setting up in Japan

 

Setting up with a kabushiki kaisha 'KK' Japanese corporation

6.  setting up with a kabushiki kaisha 'kk'

PLEASE NOTE - Japan's revised Commercial Code and new Company Law take effect on May 1, 2006. From that date it is possible to establish sole director kabushiki kaishas and the paid-in capital requirement is effectively eliminated. This site will be extensively revised in the next few days to include the effects of these changes.

In the previous section on starting a yugen kaisha 'YG' to do business in Japan, I hinted at the administrative burden of the kabushiki kaisha (often referred to as a "KK") which is the Japanese public corporation and the corporate equivalent of a "C-corporation" in the US and a "plc" in the UK.

Before examining the kabushiki kaisha's many disadvantages (at least for smaller foreign companies starting business in Japan) let's take a look at its main attractions:

  1. it has strong statutory requirements for corporate governance - all key decisions must be made by the kabushiki kaisha's Board and executed by a representative director,
  2. other than regulations applicable to listing on a public exchange, a kabushiki kaisha is relatively unrestricted in its ability to sell stock to raise operating capital,
  3. a kabushiki kaisha is an independent Japanese legal entity so its liabilities are local and personal to it and do not automatically become the liabilities of its parent,
  4. a kabushiki kaisha must comply with stringent statutory annual audit requirements,
  5. it may (though not necessarily) be easier to attract Japanese employees to a kabushiki kaisha.

In my experience (having been the President of two kabushiki kaishas), the main disadvantages of a KK for a foreign company doing business in Japan are:

  1. a kabushiki kaisha's statutory annual audit and other operating requirements cost heavily in accounting, legal and administrative expenses and management time,
  2. the only way to get profits back to the foreign parent is to pay post-tax dividends (which are then again subject to 20% withholding tax less any treaty relief, although this was eliminated for US parents further to the new US-Japan tax treaty), although pre-tax revenues can to an extent be returned through a carefully structured distribution/reseller agreement and transfer fees,
  3. structuring performance-linked compensation for directors can have expensive tax consequences because (even if the kk is operated as a cost center) any bonuses or commissions paid to directors create notional pre-tax profits for corporate income tax calculation purposes,
  4. directors terms are usually fixed 2 year agreements and removing a director mid-term, even with cause, can be very expensive,
  5. the representative director has considerable authority and can irrevocably bind a KK to an obligation (even without Board approval) - while not so likely in 2006 (although I was just involved in clearing up a similar situation), there are true horror stories of kk Presidents who have created irrevocable agreements with distributors in which they held controlling interests,
  6. a KK must have 10,000,000 (~US$93,000) of paid-in capital on deposit on its day of incorporation (reduced to 1 Yen from May 1, 2006).

Larger foreign companies, whose Japanese subsidiaries may be spending $30k - $100k or more per month immediately after incorporation, will not be deterred by the paid-in capital requirements of a kabushiki kaisha. For the many small companies aspiring to become large companies by successfully doing business in Japan, and that may only need an initial 2 person (US$15k/month if you get your compensation packages aggressively performance oriented) Japanese office, US$93,000 is a lot of 'cash up-front'.

The problem with a kabushiki kaisha is that you pay a lot more in accounting, legal and administration costs (and time), lose more in corporate income tax and yet the gross revenues you earn will be no different if you start business in Japan as a yugen gaisha which is much less expensive to incorporate and operate, especially considering the tax efficient advantages, especially to US parents, of the yugen kaisha tax structure. The statutory corporate governance and audit requirements of a kabushiki kaisha are essential elements of safeguarding a diverse shareholder pool (such as would occur if it were listed on a public exchange) but our purpose is to establish a Japanese company which will operate efficiently at the subsidiary level of a cross-border corporate structure. Unless your corporate governance doctrine demands it or you will not be the only shareholder (i.e. your Japanese subsidiary will be a joint-venture or intended for independent listing on one of the Japanese stock exchanges) you do not need the above safeguards.

"..in 2006 it will not matter to your customers whether you incorporate as a kabushiki kaisha, a yugen kaisha or simply use a branch-office."

Those Japanese business and market myths tell you that you "..must incorporate as a kabushiki kaisha if you want to succeed doing business in Japan.". Maybe the main reason why so many smaller foreign companies with great products and services never enter the Japanese market (other than through a poorly performing distributor or reseller) is because they believe that myth but cannot justify the initial paid-in capital requirements of a KK The myth is founded on the basis that a KK somehow projects an image of financial security and commitment - in 2006 it will not matter to your customers whether you incorporate as a kabushiki kaisha, a yugen kaisha or simply use a branch-office.

7.  requirements for starting a kabushiki kaisha 'kk' >>


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