Japan Branch vs Subsidiary: Registration, Tax and Liability Compared

A Japan branch (日本支店) is part of the same legal entity as its overseas head office and does business in Japan after completing a foreign company registration (外国会社の登記). A Japanese subsidiary (日本法人・子会社) is a legal entity separate from the head office, incorporated under Japan’s Companies Act. The two differ in liability, taxation, set-up procedures and standing in Japan, so the choice should reflect the purpose and expected duration of the business.

Japan branch vs Japanese subsidiary: comparison table

Both structures allow a company to do business in Japan on a continuing basis. The main differences are summarized below.

Japan branch: requirements and process for foreign company registration

Appoint a representative in Japan

To transact business in Japan on a continuing basis, a foreign company appoints a representative in Japan (日本における代表者). At least one representative must be a person with an address in Japan (Companies Act, Article 817). Nationality is not a requirement.

No continuing transactions before registration

A foreign company may not transact business in Japan on a continuing basis until it has completed its foreign company registration (Companies Act, Article 818(1)). Anyone who transacts in breach of this rule is jointly and severally liable with the company for the obligations arising from the transaction, and may also be subject to a non-penal fine (過料).

Filing deadline and key documents

When a representative in Japan is appointed for the first time, the foreign company registration must be filed within three weeks. The application is made to the Legal Affairs Bureau (法務局) with jurisdiction over the business office or, if no office is established, over the representative’s address.

• Documents evidencing the head office’s governing law of incorporation, its purpose, share capital and other details (these must be certified by the competent authority in the home country or by a consul in Japan, among others; in practice an affidavit is commonly used)
• Documents evidencing that the representative in Japan was duly appointed (such as a letter of appointment)
• Translations of the documents

Preparing foreign documents can take time. Work backwards from the target registration date and start the home-country procedures accordingly.

Authority and resignation of the representative in Japan

The representative in Japan has authority to perform all judicial and extra-judicial acts relating to the foreign company’s business in Japan. Internal limits on that authority cannot be asserted against a third party acting in good faith. Choose someone you trust, and agree with the head office in advance on the scope of authority and how reporting will work.

If all representatives in Japan resign, a procedure giving creditors the opportunity to object is required (Companies Act, Article 820). Plan from the outset for the fact that withdrawing from Japan also takes time.

Consider a subsidiary if the business will operate only in Japan

A foreign company whose head office is in Japan, or whose main purpose is to conduct business in Japan, may not transact business in Japan on a continuing basis (Companies Act, Article 821). If the plan is, in substance, to do business only in Japan, consider establishing a Japanese corporation instead.

Setting up a Japanese subsidiary

A subsidiary is usually established as a kabushiki kaisha (株式会社, KK) or a godo kaisha (合同会社, GK). How to choose between them is covered in detail in KK vs GK: the key differences.

1. Decide on the trade name, head office address, business purpose, share capital and officers
2. Prepare the articles of incorporation (定款); a KK requires certification by a notary
3. Pay in the share capital
4. File the application for incorporation registration (登記)
5. Submit notifications to the tax office, the local government, the pension office and other authorities

Since 16 March 2015, applications to register the incorporation of a KK have been accepted even when all representative directors live overseas. Opening a bank account and status of residence (在留資格) procedures, however, require separate checks.

Capital is paid into a bank account of an incorporator. Accounts at overseas branches of Japanese banks and at Japanese branches of foreign banks can also be used. Accounts at overseas branches of foreign banks cannot.

Tax differences: a branch is a permanent establishment, a subsidiary is a domestic corporation

Taxation of a Japan branch

A Japan branch is a “permanent establishment” (恒久的施設) of a foreign corporation. The FY2014 tax reform moved to a system that taxes income attributable to the permanent establishment and certain other income (the attributable income principle, 帰属主義). The branch is treated as a business independent of its head office, and its income is calculated taking internal dealings with the head office into account.

Taxation of a Japanese subsidiary

As a domestic corporation, a subsidiary pays corporation tax on all of its income, both in Japan and abroad. Prices for transactions with the parent company must be at the same level as those between unrelated parties.

Repatriating profits

A remittance from a branch to its head office is a movement of funds within the same legal entity, not a dividend. A dividend from a subsidiary to its parent is in principle subject to withholding of income tax and special income tax for reconstruction (20.42%). The rate may be reduced under a tax treaty with the home country.

Under either structure, returns for corporate inhabitant tax, enterprise tax and consumption tax may also be required. Because the relative tax burden also depends on the home country’s tax system, we recommend modelling the options with a certified tax accountant (税理士).

Differences in liability, credibility and operations

Scope of liability

The head office is directly liable for the branch’s debts, so contractual and litigation risk in Japan passes straight to the head office. With a subsidiary, the parent’s liability is in principle limited to its investment.

Credibility in Japan

Japanese business partners generally vet a counterparty through its certificate of registered matters (登記事項証明書) and financial statements. A subsidiary can show Japanese financial statements, which makes it easier to present itself as a Japanese company. A branch demonstrates credibility through the size and track record of its head office.

Financial statements and public notice

A foreign company of the same type as a Japanese KK must, after its financial statements are approved in its home country, publish the equivalent of its balance sheet in Japan (Companies Act, Article 819). A subsidiary prepares financial statements under Japan’s Companies Act and, if it is a KK, publishes a public notice of its financial statements.

FEFTA procedures

A foreign investor acquiring shares in a Japanese corporation, or a foreign company establishing a branch or similar office in Japan, may constitute “inward direct investment, etc.” (対内直接投資等) under the Foreign Exchange and Foreign Trade Act (外為法, FEFTA). Depending on the industry, prior notification may be required. For details, see Inward direct investment under FEFTA: prior notification and post-investment reports.

Branch or subsidiary: which should you choose?

When a Japan branch fits

• You want to do business in Japan on the strength of the head office’s credibility and track record
• You want to start operating early without setting share capital in Japan
• You want to manage the Japan operation as an integral part of the head office

When a Japanese subsidiary fits

• You want to ring-fence liabilities in Japan from the head office
• You want to be seen as a Japanese company by customers, financial institutions and job candidates
• You may sell the Japan business or raise funds in Japan in the future
• You plan, in substance, to do business only in Japan

There is no procedure for converting a branch into a Japanese corporation. To make the transition, you incorporate a Japanese company and have it acquire the branch’s business. Contracts and employment also have to be moved across, so the initial choice affects how much work follows later.

If the aim is market research before starting sales, an unregistered representative office is another option.

Summary

A Japan branch is part of the same legal entity as the head office and can be set up without setting share capital. On the other hand, the head office bears liability in Japan, and at least one representative in Japan must have an address in Japan. A Japanese corporation is a separate entity that keeps liability apart and makes it easier to gain credibility as a Japanese company.

Working with partner judicial scriveners (司法書士), administrative scriveners (行政書士) and certified tax accountants, TIMOA supports the whole process, from comparing structures through foreign company registration or incorporation and FEFTA procedures to tax compliance after set-up. See also our Japan Entry & Company Setup services.