How to start a company in Japan

How to start a company in Japan

Starting a company in Japan, “a JP company”, sends a very strong message to the Japanese market saying “We are here and we will succeed!”. Especially in the corporate B2B market, your company’s existing Japanese customers may well congratulate you and start planning how together you can move to the next business relationship level. Before reaping the benefits of a direct presence in Japan, your company must face its first of the many decisions involved in setting up in Japan and starting a Japanese company or branch-office” “Which of Japan’s corporate entities is the most efficient and effective to use?”

For many companies, setting up in Japan and starting a Japanese company or branch-office is the natural evolution of doing business here after having first dealt through a Japanese distributor, reseller or trading company; for others it is the first step. Regardless, setting up in Japan by starting a Japanese company or branch-office is a major commitment which your company must structure for fiscal and management efficiency and to extract most value from the investment made.

If your company is just starting business in Japan, the research done in your first month of Japanese business to understand the value of your products and projections of future revenues, is essential. This information will help you to decide whether starting a Japanese company or branch-office is the most efficient way of setting up in Japan, whether for selling direct to customers or supporting distributors. To start your decision-making process, I suggest that for the entities typically used by companies starting business in Japan, you:

1. Examine the incorporation requirements and associated costs of the available Japanese entities.
2. Examine the ongoing administrative requirements and associated costs of the available entities.
3. Examine the Japanese business taxation characteristics of the available entities.
4. Research how the tax authority in your company’s home country treats income from the available Japanese entities.
5. Estimate the overhead costs that each entity would incur to support your projected sales revenue.
6. Compare each of the available Japanese entities’ fiscal efficiency, measured as the percentage of gross sales income received by your company (the parent) during the first 5 years doing business in Japan.

Tax efficiency is always a consideration when deciding whether starting a Japanese company or branch-office is the best route for setting up in Japan. Japan’s effective corporate tax rates are relatively low at 30.86% or 34.1% (depending on whether paid-in capital is less than or greater than JPY100,000,000), but careful structuring, including relocating parts of your company’s corporate operations such as marketing and R&D to Japan, could result in effective tax rates less than 10%. When starting a Japanese company or branch-office, the entity used and the structure of the agreements and ownership between it and your company, can dramatically affect its Japanese corporate tax and withholding tax liabilities. Consider several factors including:

• Japan’s effective corporate tax rates (30.86% or 34.1%, depending on whether paid-in capital is less than or greater than JPY100,000,000).
• Your Japanese business’s projected profit margins.
• The tax treaty between Japan and your company’s home country, because it affects withholding taxes on transfer fees, dividends and interest payments made to your company.
• If your company already has subsidiaries in other countries, which of those countries has the most beneficial tax treaty with Japan?
• If starting Japanese business by incorporating a KK kabushiki kaisha, then how will you structure directors’ bonuses to reduce business income tax liabilities?

Successful business in Japan can potentially generate a substantial percentage of your company’s global profits within 3 – 5 years. If your company is really enlightened and starting Japanese business early in its corporate evolution, it could earn 20% or more of its global profits from Japan within 2 – 3 years. If your company intends to earn such levels of its global profit from Japan, then before starting a Japanese company or branch-office it absolutely must consider tax structuring to maximize its retained cash, including the possibility that it might be a candidate for an offshore inversion, where it would transfer all or part of its assets to a new parent in a lower tax country.

So lets review the three Japanese business entities that companies most often use when setting up in Japan by starting a Japanese company or branch-office and two other entities, the TMK tokutei mokuteki kaisha and TK tokumei kumiai, that while very efficient for setting up in Japan for large real-estate investments, are so uncommon that many Japanese tax accountants don’t know how to account for them! The entities are:

• The kabushiki kaisha, often abbreviated to “KK”, which is similar to a C corporation in the US or Company Limited in the UK.
• A branch-office in Japan, sometimes confused with a representative office.
• The godo kaisha, often abbreviated to “GK” and called the Japanese LLC, which is similar (except in its tax treatment) to a US LLC or UK Ltd.
• The tokutei mokuteki kaisha, often abbreviated to “TMK”, which is a special purpose company similar to a US REIT (Real Estate Investment Trust) but more flexible.
• The tokumei kumiai, often abbreviated to “TK”, which is a silent partnership or limited partnership.
• The yugen sekinin jigyo kumiai, often called the Japanese LLP, which similar to a US LLP.