Company formation in Japan, as with any other location in the world, is an affair of exhaustive and cumbersome proportions. There’s no easy way to open up a business.
To aid in simplifying this process, the Startuphive team has come up with a 7-step outline to grant a bird’s-eye-view of the overall business formation here in Japan.
- Step 1 Choose The Structure Appropriate for Your Business
- Step 2 Decide The Revenue Structure
- Step 3 Appoint a Japanese Resident Representative Director
- Step 4 Pick a Corporate address
- Step 5 Prepare and Execute Registration Documents
- Step 6 Complete the Company Registration
- Step 7 Submit the Initial Tax Notifications to the Tax Office
- Step 8 Open a Corporate Bank Account
Step 1 Choose The Structure Appropriate for Your Business
Japan has three types of business entities
- Representative Office
- Branch Office
A representative office is not a legal business entity and thus cannot be registered.
It is not subject to Japanese corporate tax in general. However, there is a risk of being imposed with the corporate tax in the case of conducting sales activities.
Representative offices are typically used for performing market research before full-scale entry to the Japan market.
A branch office is not a separate legal entity from the overseas head-office, hence there is no defined separation in terms of legal risks brought about by this business structure. The head office will be liable to all debts and credits incurred by the Japanese branch office.
A subsidiary (company), is a separate legal entity, thus the overseas parent company will not be liable to all incurred debts and credits by its subsidiary.
There are two types of company formation, Kabushiki Kaisha(KK) and Godo Kaisha(GK).
If you envision developing a full-scale business within Japan, we recommend setting up a company(KK or GK) as it would holds its own as a separate legal entity and deemed the most credible entity format among the three.
Step 2 Decide The Revenue Structure
When you choose on either of the two company formations, KK and GK, you also need to think over the type of revenue structure that your business would plan on adopting.
For instance, if your Japanese company functions as a sales support subsidiary for an overseas parent company, the 105% to 110% markup entity would best fit your business. This scheme would resolve revenue and profit calculation difficulties concerning subsidiary companies based in Japan.
If the parent company is registered in a country with relatively lower corporate tax rate, revenue share strategy would be best adapted with it’s tax-saving capabilities taking advantage of Japan’s relatively higher tax rate.
(Note: A company in Tokyo with stated capital greater than 100 million yen has an effective corporate tax rate of approximately 30% in 2019)
Step 3 Appoint a Japanese Resident Representative Director
Appoint a reputable and capable Japanese resident representative director.
For reasons significantly related to step 7, the establishment of a business is possible, but will not proceed into operational phase without a Japanese personal bank account to transfer the initial capital for the business formation.
A Japanese personal account is practically inaccessible to a foreigner — permanent residence or not. Opening a corporate tax will then be an even more herculean task. Japanese banks are notorious for implementing subjective criteria that bars almost all foreigners from successfully acquiring a Japanese bank account.
You can always take your chances. But with effort, time, and financial resources on the line, we think it best to approach the easiest way possible: by tapping on the services of a Japanese person as the business representative director.
Step 4 Pick a Corporate Address
The corporate address is the location within Japan where you will conduct and operate your business. A corporate address is registered in the Japanese legal bureau.
A virtual office can be opted as a more cost-effective option for a corporate address provided that you can satisfy the 3 must have requirements in opening a business.
In applying for a work visa within these categories: business manager visa or engineering, specialist in humanities, international services visa, then a physical office is more advisable. Nevertheless, you can still save on costs later by only initially contracting a physical office on your application for work visa and, when it is time to register your new company, you can then transfer to a virtual office.
If your business can operate without needing to hire employees, then a virtual office would work totally fine, and although a there is a caveat to setup a system for receiving and forwarding mails, saving a significant amount by not paying high rental costs on a physical office would be well worth the effort.
Step 5 Prepare and Execute Registration Documents
In general, a Japanese legal scrivener is assigned to gather all required information for the company formation and prepare the registration documents.
For an overseas company authorized as shareholder, the affidavit to certify legal particulars of the overseas company is prepared and is demanded notarization from a public notary office of the country it is registered in.
If a non-resident person is the shareholder or representative director/director, the signature certificate of the non-resident person is prepared and is demanded notarization from a public notary office of his or her country of of residence.
It will take a couple of days to process the notary in some countries, and one or two weeks in others.
The shareholder, representative director and/or director are required to have their signatures affixed on the registration documents.
Step 6 Complete the Company Registration
All executed registration documents are submitted to the Japanese legal bureau.
It will take approximately one week to complete the company registration.
Upon completion of the company registration, you can then issue the company registration certificate “Tohon” and the company seal certificate “Inkanshomeisho”.
Step 7 Submit the Initial Tax Notifications to the Tax Office
It is vitally important to submit the company formation declaration notice to the national tax office after completion of the company registration.
We strongly recommend submitting some very important applications to avail tax benefits namely blue tax return, special treatment of withholding tax on semi-annual basis, and the one month extension of filing annual corporate tax return.
Step 8 Open a Corporate Bank Account
A corporate bank account is an absolute precondition before your business, without it your business cannot proceed into full operational phase.
Application for a corporate bank account is not a smoothsailing process with extremely low chances of getting granted.
An understandable lack of proof of business activity — as business is still in the conception stage — will not compell Japanese banks to bend their standards. Thus, they will move on to evaluate two other criteria of the business: the initial capital that must cover at least one year of operating costs and, by virtue of the banks’ unspoken subjective criteria, they prefer to face Japanese person(as mentioned in Step 3) as representative director.
Each item in the 7-step outline demands meticulous thinking, organization, and collaboration from professionals concerned with the trade of business formation.
Awareness of these steps is half the battle won, making your preparations for the challenging process ahead resource-efficient and well-informed.
In knowing that you’re taking these steps, you will gain greater confidence and clearer mindset that will only positively influence and strengthen your chances of opening and operating a business in Japan.