July 28, 2023
For foreign companies looking to establish a business presence in Japan, selecting the appropriate legal form is a crucial decision. The choice will impact the company’s operations, tax liability, and overall business reputation. In this blog post, you will learn about the different types of entities available for foreign companies in Japan, focusing on Representative Offices, Japan Branches, Kabushiki Kaisha (KK), and Godo Kaisha (GK).
Representative Office
A Representative Office is an informal business presence in Japan that is not registered with Japanese corporate authorities. Its primary function is to conduct market research and act as a liaison between the foreign company and potential partners or customers in Japan. However, this type of entity is limited to non-income generating activities and cannot engage in ongoing business operations.
Drawbacks of a Representative Office include its restricted scope of activities and its inability to shield the foreign company from liability at the Japanese level.
Japan Branch
A Japan Branch is a more substantive business presence that operates as a quasi-legal entity. It is subject to Japanese corporate taxation and allows the foreign company to conduct business in Japan. However, there are several drawbacks associated with this form of entity:
a) Liability: The foreign company is directly liable for the operations in Japan without the protection of a corporate veil at the Japanese level.
b) Tax Audit Queries: There may be tax audit queries that extend beyond Japan, potentially leading to additional complexities.
c) Prestige: Compared to true Japanese corporate entities, a Japan Branch may have a lower level of prestige in doing business in Japan.
Kabushiki Kaisha (KK) – Stock Holding Company
The Kabushiki Kaisha (KK) is perceived as the most prestigious and stable entity, which can be respected by Japanese partners, customers, contractors, and employees. It is also often preferred by investors conducting substantial business in Japan.
Key features of KK:
- Requires at least one representative director who is a resident of Japan.
- Holds a shareholder meeting at least once a year within three months of the fiscal year-end.
- Can operate with just one director but may opt for a board of directors with a minimum of three directors and at least one statutory auditor.
While KK requires ongoing compliance, its scalability and acceptance by customers, partners, and employees make it suitable for most businesses in Japan.
Godo Kaisha (GK) – Limited Liability Company
The Godo Kaisha (GK) is a hybrid between a corporation and a partnership, introduced in 2006. It is particularly popular among US parent companies as it can be taxed as a non-pass-through corporation in Japan while being disregarded for tax purposes (check-the-box) in the US.
Key features of GK:
- Investors become members of the GK, not shareholders.
- A board of directors is not required, reducing ongoing corporate housekeeping requirements.
- Members are jointly and severally liable for damages caused by other members or the Executive Manager, similar to a partnership.
Conclusion
The choice of business entity in Japan depends on various factors, including the nature of the business, long-term market presence, tax considerations, and relationships with Japanese partners and employees. The Kabushiki Kaisha (KK) is generally preferred for its prestige and stability, while the Godo Kaisha (GK) appeals to companies seeking US tax flexibility. Before making a decision, we strongly recommend taking advantage of our free consultations to carefully assess your business objectives and determine the right fit together.
