Key considerations when incorporating in Japan
Japan has the third-largest economy in the world and is a popular destination for foreign companies. With the government’s active promotion of foreign direct investment (FDI), Japan offers foreign investors a strong economy, a stable business environment, a skilled workforce and efficient infrastructure.
Japan ranked 59th in our 2021 Global Business Complexity Index (GBCI), down from 46th in 2020. Overall, Japan is becoming an easier place to do business, though certain challenges remain in the incorporation process.
Japan has long been recognised for its technological innovation and as a high-end manufacturing powerhouse. Key industries include automobiles, consumer electronics, semiconductors, pharmaceuticals and processed foods, among others.
While pandemic lockdowns had an impact, Japan’s economy rebounded in Q4 of 2021 and is expected to return to its pre-pandemic trajectory of strong performance in 2022, as consumer spending rebounds.
According to a report from the Japan External Trade Organization (JETRO), the Council for the Promotion of FDI in Japan has set a target of 80 trillion yen (US$693 billion), or 12% of GDP, in FDI by 2030, with digital and green construction initiatives and public-private partnerships identified as priority areas.
There are three primary business entity types available to investors seeking to incorporate in Japan as governed by the Companies Act of Japan: Kabushiki Kaisha, Godo Kaisha and branch offices.
Kabushiki Kaisha (KK)
Kabushiki Kaisha (KK) is the Japanese term for a corporation. Also called a stock company, a KK is the most common type of foreign-owned business entity in Japan and is highly recognised and respected by potential Japanese partner companies, contractors, customers and employees.
The KK is similar to the public limited company (PLC) in other jurisdictions. Its shares can be publicly traded, and the shareholders enjoy limited liability.
The registration requirements for a KK are more rigorous than those for other types of companies, and the articles of incorporation must include:
- Company name
- Registered office address (or ward, at a minimum)
- Business purpose
- Name and address of every director and auditor (official supporting documentation may be required, eg passports)
- Total number of shares at incorporation
- Terms of directors and auditors
Ownership: investors (shareholders) and managers (directors) are separated, although it is possible to both invest in and manage the company.
Director requirements: one shareholder, and one representative director (who can be the same person). The local residency requirement was abolished in March 2016.
Additional requirements: summary of financial statements must be publicly announced, and an annual shareholder meeting must be held every year.
Godo Kaisha (GK)
A relatively new type of corporate entity (introduced in 2006), the GK is therefore generally still less well recognised and trusted than a KK. The main difference between these two entity types is that a Kabushiki Kaisha can issue shares, while a Godo Kaisha cannot.
Ownership: in a GK, the members must invest their own funds and manage the company at the same time.
Director requirements: if the company only has one member, an executor needs to be appointed. The local residency requirement was abolished in March 2016.
Foreign companies may open branch offices in Japan if they are unable to find a local partner and wish to sell directly to Japanese customers, or if they wish to set up their own operation for manufacturing, research and development, or provision of services.
Ownership: a branch office does not have independent corporate legal status and is considered as an extension of the foreign company.
Director requirements: a single branch representative is required and they must be a resident of Japan.
For both KK and GK, the minimum capital requirement is 1 yen. There is no capital requirement for a branch office.
There are also no requirements for a summary of financial statements to be publicly announced or for an annual shareholder meeting to be held for a GK.
The time required for incorporation of all three types of entities is typically about one month after all necessary information for documentation is received. Japan lags behind many other jurisdictions in allowing for online applications and the electronic submission of documents. Electronic filing is available for the purposes of incorporation, but non-Japanese companies cannot access the relevant systems from overseas.
In addition, the pandemic has created delays, particularly as certain documents for incorporation are required to be notarised. Investors seeking to incorporate in Japan are advised to prepare all required information and documentation in advance and ensure prompt responses for any additional information or documents that may be requested.
One area of complexity, as noted in the GBCI, is that Japan is one of ten jurisdictions globally that require notification at three levels – national, provincial or state, and city – essentially tripling the administrative burden of the incorporation process.
In three months from incorporation, all the incorporated entities are required notify the tax office. If the deadline is missed, the entity will lose out on certain tax advantages.
As in many jurisdictions, opening a business bank account in Japan can be a challenging process. To prevent money laundering, Japanese banks are very strict with Know Your Customer (KYC) requirements. The primary purpose of KYC is to identify customers and verify their suitability for investment products, such as the opening of a new bank account.
In-person interviews with the company representative are typically required for the opening of a bank account.
With its vibrant economy, highly developed infrastructure, and incentives for foreign investment, Japan is an appealing market for investors seeking opportunities in Asia Pacific. With advanced preparation and the following of designated procedures, it can also be a relatively straightforward place to do business.
Established in 2007 in the heart of Tokyo, TMF Japan has a large team of professionals offering world-class bilingual services to clients from across the globe. We serve businesses from a variety of industries, including financial services, real estate investment, pharmaceuticals, personal products and industrial manufacturing, as well as renewable energy, retail and IT.
For more information, or to find out how our business support services in Japan can help you and your business to expand, talk to us today.