Boasting the third-largest economy in the world, Japan is an ideal place to set up a business due to its strong work ethic, long-term political stability and well-developed supporting infrastructure. Typically, foreign business owners tend to consider a subsidiary company (limited liability company/joint stock company) or a branch office when aiming to register company in Japan. Due to the lower amount of paperwork and costs required in setting up a branch office, it may sometimes be more ideal to set up a branch office instead of a subsidiary company. As such, the branch office is a rather popular business entity for foreign companies planning to establish a business in Japan to gain access to the lucrative Japan market and surrounding Asian market. Before registering a branch office in Japan, it is important to get a better understanding of the structure of a branch office in Japan, as well as its advantages and disadvantages.
1. A branch office and its parent company are not separate legal entities.
A branch office is regarded as an extension of the parent company, and so it will have the same company name as its parent company. Since the branch office and the parent company are regarded as the same legal entity, the parent company will be held liable for any debts and obligations incurred by the branch office. This also means that if the parent company is closed down, the branch office will also be liquidated. The purpose of a branch office is to extend the foreign parent company’s operation to Japan and generate revenue for it.
2. A branch office is required to pay corporate taxes.
Since a Japanese branch office is regarded as a Permanent Establishment in Japan, it will be required to pay corporate taxes on the profits earned from the branch office based on Japan corporate tax rates. Unlike a subsidiary company, branch offices will not be required to pay withholding tax (WHT) on the repatriation of profits from the branch to the parent company.
A branch office in Japan can also choose to apply for blue form tax status. This will allow the company to file a blue form tax return for subsequent years. A blue form tax return is more simplified than a normal tax return and will allow the company to enjoy certain tax benefits such as a deduction of taxable income and the ability to carry forward losses to reduce income taxes in the next few years.
3. A branch office in Japan must have a local representative.
All branch offices in Japan must appoint a local representative to represent the company in Japan and liaise with local institutions. While there is no nationality requirement for the local representative, the local representative must be residing in Japan under a valid long-term visa. In Japan, it is mandatory for all companies to have an official seal. For a branch office, the local representative will be the one who registers the company seal with the local Legal Affairs Bureau. Only the local representative of a branch office is authorised to use the company seal.
4. There is no minimum capital requirement for the establishment of a branch office.
Previously, a branch office in Japan was a more attractive option for foreign business owners because there was no minimum paid-up share capital requirement during the incorporation of the company. However, with the abolishment of the minimum capital requirement of JPY 10,000,000 for a joint stock company under the Companies Act, business owners are no longer required to possess capital to incorporate a limited liability company or a joint stock company in Japan. As such, there is no advantage in terms of capital requirement when incorporating a branch office in Japan.
5. A branch office cannot conduct business activities of a different nature from its parent company.
The scale and scope of a branch office’s business activities will be determined by its parent company. Since the branch office is considered to be the same legal entity as its parent company, it cannot conduct business activities that are not performed by the parent company. Hence, it may be more ideal to incorporate a limited liability company if you wish to open a subsidiary company that conducts business activities beyond the scope of your foreign company.
6. A branch office must file the financial accounts of their parent company.
Although a branch office is only required to pay corporate taxes on the income derived from the branch office, it must declare the income and assets of its parent company and submit audited financial statements of its parent company if applicable. A Japanese branch office is also required to file financial statements together with its tax return annually.
7. A branch office must have a registered office in Japan.
Like a limited liability company, a branch office must have a registered office address in Japan. This address is necessary for the company to receive official mail. The address of the company will be registered under the Bureau of Legal Affairs during the Japan company registration.
8. A branch office does not need additional officeholders.
Unlike a limited liability company, there is no need to appoint directors or a management team to administer the company. A branch office in Japan can be registered solely with a local representative. This is because the Board of Directors in the parent company will be the one in charge of managing and overseeing business operations conducted by the branch office in Japan. This allows the parent company to have greater control over business activities in the representative office. Hence, it may be more attractive to open a branch office instead of a limited liability company if you wish to expand operations to Japan without hiring a separate management team.
Generally, business owners may choose to set up a branch office due to the less stringent requirements and lower administration and registration costs. However, you may wish to consider setting up a limited liability company if you wish to start a business in Japan that is of a different nature from your foreign parent company. Alternatively, if you plan to conduct non-commercial activities that do not generate revenue, it may be more ideal to open a representative office in Japan. This will allow your company to conduct market research and initiate marketing campaigns in Japan without having to register with any legal authorities in Japan.
Setting up a business in Japan can be a difficult process because of the language barrier. The business language in Japan is Japanese and all corporate documents must be written in Japanese. Even though there is no requirement for a resident director for a Japanese company, it is recommended to hire a nominee director who is fluent in Japanese and able to communicate with governmental and financial institutions to register for the required services.
Tetra Consultants provides you with a fast and easy way to register company in Japan through our service package which includes company registration with the Japan Registry Office (Houmukyoku); provision of Japan nominee director, local company secretary and registered office; opening of a corporate bank account; tax registration; and annual accounting and tax services. Tetra Consultants will also recommend the type of business entity suitable for your company, based on your long-term goals and business model.