Doing Business in Japan: Popular Business Model Types & Their Distinctions
One of the most important decisions a foreign company can make when entering Japan is choosing the right business model. Each business model carries its own legal, tax, and representation demands, all of which can impact a company’s long term market success. For companies in the early stages of expanding to Japan, here is an overview of the advantages and disadvantages of the most common business models:
What is it: Representative offices are offices established for non-transactional purposes. They are often used to carry out preparatory and supplemental tasks aimed at enabling foreign companies to engage in full-scale business operations at a future date.
Advantages: Representative offices are easy to set up and do not require registration. They are excellent vehicles for companies who wish to conduct market surveys, collect information, purchase goods, or advertise in the Japanese market.
Disadvantages: Representative offices are not allowed to engage in sales activities. Setting up an office is a relatively quick process; however, in order to open a bank account or lease real estate, a representative from the foreign company must open the bank account and sign the lease in an individual capacity.
What is it: Branch offices are offices that allow a company to conduct sales and other business activities in locations other than the main office. Despite their physical distance from the parent company, branch offices are not considered legally separate entities.
Advantages: Similar to representative offices, branch offices are relatively simple to set up and run. To register a branch office, a company has to fulfill three requirements: submit their original charter documents (and any other requested information), choose an office location, and identify a representative (minimum of one). Once established, a branch office can begin trading and selling. In contrast to the representative office, branch offices can set up a bank account and lease real estate under the company name.
Disadvantages: A branch office’s legal status exposes the parent company to legal and tax liability risks; any debts or credits generated by the branch office are the responsibility of the owning company to handle. Branch offices are also not allowed to submit tax returns (they must be submitted by the owning company). These tax returns are then subject to investigation by the Japanese tax authorities, who can expand their investigation overseas if necessary. Another difficulty with setting up a branch office is hiring a representative. Branch offices require at least one representative to live in and be a resident of Japan (the person does not need to be a Japanese citizen).
What is it: A company that is recognized as a legally separate entity but is controlled or owned by a parent or holding company. There are many types of subsidiaries, but the most common in Japan are the joint-stock corporation (called Kabushiki-Kaisha or KK) and the limited liability company (called Godo-Kaisha or GK).
Advantages: Subsidiaries protect the parent company from legal and tax liabilities by limiting their liability to that of an equity participant. As a separate legal entity, subsidiaries only have to file a tax return for themselves (limiting tax authority investigations). Unlike branch offices, subsidiaries do not need a Japanese resident in order to open a bank account or lease real estate (this requirement was ended in March 2015). Subsidiaries also don’t need to submit the original charter documents when registering.
Disadvantages: Subsidiaries can take approximately a month to set up and have higher capital requirements than a branch office. Some subsidiary models have greater market credibility than others (the KK is better received by Japanese consumers than the GK), and almost all models have stricter requirements for shareholders.
To learn more about the various business models, or to find out how much it would cost your business to register in Japan, please contact JETRO Sydney.