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Investing in Japan

Investing in Japan
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How to Set Up Business in Japan

Laws & Regulations on Setting Up Business in Japan

Section 1. Incorporating Your Business

1.2 Comparison of types of business operation

Foreign companies generally engage in business operations by establishing a branch office, subsidiary company, and the legal differences between each of these are summarized in the following table.

Table 1-1

  Branch office Subsidiary company
Kabushiki-Kaisha
(joint-stock
corporation)
Godo-Kaisha
(limited liability company (LLC))
Capital No capital 1 yen or more(*1) 1 yen or more(*1)
Number of investors - 1 or more 1 or more
Liability of equity participants/parent company toward creditors Unlimited Limited to amount of equity participation Limited to amount of equity participation
Transfer of equity participation share No equity participation share May be transferred freely in principle. May be stipulated in articles of incorporation that approval of Board of Directors is needed for transfer of shares. Unanimous approval of equity participants (members) required
Number of executives required Representative in Japan.
1 or more(*2)
See Tables 1-2, 1-3 No legally stipulated minimum.
In principle, all members are executive officers, but a representative member may be appointed(*2).
Legally stipulated term of office for executives No legally stipulated term See Tables 1-2, 1-3 No legally stipulated term
Regular general meeting of shareholders (members) Not required In principle, must be held every year Not required
Possibility of public offer of stock (equity participation share) No equity participation share Possible Not possible
Possibility of reorganization into joint-stock corporation Not possible. Need to separately close branch office and register resignation of all representatives in Japan, and establish joint-stock corporation(*3) -
(A joint-stock corporation may be reorganized into a limited liability company.)
Possible
Distribution of profits and losses - Allocated according to equity participation ratio May be allocated at a different rate from equity participation rate if specified in articles of association
Taxation of profits Income arising within Japan is in principle taxed Taxed according to profits of joint-stock corporation and profits allocated to shareholders Taxed according to profits of Godo-Kaisha and profits allocated to participants

(Note) Regardless of the type of operation, prior notification must be filed with the Bank of Japan if establishing an operation in an industry in which the Foreign Exchange and Foreign Trade Act requires that such notification be filed when making an inward direct investment.

(*1) Although establishment with capital of zero yen is theoretically possible, approval is granted ex post facto, and it is not in practice possible to incorporate a company without paying in capital.
(*2) At least one representative must have an address in and be resident in Japan.
(*3) See 1.7.1 "Closure of a branch office and resignation of all representatives in Japan".

Comparison regarding directors of Kabushiki-Kaisha (joint-stock corporations)
(if no nominating committee, etc. or committee of audit, etc. (*1) is established)

Table 1-2

  Small and medium companies
(joint-stock corporations with capital of less than 500 million yen and total liabilities of less than 20 billion yen)
Large companies
(joint stock corporations with capital of 500 million yen or more or total liabilities of 20 billion yen or more)
Kabushiki Joto Seigen Kaisha
(joint-stock corporations subject to restrictions on the transfer of issued shares)
Kokai Kaisha
(publicly traded joint-stock corporations that are not Kabushiki Joto Seigen Kaisha)
Kabushiki Joto Seigen Kaisha
(joint-stock corporations subject to restrictions on the transfer of issued shares)
Kokai Kaisha
(publicly traded joint-stock corporations that are not Kabushiki Joto Seigen Kaisha)
Directors No. Appointment of 1 or more required.
Representative director with right to execute business.
If no representative director is appointed, executive officers each have the right of representation(*2).
Appointment of 3 or more required Appointment of 1 or more required.
Representative director with right to execute business.
If no representative director is appointed, executive officers each have the right of representation(*2).
Appointment of 3 or more required(*3)
Term 1 to 10 years.
Extendable up to 10 years.
2 years 1 to 10 years.
Extendable up to 10 years.
2 years
Board of directors
(3 directors or more)
Establishment optional. Establishment required if board of auditors is established. Establishment required Establishment optional. Establishment required if board of auditors is established. Establishment required
Representative director(s) Appointment possible if 2 or more directors appointed. Executive officer with right of representation(*2). Appointment of 1 or more required.
Executive officer with right of representation(*2).
Appointment possible if 2 or more directors appointed. Executive officer with right of representation(*2). Appointment of 1 or more required.
Executive officer with right of representation(*2).
Auditors No. 1 or more may be appointed.However, appointment of 1 or more is required if a board of directors is established and no accounting counselor is appointed Appointment of 1 or more required Appointment of 3 or more required
Term 4 years in principle.
Extendable up to 10 years.
4 years 4 years in principle.
Extendable up to 10 years.
4 years
Board of auditors
(3 or more auditors)
Establishment possible Establishment required
Accounting auditor Appointment Appointment possible Appointment necessary
Term 1 year
Accounting councilor(*4) Appointment Appointment possible.
However, 1 or more must be appointed if a board of directors is established and no auditor is appointed.
Appointment possible
Term 2 years in principle.
Extendable up to 10 years.
2 years 2 years in principle.
Extendable up to 10 years.
2 years

(*1) From the date of enforcement (on a date specified by cabinet order within 18 months of the date promulgation) of the Bill on Partial Revision of the Companies Act (hereinafter "Companies Act Revision Bill" ; promulgated June 27, 2014 (Act No. 90), companies classed as "companies with committees" before the bill's enforcement will be called "companies with nominating committees, etc." Following such enforcement' a new category of company called "company with committee of audit, etc." will be created.
(*2) At least one director with the right of representation must have an address in and reside in Japan.
(*3) If a company subject to the Financial Instruments and Exchange Act has not appointed an outside director by the last day of every business year after the enforcement of the Companies Act Revision Bill, it must explain the reason why appointing an outside director would not be appropriate at its annual shareholders meeting.
(*4) An accounting councilor must be a certified public tax attorney or certified public accountant. An auditing councilor prepares financial documents in association with the directors, and may not hold another position as well, such as director, auditor, or accounting auditor.

Comparison regarding directors of Kabushiki-Kaisha (joint-stock corporations)
(if a nominating committee, etc.(*1) are established)

Table 1-3

  Small and medium companies
(joint-stock corporations with capital of less than 500 million yen and total liabilities of less than 20 billion yen)
Large companies
(joint stock corporations with capital of 500 million yen or more or total liabilities of 20 billion yen or more)
Kabushiki Joto Seigen Kaisha
(joint-stock corporations subject to restrictions on the transfer of issued shares)
Kokai Kaisha
(publicly traded joint-stock corporations that are not Kabushiki Joto Seigen Kaisha)
Kabushiki Joto Seigen Kaisha
(joint-stock corporations subject to restrictions on the transfer of issued shares)
Kokai Kaisha
(publicly traded joint-stock corporations that are not Kabushiki Joto Seigen Kaisha)
Directors No. Appointment of 3 or more required
Term 1 year
Board of directors
(3 or more directors)
Establishment required
Representative director Appointment not possible
Executive No. Appointment of 1 or more required.
Appointment of representative executive officer if 2 or more(*2).
Term 1 year
Auditors Appointment not possible
Board of auditors
(3 or more auditors)
Appointment not possible
Accounting auditor Appointment Required
Term 1 year
Accounting councilor Appointment Possible
Term 1 year
Auditors committee Establishment required (for auditing, etc. of performance of duties by executive officers).
Consists of 3 or more directors, of which a majority must be outside directors(*3).
Nominating committee Establishment required (to decide on proposed appointment and dismissal of directors for submission to the general meeting of shareholders).
Consists of 3 or more directors, of which a majority must be outside directors(*3).
Benefit committee Establishment required (to determine compensation of executive officers, etc.).
Consists of 3 or more directors, of which a majority must be outside directors(*3).

(*1) Companies classed as "companies with committees" before the enforcement of the Companies Act Revision Bill will be called "companies with nominating committee, etc." after such enforcement.
(*2) At least 1 executive officer with the right of representation must have an address in and reside in Japan.
(*3) Note that the requirements of outside directors will be altered by the enforcement of revisions to the Companies Act.

Comparison regarding directors of joint-stock corporations (if a committee of audit, etc.(*1) is established)

Table 1-4

  Small and medium companies
(joint-stock corporations with capital of less than 500 million yen and total liabilities of less than 20 billion yen)
Large companies
(joint stock corporations with capital of 500 million yen or more or total liabilities of 20 billion yen or more)
Kabushiki Joto Seigen Kaisha
(joint-stock corporations subject to restrictions on the transfer of issued shares)
Kokai Kaisha
(publicly traded joint-stock corporations that are not Kabushiki Joto Seigen Kaisha)
Kabushiki Joto Seigen Kaisha
(joint-stock corporations subject to restrictions on the transfer of issued shares)
Kokai Kaisha
(publicly traded joint-stock corporations that are not Kabushiki Joto Seigen Kaisha)
Directors
(members of comm. of auditors, etc.)
No. Appointment of 3 or more required(*2)
Term 2 year
Directors
(excl. members of comm. of auditors, etc.)
No. Appointment of 1 or more required.
Term 1 year
Board of directors Establishment required
Representative director Appointment required(*3)
Auditors Appointment not possible
Board of auditors Appointment not possible
Accounting auditor Appointment Required
Term 1 year
Accounting councilor Appointment Possible
Term 1 year
Auditors committee Establishment required (for audit, etc. of performance of duties by directors).
Consists of 3 or more directors, a majority of which must be outside directors(*2).

(*1) A new type of company established following the enforcement of the Companies Act Revision Bill.
(*2) A majority must be outside directors. They do not have to be full time.
(*3) At least one representative director must have an address and be resident in Japan.


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