Doing business in Japan information
by Venture Japan
PLEASE NOTE - Effective May 1, 2006, Japan's Limited Liability Company Law is abolished and for legal purposes yugen kaishas will be treated as sole director kabushiki kaishas. Existing yugen kaishas will continue to operate as "tokurei yugen kaisha" or "TYK". The last day upon which a yugen kaisha can be registered is April 30, 2006. This section will be revised within the next few days.
As mentioned in the previous section on tax structures to consider for doing business in Japan, the tokurei yugen kaisha "YK" has numerous administration advantages compared to the kabushiki kaisha "KK" and especially for a US parent can offer a substantial tax advantage compared to either a branch office or kabushiki kaisha.
A US parent can elect to treat a tokurei yugen kaisha Japanese subsidiary as a 'disregarded entity' or partnership for income tax purposes. That means that if you are a US company starting business in Japan, a yugen gaisha is a per se eligible entity under the 'check the box' entity classification regulations for US tax purposes and will allow you to obtain flow-through US income tax treatment for your Japanese business income.
Unless you have the resources to engineer and maintain a 'Dutch TK' (a tokumei kumiai "tk" 'silent partnership' that is funded by a Dutch parent further to the Japan-Netherlands tax treaty) the yugen gaisha is the way to go. If you are a US SME starting business in Japan then it is probably the optimal solution. The yugen gaisha has low administration costs, is not subject to annual statutory audits, has minimal corporate governance overhead and gives litigation protection for the foreign parent. The only real obstacle to any foreign company starting business in Japan with a yugen kaisha will most likely be its local Japanese executives who will complain (as noted in those myths of the Japanese market) that the perceived prestige of the kabushiki kaisha is essential to success. To counter that largely out-dated myth, I would point your subsidiary President to one of the most notable foreign company subsidiaries to be incorporated in Japan as a yugen kaisha - Exxon Mobil y.g.!
While every Japanese subsidiary will have unique aspects to its costs of doing business in Japan and its relationship with its foreign parent, the most generally tax efficient and legal structure for starting business in Japan that I know is as follows:
The objective is to legitimately shift margins from Japan (a high tax jurisdiction) to lower tax jurisdictions by shifting costs to the yugen kaisha. The business benefit is realized because its more efficient to use cash for manufacturing and R&D than to lose it in income taxes. The above structure could result in your effective Japanese income tax rate being less than 10% - substantially less than the 42% paid by many foreign companies on the profits they earn doing business in Japan, while substantially reducing your costs in lower tax regions and increasing your output.
PLEASE NOTE that this section is here for guidance only. Japan has 45 or more tax treaties in place, each of which is different and all of which are constantly being challenged and reinterpreted. Before using any form of non-standard structure YOU MUST GET INDEPENDENT TAX ACCOUNTING AND LEGAL ADVICE!
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