Step-by-Step Guide to Setting Up a Subsidiary in Japan

A subsidiary is a local entity of a company with headquarters in a different country. A foreign subsidiary’s designation depends on the parent company’s ownership percentage. 

Usually, parent companies of subsidiaries own more than 50% of the controlling interest of the subsidiary’s stock. However, when the parent company has full stock ownership, it becomes a wholly-owned subsidiary. On the contrary, ownership of less than 50% stock makes the parent company an associate or affiliate company.

Ideally, foreign subsidiaries operate independently and are fully responsible for their assets and liabilities. Hence, they become a separate legal entity eligible for taxation and regulatory oversight. The parent company can only control the overall structure of the subsidiary. However, it can govern the subsidiary by establishing a board of directors and selling it without the shareholder’s approval. 

You can choose to set up a foreign subsidiary in Japan to expand your reach in the market. But you must possess in-depth knowledge and a thorough understanding of the country’s subsidiary laws for the entity’s smooth functioning.

There are four kinds of business structures you must know before setting up a subsidiary business in Japan:

• Godo-Kaisha: Also commonly abbreviated as GK, a Godo-Kaisha is the Japanese equivalent of the American LLC or Limited Liability Company, hence nicknamed the Japanese LLC. It has a simple internal structure similar to that of a partnership. The only difference is that a GK offers limited liability for the investors. It was first introduced by the Companies Act and became effective on May 1, 2006. The company’s investors, or ‘shain’, must sign articles of incorporation or ‘teikan’ to form a GK. This subsidiary structure is taxable under Japanese law.
• Goshi-Kaisha:  Goshi-kaisha has a similar business structure to a limited partnership, but it is an incorporation of “unlimited liability” under the Companies Act of Japan. However, there isn’t any limit on what a ‘mugen sekinin shain’ or the company’s general partner is responsible for on legal terms.
• Gomei-Kaisha: In Japan, as per the Companies Act, a Gōmei Kaisha is a corporation where all partners are jointly liable for any liability. In this structure, the liability of the partners is unlimited, and creditors have the authority to seize the partner’s assets if the partnership’s assets are insufficient to meet the commitment.
• Kabushiki-Kaisha (KK): ‘Kabushiki-Kaisha’ literally translates to ‘share company’. Commonly abbreviated as KK, a Kabushiki Kaisha is a joint-stock corporation under the Companies Act of Japan. This model is Japan’s most popular business structure and is ideally the best choice for foreign companies planning to set up a subsidiary. Like the Goshi-Kaisha model, the liability in KKs is also limited to the assets contributed by the partners.

Here is how to register a subsidiary company in Japan:-

1. Name: The first step is to choose a relevant name for the company. You can always check for name availability with the Legal Affairs Bureau.
2. Incorporation documents: The articles of incorporation include the company’s name, scope, and details about the directors and the like.
3. Parent company documents: Prepare the registration certificate of the parent company along with the required affidavits and specimen signatures of the parent company’s representatives.
4. Notarize: The articles of association of the subsidiary companies should be notarized by a Japanese notary.
5. Provide the capital: Apply to any bank for capital custody and remittance of the subsidiary capital.
6. Appointments: Before establishing a subsidiary company, you will need to appoint the company’s directors, auditors, and the like.
7. Registration: The subsidiary and company seal must be registered with the Legal Affairs Bureau in Japan.
8. Bank account: You must open a corporate bank account for setting up a subsidiary in Japan where the capital is deposited.

Once the company is established, a registration certificate and company seal are issued after the application is approved. 

There are distinct advantages of setting up a subsidiary in Japan:

• Subsidiaries in Japan have the authority to operate independently from their offshore parent companies. They can cater to the Japanese consumers by tailoring their operations as per the Japanese cultural norms and even offering extra services to cater to the needs of Japanese citizens.
• The subsidiaries need not transfer liability to the parent company. This ensures that the offshore business will not be held liable for compliance-related issues. If anything happens to the Japanese subsidiary, the parent company can continue its operations.

For setting up a subsidiary company in Japan, the parent company needs to prepare certain documents and file them with the Trade Register. Here is a checklist of documents for incorporation of a foreign subsidiary in Japan:-

• The application form issued by the local office of the Trade Register in Japan
• The certificate of incorporation and statutory documents of the parent company
• The appointment letter and acceptance letters of the directors of the subsidiary
• The notification of the seal or ‘inkan’ by the  Japanese company
• The notarized incorporation documents of the subsidiary

In Japan, subsidiaries are generally established as either of the two in most cases. They are as follows:-

• Limited liability companies (Godo Kaisha) 
• Joint-stock companies (Kabushiki Kaisha). 

Subsidiaries in Japan are expected to be more inclined to Japan’s market and business environment since they operate under the status of a Japanese business entity. These companies are primarily established and organized as separate legal entities with a cordial and flexible relationship with their respective parent companies. Japanese subsidiaries are given greater legal authority to act independently and assume the necessary liabilities, unlike its branches. 

Even though registering a joint-stock company as a subsidiary in Japan is a longer and a costlier process than opening a branch office, it is a preferred choice amongst most international corporations because it brings in greater confidence from the business partners as the customers proving how committed the company is to the Japanese market.

Anyone wishing to set up a Japanese subsidiary must follow the given laws:

• As per the subsidiary laws in Japan, a KK must have at least three directors, one of whom is the representative director holding the corporate seal. This director represents the company during transactions. 
• One of the three directors should have a permanent residence in Japan.
• Foreign investors must know that specific industries require prior notification. The Bank of Japan handles a part of these notifications for the sectors under its supervision.

After your business is successfully incorporated in the Japanese Companies Act, you must fulfill the post-compliance requirements, including –

• Annual requirements: As per the Companies Act, any Stock Company or a Kabushiki Kaisha, “KK” must call for an Annual General Meeting of Shareholders within three months of its fiscal year. This meeting is a discussion among the shareholders on the past year’s business. It may also be used for other purposes, like seeking approval of the company’s financial statements for publishing a public notification. Members can also take official decisions regarding the election or re-appointment of officers.
• Changes to recorded matters: The following changes can be incorporated:-

• Change of Address: Changing the registered company address is a decision made by the shareholders or the company’s Board of Directors in relocation cases. Relocation of the company to another administrative jurisdiction also requires the amendment of the Articles of Jurisdiction. 
• Change/Re-appointment of Directors: Change or the resignation of Directors must be reported to the authorities. 
• Registered Capital Increase: When the registered capital of the company increases, shareholders should call a meeting to discuss the resolution because a capital increase leads to the issuance of additional company shares.
• Change of Company Trade Name: Changing the company registered name needs the shareholders’ approval via a meeting. For this, the company must pay a registration tax of 30,000 Yen. 

According to the laws governing the taxation of foreign subsidiaries in Japan, you have to contribute the following taxes:

• Corporate income tax: Subsidiaries in Japan must pay an income tax of 23.2%.
• Dividends: Companies owning more than 33.3% of the subsidiary shares are excluded from taxable income. Other progressive rates are applicable depending on the share ownership percentage.
• Consumption tax: The standard rate of the consumption tax for Japanese subsidiaries is 10%, which is 8% for beverages.
• Social security: The employer contributes to social security on behalf of the employee. The maximum contribution rate is 16.24% of the employee’s salary.
• Others: A stamp duty is applied on any contract executed in Japan, and a real property tax is applied at a 1.4% annual rate.
• License tax: Subsidiaries in Japan are also subject to license taxes that depend on the business field. There isn’t any net worth tax or net wealth, and a registration fee is also applicable.

Companies must file the annual tax return within two months after the fiscal year ends. The tax is paid in two months, starting from the end of the sixth month of the fiscal year. The amount payable can be 50% of the tax paid in the previous year or the tax liability incurred in the first six months. Japanese companies can file a white or a blue return, where the latter offers access to various tax deductions.

However, companies must apply at the beginning of the tax year to benefit from this filing regime. Newly established subsidiaries can apply before the first fiscal year ends.

Tax Incentives for Businesses Setting Up a Subsidiary in Japan

Subsidiaries in Japan are given a host of tax incentives. For instance, export companies do not have to pay consumption tax for every business transaction. However, it is a mandate for these businesses to provide written evidence of the export documents.

Furthermore, newly established companies do not have to pay the consumption tax when the taxable sales fail to exceed JPY 10 million in a fiscal year. However, this incentive is only applicable for two taxable years.

The domestic business transactions exempted from paying consumption tax are as follows:-

• Transfer or lease of a tangible or intangible asset outside of Japan
• Export transactions
• Performance of services for a company resident out of Japan
• Sales or leases of land
• Monetary transactions like guarantees, loans, insurance premiums, and others
• Sales of securities and other instruments
• Specific activities carried out by the central and local governments
• Medical treatment under public medical insurance law
• School tuition and examination services
• Social welfare activities
• Housing rentals
• Services related to burial and welfare, childbirth, and centers for aged and physically challenged people.

Other Important Considerations

Setting up a Japanese subsidiary requires time and money and can span from a few days to sometimes even months. In addition, article filing, paperwork, and other legal procedures can cost around 450 to 20,000 Japanese yen.

If you want to set up a Japanese subsidiary after considering these factors, you must hire directors for the Japan office or transfer current employees to Japan. This can cause considerable strain on your resources. 

Another vital thing to note is that companies cannot hire employees until the subsidiary is officially set up. It could potentially lead to the loss of valuable talent during the lengthy process of filing paperwork, looking for office spaces, creating bank accounts, etc.

Establishing a subsidiary company is always a better choice for companies looking to expand their business worldwide. However, it can be a long and tedious process requiring many documents. 

A wise choice is to partner with a global PEO, like Multiplier. 

Our expert team will assist you in navigating through the intricacies of hiring, onboarding, and managing your international team in Japan. Furthermore, we help draft contracts, adhere to labor laws, offer mandatory benefits, etc. With Multiplier EOR, you can establish international teams while saving time and resources.