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 you are a foreign individual who don’t own any company outside Japan but intend to start business in Japan, you have two options; setting up a Japanese company or going a sole proprietorship (or a freelance).

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. At the same time, you have to consider a visa status to manage the business while staying in Japan.

Each county has its own administrative system and procedures, taxiation, social insurance and so on. You should learn structure of Japanese company in general as well as the advantages and disadvantages of each type of business operation. Also, you will need to take time to examine what options you have for your (or your employee’s) visa status.

* 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 (hereinafter referred to as "RO") 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. RO does not require legal registration at Legal Affairs Bureau, so it is easy to start and it costs less than other options. However, RO is not regarded as a corporate entity and it is not permitted to engage in sales activities. The activities which can be performed by RO are very limited. In addition, it is difficult to open corporate bank account in Japan as well as to eroll in the Japanese Social Insurance in the name of RO.

Basically, RO is not subject to taxiation in Japan. However, there are possibilities to be taxed regarding the activities of RO depending on;

  • whether the activities of RO 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 RO

[Advantages]

  • Opening RO 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 RO – in general, it should be made in the name of the parent company name or the representative person’s individual name.
  • There are some cases which would be hard to arrange the situation based on RO to satisfy requirements for visa status applicable to.
  • For the visa application, Information (Certification of Company Registration, financial statement etc.) of the head office is required.

【2】 Branch Office (支店 Shiten)

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

Japanese Branch Office (hereinafter referred to as "BO") is to be 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 and individual corporate status in Japan. BO is recognized as a part of a foregin company. Liabilities of Japanese BO are generally attributed to the head office outside Japan.

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 foregin company).
  • Initial capital is not required.
  • It is possbile to make a rent/lease contract and open a corporate bank account under the name of BO.
  • While a Japanese company (KK, GK etc. even if it is a subsidiary of a foreign company) is not allowed to add up irregular compensation for directors, all compensation for a representative in Japan of BO is to be added up to the operating expenses in case she/he is not registered as the director/executive of the head office outside Japan.

[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.
  • For the visa application, Information (Certification of Company Registration, financial statement etc.) of the head office is required.

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

This is to set up a new corporate entity 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.

A foreign company can set up a subsidiary company by investing money of the parent company.

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 arrange the situation in order to apply for a relevant visa status for the management team or employees.

[Disadvantages]

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

【4】 Comparison of types of buisness operation

Each types of business operation above (RO, BO, 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; BO is regarded as a part of the foreign company. Credits and debts relationship between BO 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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