setting up in Japan

 

Starting a Japanese company says 'We are here!'

1.  Starting a Japanese company says 'We are here!'

Setting up in Japan and starting a Japanese company sends a very strong "We are here and we are here to stay!" statement to the market. The key decision when setting up in Japan by starting a Japanese company (or branch-office) is which corporate entity is the most efficient and effective to use?

For many foreign companies, setting up in Japan and starting a Japanese company or office is phase two of doing business here (e.g. after having dealt through a distributor) - for others it is phase one. Irrespective, setting up in Japan by starting a Japanese company or office is a major commitment which needs to be structured to be fiscally efficient and extract maximum value from the investment made.

If you are just starting business in Japan, then the research done in your first month of Japanese business (the data accumulated regarding your product's value and projections of future revenues) will be crucial decision making tools when deciding whether starting a Japanese company or office is the most efficient way of setting up in Japan for direct sales or distributor support. In deciding, I suggest that for the entities typically used by foreign companies starting in Japan you:

  1. examine each entity's administrative requirements and tax structure characteristics,
  2. consider the statutory paid-in capital requirements for starting a Japanese company,
  3. investigate how the tax authority in your head-office country treats income from each entity,
  4. estimate the overhead costs each entity will incur to support your projected revenue,
  5. compare each entity's fiscal efficiency measured as the percentage of gross income received by the parent during the first 5 years.

Tax efficiency is the factor to consider when deciding whether starting a Japanese company or office is the best route for setting up in Japan, where corporate tax rates are still 41% or more. When starting a Japanese company or office, the entity used and the structure of agreements and ownership between it and its foreign parent will dramatically affect corporate and withholding taxes paid in Japan. Consider several factors including:

  • Japan's corporate tax rates (presently around 41%)
  • projected profit margins doing business in Japan
  • the tax treaty between Japan and your head-office country, which (if starting a Japanese company) affects:
    • transfer fees paid to the parent company,
    • dividends paid to the parent company,
    • Japanese withholding taxes applicable to those transfer fees and dividends,
  • If starting a Japanese company absolutely requires you to start a kabushiki kaisha (e.g. it will be a joint-venture), then how you structure directors' bonuses also has corporate tax implications.

Successful business in Japan can generate 30% of your global profits within 3 - 5 years. If you are really enlightened and starting a Japanese company early in your evolution, that could hit 70% within 2 - 3 years. If your company will earn those levels of income in Japan, then before starting a Japanese company or office you must consider tax structure to maximize your retained cash. You might also consider 'offshore inversion', by which your company transfers assets to a new parent located in a lower tax country - often achieving an effective tax rate <30%. Inversion is an interesting subject but outside of this discussion of setting up in Japan by starting a Japanese company or office!

So lets look at the 2 entities (kabushiki kaisha and tokurei yugen kaisha) until now most frequently used by most foreign companies when setting up in Japan by starting a Japanese company or office and two other entities, the tokutei mokuteki kaisha and tokumei kumiai, that while very efficient for setting up in Japan for certain transactions, are so uncommon that many regular Japanese tax accountants don't know of them or how to administrate them! The entities are:

  • branch office, sometimes called a representative office,
  • tokurei yugen kaisha (true pronunciation is yugen gaisha) equivalent to a US LLC or UK Ltd. (these entities can be acquired but you will not be able to incorporate a new one after April 30, 2006),
  • kabushiki kaisha, equivalent to a C corporation in the US or plc in the UK,
  • tokutei mokuteki kaisha, the TMK is a special purpose company, similar to a US REIT (Real Estate Investment Trust) but more flexible,
  • tokumei kumiai, equivalent to a 'silent' or 'limited' partnership,
  • yugen sekinin jigyo kumiai (equivalent to a US LLP) which was introduced on August 1, 2005 and which we will cover in the new version of this site in early May 2006,
  • godo gaisha (equivalent to a US LLC but without the passthrough characteristics) which can be incorporated from May 1, 2006 and will also be covered in the new version of this site.

2.  setting up with a Japanese branch-office >>


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