Types of Business Operation

In case that foreign companies wish to set up a business entity in Japan to operate their business, basically there are three options of business form as follows:

1. Representative Office (駐在員事務所 Chuzaiin Jimusho)
2. Branch Office (支店 Shiten)
3. Subsidiary or Japanese Company (子会社 or 日本法人 Kogaisha or Nihon Houjin)

In case of foreign individuals who don’t own any company outside Japan but intend to start business in Japan, generally they can choose a type of business operatioin among two options, setting up a company or sole proprietorship.

Since each business operation has its own features and characteristics, you should consider and choose the best way in order to pursue your business plan and activities in Japan.

In case you or your company are planning to set up business in Japan for the first time, it would be better to set up a "Representative Office" first for the observation, market research, market development or promotion in Japan. Then, you can move on to the next step – setting up a Branch Office, Subsidiary of the parent company or Japanese Company separated from the parenet company.

Each county has its own administrative system and procedures, taxiation, social insurance and so on. You should consider the operation and structure of Japanese company as well as the advantages and disadvantages of each types of business operation.

* In addition to types of business operation explained in 1 – 3 above, there are several options: (a) invest into an existing company in Japan, (2) establish a joint venture company. However, we don’t discuss (a) and (b) here.

【1】 Representative Office (駐在員事務所 Chuzaiin Jimusho)

Representative Office ("Rep Office") is an entity to be set up as a base for preperatory activities such as collecting information, market research, advertising, purchasing goods before the foreign company actually starts engaging in full-scale business operations in Japan. Rep Office does not require legal registration at Legal Affairs Bureau, so it is easy to start and costs less. However, the activities which can be performed by a Rep Office are limited and not permitted to engage in sales activities.

Basically, Rep Office is not subject to taxiation in Japan. However, it is possible to be taxed regarding the activities of the Rep Office depending on;

  • whether the activities of Rep Office is treated as Permanent Establishment ("PE") .
  • the tax treaty between the country of the head office and Japan.

Income tax related to expat’s salary for the business activities in Japan is subject to be withholded, so relevant notifications and declaration to Tax Office are required. You would need help of specialists who are familiar with international taxiation and accounting.

What is Permanent Establishment ("PE")?

Permanent Establishment is divided into 3 categolies:

  1. PE1: a fixed place of business activities such as branches, office, factories, plants, mine and stone pit, exhibition sales and so on.
  2. PE2: a long term (more than one year) construction project such as
  3. PE3: an agancy which has an authority to make contracts for their own business.

It is evaluated based on the functional features. It is not considered as PE1 in case of a place used for the purpose of non-profit-making acitivities such as purchase and storage of the goods, providing or collecting information, market research and so on.

(Cited from Tax Answer of National Tax Agancy)

Basically, only "income accrued from domestic sources" is to be taxed for Non-residents and foreign companies ("Non-residents"). However, it depends on the existance of PE in Japan and the type of PE.

For example, Non-residents’ income accrued from the business in Japan could be taxable if the Non-residents are recognized they have PE in Japan. However, if the Non-residents are recognized they don’t have PE in Japan, they are not subject to be taxed.

(End of citation)

Advantages and disadvantages of Rep Office

[Advantages]

  • Opening Rep Office are not required legal regisration at Legal Affairs Bureau, so it is easy to open as well as close.
  • Easy to change to Branch Office or other corporate capacity.
  • Non-taxable unless it is not recognized as PE.

[Disadvantage]

  • It is not allowed to engage in sales acitivities – only can engage in non-profit-making activities such as marketing research, collecting information, advertising, purchase of goods and so on.
  • It cannot open a corporate bank account and make a lease/rent contract in the name of Rep Office – in general, it should be made in the name of the parent company name or the representative person’s individual name.
  • It would be possible to be considered that the Rep Office does not satisfy the requirement for the visa application depending on the case.

【2】 Branch Office (支店 Shiten)

In order to engage in sales activities continuously, foreign companies have to establish a Branch Office, Subsidiary of the parent company or Japanese Company and register it at Legal Affairs Bureau.

Japanese Branch Office ("BO") is to set up as a base to conduct business activities determined by the head office outside Japan. Therefore, in terms of the Japanese Companies Act, BO does not have its own legal corporate status in Japan and is recognized as a part of the foreign company. Liabilities of Japanese BO are generally attributed to the head office.

BO has to be registered at Legal Affairs Bureau. See the following page for the procedures. >> Setting up Branch Office

Advantages and Disadvantages of Branch Office

[Advantages]

  • It can engage in full-scale business in Japan (detailed business activities are determined by the head office of the company).
  • Initial capital is not required.
  • It is possbile to make rent/lease contracts and open a corporate bank account under the name of BO.
  • All compensation for representatives in Japan is to be added up to the operating expenses while Japanese company (KK, GK etc.) is not allowed to add up irregular compensation for directors.
  • It is possible to satisfy the requiremets for the visa application.

[Disadvantages]

  • In case information in the Japanese registry has been changed, it has to revise and re-register new information at Legal Affairs Bureau in Japan. In this case, documents of the head office are required to be submitted as proof of the new information.
  • BO is taxed based on the paid-in capital of the foreign company. In case that the amount of paid-in capital of the company is large, it is possible that the tax rate of the BO would be larger than that of Subsidiary.
  • Required to file a corporate tax return in Japan. Financial statement of the head office is required to be attached to the tax return.

【3】 Incorporation in Japan (日本法人 Nihon Houjin)

This is to set up a new company in Japan pursuant to the Japanese Companies Act.

There are several types of company in Japan – Kabushiki Kaisha, Goudou Kaisha, Goushi Kaisha, Goumei Kaisha and so on. The most popular one is Kabushiki Kaisha ("KK"). The number of Goudou Kaisha("GK") is getting bigger because it is simple and costs less. Goushi Kaisha and Gomei Kaisha are not popular since they have to bear unlimited liability.

Refer to the following page for company establishment in Japan. >> Incorporation ("KK", "GK")

Advantages and Disadvantage of Company Establishment

[Advantages]

  • It is set up under Japanese laws and regulations and familiar among Japanese companies.
  • It can make rent/lease contracts and open corporate bank account under the name of the Japanese company.
  • Parent company has a responsibility for the investment, however, liabilities and debts of the subsidiary in Japan does not attribute to the parent company.
  • Required to file a corporate tax return in Japan, but not required to attach the financial statement of the head office.
  • In case that pain-in capital of the parent compay is more than the amount equivalent to 100 million yen,
  • It is relatively easy to satisfy the requirement of visa applications.

[Disadvantages]

  • Contracts and Invoices are required for business transactions between family companies.
  • Financial loss created by Japanese company cannot sum up to the head office account – so, it is not expected to produce tax effect.

【4】 Comparison of types of buisness operation

Each types of business operation above (Rep Office, Branch Office, Japanese Company) can be compared as follows:

  Representative Office Branch Office Japanese Company (Subsidiary)
Marketing research
For-profit and sales activities ×
Legal Registration Not required Required Required
Appointment of directors × Appointment of at least 1 representative who reside/has a registered address in Japan. Appointment of at least 1 director.
Liability × ×(※3)
Renting/Leasing ×(※1)
Opening corporate bank account under company's name ×(※2)
Acquiring visa for directors/representatives/employees
Required to check carefully whether the Rep Office satisfy the requirement for visa application.

※1: In general, leasing/renting should be signed under the name of private name. Some lessor accepts a contract signed by the head office of foreign company.

※2: Representative office cannot open the bank account under the name of the company, however, there is some possibility that the bank accepts opening an account under his/her personal name with the representative office’s name if the person has been in Japan for several months already. Some bank doesn’t accept even opening a personal account if the person has been in Japan for only a few months.

※3: Branch office of foregin company in Japan is not granted corporate status; it is regarded as a part of the foreign company. Credits and debts relationship between branch office in Japan and others belongs to the parent company.

Immigration Procedures to Work in Japan.

In order for a foreign nationals to work in Japan, they must obtain visa status appropriate for their intended activities in Japan depending on their current position, role and occupation, period of work, work and academic experience. Those who are not eligible for any visa status cannot stay in Japan.

In case of the foregin national living outside Japan and planning to relocate to Japan for his/her job, the person must apply for "Application for Certificate of Eligibility" depending on his/her appropriate visa status. In case of the person living in Japan already under specific visa status, he/she would need to process relevant immigration procedures depending on the situation.

Please refer to the page, "INTRODUCTION: Overview of Immigration System in Japan" for the details of visa status and immigration procedures.

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