Representative Office in Japan: What It Can and Cannot Do

A representative office (駐在員事務所, chuzai-in jimusho) is a base from which a foreign company carries out market research, gathers information and liaises with its head office in Japan. It requires no registration, but it cannot conduct business. If you plan to start revenue-generating activities such as signing contracts, selling or invoicing, you need to set up a Japan branch or a Japanese subsidiary.

What a representative office is: how it differs from a branch or subsidiary

“Representative office” is not a legal term defined by statute. It is a practical label for a liaison base that does not conduct business.

Under the Companies Act, a foreign company that carries on transactions in Japan on a continuing basis must register as a foreign company (Article 818). Because a representative office does not transact on a continuing basis, it can be maintained without registration.

What a representative office can do

A representative office’s activities are limited to those that are preparatory or auxiliary to the head office’s business. Typical activities include:

• Researching the Japanese market and gathering information on the industry and competitors
• Reporting to and liaising with the head office
• Advertising and promoting the head office’s products and services
• Displaying samples
• Meeting and building relationships with prospective business partners (contracts are signed by the head office)

It is well suited to the stage before a full market entry, for example to test market response or to look for partners.

Although no registration is required, hiring staff or sending expatriates from the head office involves procedures with the tax office and the Immigration Services Agency (出入国在留管理庁, ISA). List the required procedures before starting activities in Japan.

What a representative office cannot do

• Sign contracts with Japanese customers
• Sell goods or provide services
• Issue invoices or receive payment
• Carry out core sales activities such as taking orders or negotiating prices
• Open bank accounts or lease property in the office’s name

The risk of conducting business in practice

Even if it is called a representative office, conducting business in practice means the company has carried on continuing transactions in Japan without registration. The person who carried out the transactions is jointly liable with the company and may also be subject to a non-criminal fine (過料).

For tax purposes, the company may be found to have a permanent establishment and be required to file a corporation tax return. Define the scope of activities clearly in internal rules and in the job descriptions of expatriate staff.

When the head office contracts directly with Japanese customers

It is common for the overseas head office to contract directly with Japanese customers while the representative office signs nothing. Be careful, however, of arrangements in which the expatriate staff in effect conclude negotiations and the head office merely signs as a formality.

The FY2018 (平成30年度) tax reform revised the rules so that a person who plays the principal role leading to the conclusion of contracts may also give rise to a permanent establishment (a dependent agent PE). Keep the expatriate staff’s role to providing information and referring matters to the head office.

In whose name are accounts and office contracts held

Because a representative office has neither legal personality nor registration, it cannot open a bank account or sign a lease in its own name. The head office, or the representative of the office personally, becomes the contracting party. If an account in an individual’s name is used, keep the office’s expenses separate from personal funds.

Tax treatment: is the office a permanent establishment

Whether a foreign corporation pays corporation tax in Japan depends in part on whether it has a permanent establishment (PE) in Japan. A fixed place through which business is carried on is, in principle, a permanent establishment.

However, a place used solely for specified activities such as storage, display, delivery, purchasing or information gathering is not a permanent establishment, provided those activities are of a preparatory or auxiliary character.

The FY2018 reform clarified the “preparatory or auxiliary” requirement

The FY2018 tax reform made clear that this exception applies only where the activities are of a preparatory or auxiliary character. According to the National Tax Agency (国税庁, NTA) circular, auxiliary activities are those that support an essential and significant part of the business without forming part of it.

Tax treaties also contain permanent establishment provisions. Check the treaty between Japan and the country where the head office is located as well.

Payroll withholding and notifications

If the office hires staff in Japan and pays salaries, it must withhold income tax. When an office that handles salary payments is opened, a Notification of Establishment of a Salary Payment Office (給与支払事務所等の開設届出書) must be filed with the tax office within one month of opening.

Depending on headcount and working arrangements, social insurance and labor insurance procedures may also be required. See social insurance and labor insurance obligations for employers for details.

How to set up a representative office

1. Obtain internal approval at the head office to establish the representative office
2. Decide on the scope and duration of activities (making clear that no business will be conducted)
3. Appoint a representative (expatriate)
4. Secure office premises (contracted in the name of the head office or the representative)
5. If sending staff from overseas, apply for their status of residence
6. If hiring locally, file notifications with the tax office and complete insurance procedures

Who can be the representative

The representative may be a Japanese or a foreign national. If a foreign national is appointed, that person must hold a status of residence that fits the activities in Japan. Because the representative often becomes the named party on office contracts and accounts, agree in writing with the head office on the scope of their responsibility.

Keep records of activities

Tax audits and residence status renewals may require you to explain what the office does in Japan. Keeping records such as research reports, communications with the head office and business trips makes it easier to show that activities remain within the preparatory or auxiliary scope.

Status of residence for expatriate staff (Intra-company Transferee)

When sending staff from the head office, the Intra-company Transferee (企業内転勤) status of residence is commonly used. It allows employees of an overseas head office or branch to transfer to an office in Japan for a fixed period and perform work falling under the Engineer/Specialist in Humanities/International Services category.

• The employee has worked continuously for at least one year at the overseas head office, branch or similar office immediately before the transfer
• The employee receives remuneration at least equal to what a Japanese national would receive for the same work

A transfer to a representative office may also qualify for this status. The review requires evidence that the office actually exists and an explanation of the activities in Japan. For foreign employees hired locally, see hiring foreign employees and work visas.

When to switch to a branch or subsidiary

Consider setting up a Japan branch or Japanese subsidiary when you move into any of the following stages:

• You want to contract directly with Japanese customers
• You want to issue invoices and receive payment in Japan
• You want to grow your headcount in Japan significantly
• You want to start a business that requires a license or permit

A good point to consider the switch is when your market research shows that you can expect sales in Japan. Information gathered during the representative office period becomes material for the Japanese company’s business plan and for status of residence applications. Compile your research findings in a reusable form, such as figures and lists of prospective partners.

There is no procedure for converting a representative office into a branch or subsidiary. You newly register a foreign company or incorporate a company, then transfer the office contracts and employment. Preparing foreign documents can take time, so work backwards from your planned start of business. For how to choose a structure, see our comparison of a Japan branch versus a Japanese subsidiary.

Summary

A representative office is a liaison base that can be maintained without registration. It suits market research and information gathering but cannot conduct business. Once activities go beyond the preparatory or auxiliary scope, registration and corporation tax issues arise.

Working with partner administrative scriveners, certified tax accountants and labor and social security attorneys, TIMOA supports you from defining the representative office’s scope of activities through expatriate visas and tax notifications to the move to a branch or Japanese subsidiary. See also our Japan Entry & Company Setup services.