Doing Business In Japan:

An Introduction on Choosing The Right Entity

By

Douglas M. Whitehead

The land of the rising sun is an ideal place to do business. Japan is the second largest market in the world and doing business there is getting easier for foreigners as the Japanese government is easing restrictions and moving to a market-based economy and away from a planned economy. Critical to entry into this important market is choosing the right legal entity. This article will discuss the available legal entities and their benefits and limitations. Understanding them will help you meet your business and tax objectives as you plan your entry into this important market.

Representative Office
A foreign enterprise may establish a representative office (“RO”) in Japan with no registration or notification requirements. However, the RO may not conduct business and its powers are limited. An RO may collect information, conduct market research, store materials for the parent company, conduct market research, and even advertise; however, it may not trade or sell. Because of its limitations, the Japanese tax authorities do not recognize an RO as a permanent establishment, which would otherwise subject it Japanese corporate tax law. The business pointer here is that if you intend to use the RO as part of your initial entry into the land of the rising sun, seek professional advice on how to best use the RO so that its activities do not become taxable.

Branch
A branch office may engage in any approved corporate activity. It is used primarily for liaison, technical servicing, purchasing, and less frequently for importation and sales. It requires registration with local authorities. Once the branch office receives the approvals, its office and its legal representative in Japan (the branch manager) are considered to be registered with the corporate registry authorities. At this point, the branch formally comes into effect. The registered branch manager then becomes authorized under the Japanese law to represent the branch office in all capacities, and to conclude contracts with third parties without any additional internal corporate authorization. You must register each change of branch manager. The downside to a branch is that it does not limit the liability of the foreign parent. However, this can easily be dealt with by creating an intermediary domestic parent company. In other words, parent company USA, Inc. can create a domestic subsidiary, USA-Japan, Inc., and USA-Japan, Inc. can establish a branch in Japan. If USA, Inc. is a Sub S corporation, it can make a Q-sub election for USA-Japan, Inc. in order to permit profits and losses to pass through the branch all the way to the shareholders of USA, Inc.

Subsidiary
Full entry into the Japanese market is typically done through a subsidiary, which may be wholly owned by a foreign enterprise. Fortunately, the process is simple and Japanese corporate law is similar in many important ways to U.S. corporate law, thanks to a concerted effort over the last five years by the Japanese Ministry of Justice and the Diet to modernize the law.

The most common form of subsidiary is the Kabushiki Kaisha (“K.K.”). This is similar to a U.S. corporation. The liabilities for the entity’s activities are limited to the entity itself. The shareholder’s liability is limited only to his or her investment, as is the case with U.S. corporations. A K.K. issues shares (stating a par value is no longer required) and the shareholders elect directors (one of which is the Representative Director, who must be a resident of Japan) and officers. Annual meetings of the shareholders and directors are required, as are special meetings for unique events (entering into major contracts, adding/removing directors and officers, etc.). The downside to the K.K. is that the IRS does not classify it as eligible for the “check the box” election that would treat it as a disregarded entity, which would otherwise allow profits and losses to pass through to the parent company.

Effective last month [April 2006] a new legal entity is allowed in Japan, the Godo Kaisha (“G.K.”), or “joint company”, a type of limited liability company similar to those found in the U.S. and some European countries. It allows greater flexibility and still limits liability. Some tax experts predict that the G.K. will be eligible for check the box status, but the IRS has not yet listed it. While the advantages for a parent foreign company is obvious, the G.K. may carry the same stigma carried by the recently outlawed Yugen Kaisha, which was viewed by many Japanese as having a much lower prestige than the K.K. because of the low capitalization requirements. However, this stigma may disappear as the capitalization requirement for the K.K. was recently reduced from ¥ 10 Million to ¥ 1.

Other less common subsidiaries are beyond the scope of this article. As always, getting good professional advice is always worth the investment before doing business in any foreign market.

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© 2006 Douglas M. Whitehead. All rights reserved.

Doug has been delivering results to clients for over 17 years. As an established attorney specializing in corporate clients with international needs, he has both saved hundred of thousands of dollars on their bottom line and contributed millions of dollars to their top line with savvy business advice and proactive lawyering. His primary clientele are multi-national direct selling enterprises and dietary supplement companies, though he services a wide variety of business ventures.

Being an in-house legal advisor to several organizations has given Doug an advantage to understanding the needs of his corporate clients. His in-house legal experience in the direct selling industry includes 4 years with two $250 million companies. He was Associate General Counsel to Enrich International and held the same position after Enrich and Rexall Showcase International merged to form Unicity Network. He then served as General Counsel to Unicity International for 2 1/2 years.

Early in his legal career, Doug served a JAG in the U.S. Air Force. He attended Brigham Young University, where he earned a Bachelor’s of Arts in 1984 and a Juris Doctorate in 1988.

Doug can be reached at dmwlaw@comcast.net and (801) 376-6261.