However, if a representative of a representative office or the like engages in a contract in their individual capacity, the representative will bear the legal consequences. In this case, it is the representative individual who holds the rights and obligations.

(6) What is the liability of the investors and head office to its creditors?

① In the case of a Japanese subsidiary

A Japanese subsidiary is primarily liable to its creditors. While the parent company (foreign company) is also considered an investor, due to the provisions on limited liability of shareholders, a shareholder’s liability is limited to the amount of investment made to its subsidiary company.

② In the case of a Japanese branch office

In the case of a Japanese branch office, the foreign entity that the Japan office is part of is ultimately liable to the branch office’s creditors. Liability to the creditors is not limited, and there are no legal provisions that limit the liability of shareholders.

③ In the case of a representative office

In the case of a representative office, liability to the creditors is not limited, and there are no legal provisions that limit the liability of shareholders.

(7) What is the extent of liability for lawsuits arising in Japan?

① In the case of a Japanese subsidiary

This would also be easier to understand when you remember the company’s type of operation, and the fact that it is a separate business entity from the foreign company. If suits are filed against a Japanese subsidiary, the extent of liability is limited to the Japanese company. Liability generally does not extend to the foreign company located in the home country.

② In the case of a Japanese branch office

In the case of a Japanese branch office, since they are considered part of the foreign company, in the case that a suit is filed, the foreign company is also part of the extent of liability.

③ In the case of a representative office

The case for a representative office is a little more complicated. In the case that a lawsuit is filed, generally, the representative of the representative office is liable. However, if the foreign corporation itself is deemed to have some responsibility, the liability may extend to the foreign corporation.

(8) Can we open a bank account under the company/entity’s name?

① In the case of a Japanese subsidiary

In the case of a Japanese subsidiary, it is possible to open a bank account in your company’s name. Without a bank account, you won’t be able to monetarily communicate with your clients, employees, or the tax authorities. There was a time when it was very difficult to open a bank account as a Japanese subsidiary of a foreign company, but recently, restrictions have begun to gradually ease up.

② In the case of a Japanese branch office

It is also possible for a Japanese branch office to open a bank account under the company’s name. However, there are cases where Japanese branch office may be required to provide more documents compared to a Japanese subsidiary.

③ In the case of a representative office

Representative offices cannot open bank accounts under their company’s name. Opening a bank account using the name of a company requires a “juridical personality”, regardless of whether the company is a Japanese company or a foreign company. Since a representative office in Japan is not recognized as a corporation, representative offices often follow this pattern when naming their bank accounts: 〇〇 Bank, 〇〇 Representative Office Representative 〇〇〇〇.

(9) Can equity interest be transferred? Is equity interest recognized?

① In the case of a Japanese subsidiary

In the case of a Japanese subsidiary, there is such a thing as equity interest. It is also possible to transfer an equity interest. Both kabushiki-gaisha and goudou-gaisha can transfer their equity interests in principle, although certain approvals may be required.

② In the case of a Japanese branch office

In the case of a Japanese branch office since they are not independent companies (kabushiki-gaisha, goudou-gaisha, etc., like the Japanese subsidiary) and are simply part of a foreign company, they have no equity interest. Therefore, it is not possible to transfer equity interest from the Japanese branch office.

③ In the case of a representative office

In the case of a representative office, there is no concept of equity interest. As such, transfers of equity interest also cannot be done.

(10) Is it necessary to register with the Legal Affairs Bureau?

① In the case of a Japanese subsidiary

Registration with the Legal Affairs Bureau is required for all companies. Japanese subsidiaries must register because they are considered as Japanese corporations. The registration process of a Japanese subsidiary is basically the same as that of any other company in Japan.

② In the case of a Japanese branch office

As Japanese branch office are considered a part of a foreign company, they must also register with the Legal Affairs Bureau. However, unlike the Japanese subsidiary, a certified articles of incorporation is not necessary for registration.

③ In the case of a representative office

A representative office does not need to be registered. While the non-necessity of registration can be seen as an advantage when compared to a subsidiary or branch office, the lack of registration means the representative office is less trustworthy in comparison.

(11) What about the appointment of a representative director and directors? Do they have representative directors and directors in Japan?

① In the case of a Japanese subsidiary

A Japanese subsidiary that is a kabushiki-gaisha requires the appointment of a representative director or director. In the case of a Japanese subsidiary, this means there needs to be at least 1 representative director. Before, one of the directors had to be a resident of Japan, but this is no longer the case.

② In the case of a Japanese branch office

A Japanese branch office is not required to appoint a representative director. Rather, they must have at least one “representative in Japan”. At least one of these representatives must be a resident of Japan.

③ In the case of a representative office

Since representative offices are not considered a corporation, appointing a representative director is not necessary, but they must have a representative in Japan. The representative is generally a resident of Japan, as his or her purpose is handling various contracts in Japan.

(12) What about the appointment of a company auditor? Do they have company auditors in Japan?

① In the case of a Japanese subsidiary

Together with a general meeting of shareholders and a board of directors, a company auditor is one of the authorities that can be established by a kabushiki-gaisha. For a kabushiki-gaisha, while it may seem that appointing a company auditor is a necessary decision, it is completely voluntary, and they can choose to appoint one when necessary.

② In the case of a Japanese branch office

In the case of a Japanese branch office, as it is not a Japanese kabushiki-gaisha, there is no need to appoint a company auditor.

③ In the case of a representative office

Similar to a branch office, representative offices do not need to appoint a company auditor.

(13) How is capital contribution done? Is there such a thing as capital in Japan?

① In the case of a Japanese subsidiary

In the case of a Japanese subsidiary, because of the existence of capital, capital contribution must be made to incorporate the company. Before the incorporation of the Japanese subsidiary, it is not possible to open a bank account for the company. In this case, the capital shall be paid into the personal bank account of the person who will be the representative of the Japanese subsidiary.

Also, the capital of the company must be at least 1 JPY. However, as mentioned earlier, if the representative of the company is applying for a business manager visa, the capital must be at least 5 million JPY.

② In the case of a Japanese branch office

A Japanese branch office is a business type that does not require capital contribution from investors, because it is simply an office. Since the Japanese branch office is a part of the foreign company, the capital of the Japanese branch is the capital of the foreign company.

③ In the case of a representative office

A representative office does not have capital.

(14) How much time do we need to establish (incorporate) a business in Japan?

① In the case of a Japanese subsidiary

The time required to set up a Japanese subsidiary can vary on a case-to-case basis, but the documents of the parent company must be notarized as they are from a foreign company. The notarization of these documents can take up to 1-2 months.

② In the case of a Japanese branch office

In the case of a Japanese branch office, documents related to the foreign company must be notarized. As such, this can also take up to two months, same as the Japanese subsidiary.

③ In the case of a representative office

Representative offices do not have to be incorporated. As such, when compared to a subsidiary or branch office, a representative office can be set up relatively easily and in practically no time.

(15) What are the legal costs of establishment?

① In the case of a Japanese subsidiary

There are certain fees to incorporate a company. To be specific, the registration and license tax is more than 150,000 JPY, the certification for the articles of incorporation is more than 52,000 JPY, and the revenue stamp is 40,000 JPY, which means that incorporation can cost at least 242,000 JPY. By having a company such as Shiodome Partners handle the incorporation procedures, we can save 40,000 yen of revenue stamps, but the cost of incorporation can still reach 202,000 JPY. Having a company handle the procedure on your behalf would also cost you professional fees, and there are also costs related to the seal registration certificate and a certified copy of the company register.

② In the case of a Japanese branch office

In the case of a Japanese branch office, the registration and license tax is only 90,000 JPY.
Although there are additional fees for the procedures of setting up a company and obtaining a seal registration certificate and a certified copy of the company registry, the registration tax itself is less than half of the cost of incorporating a Japanese subsidiary. However, since a lot of work such as translation needs to be done, we cannot guarantee that the cost will be cheaper than the cost of establishing a Japanese subsidiary.

③ In the case of a representative office

Generally speaking, establishing a representative office does not have any registration fees. Therefore, the representative office is the least expensive option, as you only need to pay for the office space you will be using.

4. Comparing a Japanese subsidiary, a Japanese branch office, and representative office from an accounting and tax perspective

Now, let’s take a look at the differences between Japanese subsidiary, a Japanese branch office, and a representative office from an accounting and tax perspective. Whether or not accounting and tax documents are required, as well as accounting treatments, will also vary.

(1) Do we need to prepare financial statements as a business entity?

① In the case of a Japanese subsidiary

As a Japanese subsidiary is a separate legal entity established under Japanese law, if the parent company is in a foreign country, the Japanese company will become a subsidiary. Therefore, while the Japanese subsidiary is required to prepare its financial statements in accordance with Japanese law, the foreign company may also often request information necessary for the preparation of its consolidated financial statements. In such cases, necessary adjustments may be made in accordance with the accounting standards adopted by the foreign parent company, such as USGAAP or IFRS.

② In the case of a Japanese branch office

In the case of a Japanese branch office, since it is an office of a foreign company, it can be seen as something similar to a subsidiary. However, a Japanese branch office must take into account its head office and the main branch overseas. The Japanese branch shall prepare its own financial statements, which shall then be consolidated at the head office of the foreign company.

③ In the case of a representative office

Since representative offices cannot engage in business activities that involve income, only expenses will be reflected on their financial statements. Accordingly, those expenses will be converted from yen to foreign currency and recorded in the head office. What matters is that the representative office has to report its expenditures to the head office.

(2) What is the scope of corporate taxation on profits generated by activities conducted in Japan?

① In the case of a Japanese subsidiary

Income tax is levied on the profits earned by the Japanese subsidiary from its activities. It is important to note that the profits earned by the Japanese subsidiary abroad are also taxed, so the scope of taxation is worldwide income.

② In the case of a Japanese branch office

Unlike subsidiaries, only the domestic transactions of the branch offices are subject to taxation. In other words, income tax is levied on income attributable to the Japanese branch office.

③ In the case of a representative office

Since representative offices cannot engage in business (sales) activities in Japan, they are not expected to engage in tax-levied transactions. So, in principle, no tax will be imposed on the representative office.

From fiscal years beginning on or after January 1, 2019, a business is taxed as a permanent establishment (PE) if its activities are supplementary or ancillary in nature but serves as a complementary function as part of an integrated operation.

(3) How do deficits and surpluses offset each other (aggregation of profits and losses)?

① In the case of a Japanese subsidiary

In the case of a Japanese subsidiary, its profit and loss cannot be offset with that of its foreign parent company. The reason for this is that the Japanese subsidiary has a separate juridical personality from the foreign company, and therefore, the accounting process must only be done at the Japanese subsidiary.

② In the case of a Japanese branch office

As mentioned earlier, the position of the Japanese branch office is only a part of the foreign company in the home country. As such, the financial statements of the Japanese branch office are consolidated with those of the head office and other branches.

③ In the case of a representative office

Aggregation of profits and losses is possible in the case of a representative office. Generally, because a representative office only records expenses, their loss, rather than profit, will be consolidated with the profits and losses of the head office and other branches.

(4) What will be the accounting period of the business entity?

① In the case of a Japanese subsidiary

accounting

The accounting period can be easier understood if you recall the question of whether or not the profit and loss can be aggregated. As mentioned earlier, the Japanese subsidiary’s profits and losses cannot be aggregated with that of the foreign company, which means that the accounting periods of the Japanese corporation (subsidiary) and the foreign company do not need to be the same. Therefore, the accounting period of the Japanese branch can be determined freely.

② In the case of a Japanese branch office

In the case of a Japanese branch office, since it is a part of the foreign company, aggregation of its profits and losses with the head office is possible. The accounting period (last month of the accounting period) of the Japanese branch office must automatically coincide with that of the head office of the foreign company, meaning they should always be the same.

③ In the case of a representative office

Profits and losses of a representative office can also be aggregated with the head office. The accounting period (last month of the fiscal period) of the representative office and the head office of the foreign company should always coincide. Although a representative office does not have the concept of a “settlement of accounts” on its own, the accounting period is important in computing the expenses incurred during the concerned period.

(5) Can funds be transferred between Japan and the home country?

① In the case of a Japanese subsidiary

When a Japanese subsidiary transfers funds to a foreign company, it generally does these payments in the form of dividends, interest, royalties, etc. When these payments are made to the foreign parent company, as a general rule, a withholding tax of 20.42% is applied. However, if the foreign parent company is in a country that has a tax treaty with Japan, it is possible to apply a smaller withholding tax rate, or even an exemption, by submitting a notification to the tax authorities.

② In the case of a Japanese branch office

Transfers of funds to or from a Japanese branch office to its head office is considered an inter-account transfer of funds within the same company. Because of this, no tax is imposed.

③ In the case of a representative office

It is possible for a representative office to receive funds from the head office located overseas. These transfers do not have tax levied on them.

5. Comparing a Japanese subsidiary, a Japanese branch office, and representative office from a human resources and labor perspective

Finally, let’s take a look at the differences between Japanese subsidiary, a Japanese branch office, and a representative office from a human resources and labor perspective. Here we will discuss common employment issues, as well as social insurance-related issues.

(1) Can I hire individuals in Japan as a business entity?

① In the case of a Japanese subsidiary

It is possible for a Japanese subsidiary to hire workers in Japan. This is no different from other Japanese companies.

② In the case of a Japanese branch office

Japanese branch offices can also hire workers in Japan. This means that its workers will be considered employed by the Japanese branch of the foreign company.

③ In the case of a representative office

Representative offices can also hire workers in Japan. In theory, this means the employed individuals would be employed by the foreign company.

(2) Can my hired workers be covered by Worker’s Accident Insurance?

① In the case of a Japanese subsidiary

If there is at least one qualified worker, the employer is obliged to apply them to a Worker’s Accident Insurance. However, the representative director of the Japanese branch is not considered a worker and therefore cannot be covered by the Worker’s Accident Insurance.

② In the case of a Japanese branch office

Japanese branch offices must also apply for a Worker’s Accident Insurance even if they only have one qualified worker. Note that the representative of the branch office is not considered a worker and therefore cannot be covered by the Worker’s Accident Insurance.

③ In the case of a representative office

In the case of a representative office, they must meet certain conditions for the Worker’s Accident Insurance coverage, but it is compulsory if they have at least one worker. The representative of the representative office is not considered a worker and therefore cannot be covered by the Worker’s Accident Insurance.

(3) Can my hired workers be covered by Employment Insurance?

① In the case of a Japanese subsidiary

Enrollment under the Employment Insurance is generally the same as that of a Worker’s Accident Insurance. The Japanese subsidiary is required to enroll its employees in the same manner as a normal Japanese company, however, the representative director is not qualified for the Employment Insurance.

② In the case of a Japanese branch office

The same applies for Japanese branch office when it comes to Employment Insurance. The representative of the branch office is not considered a worker and therefore cannot be covered by the Employment Insurance.

③ In the case of a representative office

Enrollment in Employment Insurance is optional for representative offices with less than 5 workers, and mandatory for representative offices with 5 or more workers.

(4) Can my hired workers be covered by Social Insurance?

① In the case of a Japanese subsidiary

social-insurance

If your company is located in Japan, you are obliged to apply your hired workers for Social Insurance. Since a Japanese subsidiary is a company located in Japan, they must enroll their employees under Social Insurance.

② In the case of a Japanese branch office

While the Japan branch office is simply a part of the foreign company, it is still considered a Japanese company, which means it is required to enroll its employees under the Social Insurance system.

③ In the case of a representative office

Representative offices are not considered corporations in Japan. Representative offices with less than five employees can voluntarily apply for coverage with the representative as the employer, but the representative himself/herself will not be included. Alternatively, there is a voluntary enrollment method where the representative office will be considered as an “organization without juridical personality” for insurance coverage for employees, including the representative. Representative offices with more than 5 regular employees under certain industries are required to apply for the social insurance. However, the procedure for including the representative as an insured person is often difficult to follow because the government does not have specific regulations on the handling of representative offices.

(5) What are the types of work visas that a representative can obtain?

① In the case of a Japanese subsidiary

If the representative of the Japanese subsidiary is a foreign national, they can apply for a business manager visa. However, please recall that we mentioned earlier that in order to obtain this visa, as a general rule, a minimum of 5 million yen in capital (investment amount) is required.

② In the case of a Japanese branch office

If the Japanese branch office is ultimately recognized as a part of the foreign company, the representative can apply for an intra-company transferee visa. However, there may be cases where they would be required to obtain a business manager visa. In such cases, the decision will be made by the Japanese immigration authorities, so it is best to have a consultation regarding this.

③ In the case of a representative office

Representatives for a representative office can apply for an intra-company transferee visa. As it is generally considered as an office focused on conducting market research in Japan, the activities it engages in is slightly different from actually running or managing a business.

6. Conclusion

Here we conclude our comparison of a Japanese subsidiary, a Japanese branch office, and a representative office. We hope this can be a useful reference for everyone.

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Inquiry
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