Setting up with a Japanese branch-office
- A Japanese branch-office is legally similar to any other branch-office your company may already have in its domestic market or overseas; it’s just another office from which your employees do business.
- A branch-office in Japan has no equity, but for tax purposes inherits the value of its foreign head-office’s paid-in capital.
- A Japanese branch-office has no Board of Directors, but legally its foreign head-office’s directors are liable for its actions.
- A branch-office in Japan must have a Japanese or foreign representative (often called its representative manager) who is resident in Japan.
- A Japanese branch-office must have a registered office address in Japan.
- A Japanese branch-office’s name is the same as its foreign head-office’s name.
- A branch-office in Japan can register for “Blue Form” tax status, which allows it to carry forward losses to offset against income taxes for up to 9 years after the year in which it incurred the loss (up to 10 years for losses incurred in financial years starting on or after April 1, 2017).
As noted above, a Japanese branch-office is legally similar to any other branch-office your company may already have in its domestic market or overseas; it’s just another office from which your employees do business. The difference is that Japan’s Commercial Code (which governs branch-offices in Japan) considers your company’s branch-office in Japan as a ‘quasi-foreign company’ which must adhere to all Japanese laws, including taxation laws, labor laws, product liability laws, etc. This causes your company’s branch-office in Japan to seem as two entities: it’s considered a Japanese company (except it has no local paid-in capital, no local equity, and no local directors other than its representative) and it’s also considered an annex of your company’s head-office (meaning it inherits the value of your company’s paid-in capital, and inherits your company’s officers).
Of legal importance, even though it exists in a separate legal jurisdiction, a branch-office in Japan is not a separate legal entity from its foreign head-office. This is a litigation concern because a Japanese branch-office’s liabilities, whether debt, employee, product or otherwise, are ultimately liabilities of its foreign head-office. Japan’s Commercial Code imposes strict statutory responsibilities on directors of companies and likewise on both the representative of a Japanese branch-office and on the officers of its foreign head-office. In the US, directors have become accustomed to being shielded by the corporate veil and being generally protected from personal liability for a company’s failures and liabilities. Japanese judges tend to rule to the letter of Japan’s written statutes which often favor creditors and employees. Directors of failed companies and representatives of failed branch-office’s can, and sometimes do, suffer substantial financial and penal penalties.
Japan also has the ‘Application of Laws’ law, under which a Japanese judge can rule based on the law of a foreign jurisdiction if the plaintiff shows that disputed contracts or agreements are reasonably subject to that foreign jurisdiction’s statutes. If a Japanese branch-office fails, it’s conceivable that a Japanese court could make officers of the branch-office’s foreign head-office liable for Japanese debts and any statutory damages imposed by that foreign jurisdiction. A further concern is that of a litigious Japanese branch-office employee threatening to seek punitive compensation in the foreign head-office’s domestic courts. This is especially a concern for US companies, because levels of labor-related awards in the US are orders of magnitude higher than in Japanese courts (which do not award punitive damages).
A Japanese branch-office must register with Japan’s Ministry of Justice, must register a Japanese or foreign resident of Japan as its representative, and must have a registered business address in Japan. A branch-office in Japan must file annual financial statements and tax-returns just as Japanese companies must.
A company that will only do sales in Japan through its Japanese branch-office may find a branch-office useful, but we do not recommend a Japanese branch-office as a sales office for any company that also does other business in Japan, unless it can clearly separate sales that involve the Japanese branch-office and sales made direct to Japanese customers that do not involve the branch-office. The problem is that a Japanese branch-office creates a permanent establishment ‘PE’ in Japan of its foreign head-office; Japan’s Corporation Tax Law states that any foreign company with a permanent establishment in Japan must pay income tax on that part of its Japanese sales attributable to the branch-office. The tax office assumes that all sales such a foreign company makes in Japan are attributable to the branch-office unless the foreign company can prove otherwise, thus a Japanese branch office creates Japanese corporate income tax exposure on all of its foreign head-office’s Japanese business income, unless it implements strict sales and accounting processes. This means that the head-office must not involve Japanese branch-office’s staff in any sales negotiations, import management, or order fulfilment of any sales the foreign head-office does in Japan. It also means the branch-office’s details must not appear on any invoices its foreign head-office issues direct to Japanese customers, that the head-office’s Japanese customers must not pay into the branch-office’s bank-account, and that the head-office must not involve branch-office staff in payment collections on behalf of the foreign head-office. To help ensure compliance, Japan’s Corporation Tax Law requires a branch-office to file a copy of its foreign head-office’s most recent balance-sheet when it files its Japanese tax-returns.
Other than the PE permanent establishment issue discussed above, a Japanese branch-office’s tax calculation and liability are generally the same as those for a KK kabushiki kaisha or GK godo kaisha, except that: 1) thin-capitalization rules do not apply to a branch-office in Japan, and 2) Japan’s Anti Tax Haven Law does not apply to branch-offices in Japan. One other caution is that tax-sensitive companies with paid-in capital more than JPY100,000,000, should consider avoiding setting up a branch-office in Japan because the Japanese Corporation Tax Law considers such companies as large enterprises and charges them high minimum local income taxes.
Although a branch-office in Japan can register for Blue Form and carry forward losses to offset against future income taxes, a foreign company cannot convert its branch-office to a KK kabushiki kaisha or GK godo kaisha, and will lose any accrued tax losses if it decides a branch-office in Japan is inadequate in the future.