3. requirements for starting a Japanese branch-office
In the previous section introducing starting business in Japan with a Japanese branch-office, I noted that a branch-office can be a good short-term (though definitely not long-term because of its income tax liability) way to quickly start Japanese business. Those infamous myths of doing business in Japan want you to believe there is no choice other than a kabushiki kaisha '..if you are serious about doing business in Japan.." but in my experience that is not so. Amongst other clients, I represent a small US software company's Japanese branch-office and in the past 3 years have negotiated $32.2m business opportunities with Japan's #1 automotive company and one of its subsidiaries. Not once did the customers comment that we were '..just a branch office..'. Obviously that branch-office will be closed and replaced with a yugen kaisha before receiving that level of revenue.
"..in 2004 you should be deciding the corporate form of your Japanese operation based primarily on tax and administrative efficiency.."
Another potential issue with a branch office is that it may be more difficult to attract Japanese staff because of confusion regarding its legal status, although the hardened employment market has to an reduced this problem. In fact, it may be that despite the myths the only person other than your corporate tax accountant who really cares whether your Japanese office is a kabushiki kaisha, a yugen kaisha, a tokumei kumiai or a branch-office is your local country manager because there is a lot of personal prestige attached to being the President of even a small kabushiki kaisha. I suggest that in 2004 you should be deciding the corporate form of your Japanese operation based primarily on tax and administrative efficiency because any country manager worth employing should be more concerned with the value the entity creates for the head-office than whether the entity impresses his/her neighbors, relatives and drinking buddies!
In summary, the key administrative requirements and basic corporate tax liabilities of a Japanese branch-office are:
- a branch office:
- must be registered with the Japanese Ministry of Justice,
- must have a registered representative who is resident in Japan,
- must have a registered office in Japan (which since April 2003 can be the representative's home address,
- a branch office can have a bank account, can rent office space, can lease equipment and can do most other things a domestic company can do
- there are certain government regulated industries in which a branch office cannot do business
- a branch office can employ any number of employees but must adhere to all requirements of the Labor Standards Law and pay all social, welfare and other legally required insurances and taxes on behalf of full-time employees just as any domestic Japanese corporation does
- a branch office is governed by Japan's Commercial Code and is liable under Japanese law for its debts etc.
- because a branch office is not a separate legal entity from the head-office (just as the Californian office of a a Delaware corporation is not a separate entity) the head-office can also be sued for the branch's debts etc. in its country of residence
- a branch office must file annual financial statements of its Japanese operations, including all revenue derived in Japan by its foreign parent, and corporate taxes will be collected from the branch-office on all those revenues less the branches expenses
- a branch office is not required to deduct any withholding taxes when transferring revenue back to the foreign parent
- the head-office is allowed to assign some part of its G&A costs to the branch-office to offset against Japanese corporate tax
- a branch-office can 'roll-up' any year's losses and carry them forward for a maximum of 5 years to offset against profits when calculating corporate taxes
- a branch-office cannot be directly converted to a Japanese company so the corporate tax benefit of rolled-up losses will be lost if for any reason a switch is made to a kabushiki kaisha or yugen kaisha prior to the rolled-up losses being offset (although capital assets can be transferred from the branch office and losses 'incurred' by the new company in the process)
- it costs $1,500 - $2,000 to setup and register a branch office using a local Japanese paralegal office but can easily cost more than 3x that sum if you use a bilingual law firm or accounting firm.
4. setting up with a yugen kaisha 'yg' >>