Japan 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.
Long recognized for its technological innovation and as a high-end manufacturing powerhouse, Japan's key industries include automobiles, consumer electronics, semiconductors, pharmaceuticals and processed foods, among others. Japan also ranked 38th in the latest Global Business Complexity Index (GBCI), up from 43rd in 2023. But while the country is becoming an easier place to do business, certain challenges remain. Considering incorporating in Japan? Here's what to consider.
Entity types
As governed by the Companies Act of Japan, there are three primary business entity types available to investors.
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 recognized 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 of every director and auditor
- Total number of shares to be issued at incorporation
- Terms of directors and auditors, etc
Investors (shareholders) and managers (directors) are separated, although it is possible to both invest in and manage the company. At least one shareholder and one director are required. A shareholder can be an entity, but a director must be a natural person (no corporate director is accepted in Japan). The local residency requirement was abolished in March 2016.
It is not a requirement for financial statements to be filed with the authority (except for tax return filing), but it is mandatory that all a KK must hold an annual shareholder meeting within 3 months from the business year end to approve the financial statements. Additionally, a non-listed KK post public notice of balance sheet and profit/loss statements must also be publicly announced.
Godo Kaisha (GK)
Introduced in 2006, the GK is generally less recognized and trusted than a KK. However, the main difference between these two entity types is that a Kabushiki Kaisha can issue shares, while a Godo Kaisha cannot.
Ownership and management are similar to a US LLC (limited liability company), without the separation you would find in a KK. An owner can be a corporate or an individual and a GK is not required to hold the annual shareholder meeting or post a public notice. Comparatively, compliance requirements are also relatively casual and as such, non-Japanese companies often choose a GK over a KK.
Branch office
A branch office is not a subsidiary of a non-Japanese company and as a result, set-up requests in Japan are on the decline. Similarly, Branch offices do not have independent corporate legal status and are considered an extension of their parent foreign company. However, they remain regarded as a legal entity under Japanese law and so can open a bank account, hire employees and contract independently. As for director requirements, at least one local natural person is required as representative in Japan.
Capital requirements
For both a KK and a GK, the minimum capital requirement is 1 yen, while there is no minimum requirement for a branch office. At a practical level, there are not many GK and KK who choose 1 yen, because the capital is registered, and in public – those registering a smaller capital might then be considered as less reliable. For a visa application, at least 5 million yen could be required.
Document submission
The time required for incorporation of all three types of entities is typically about one to two months, 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 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.
Some businesses are subject to pre-notification/pre-approval by the authority under Foreign Exchange laws with the range of businesses subject to these approvals constantly expanding.
Opening a bank account
As in many jurisdictions, opening a business bank account in Japan (at a local bank) can be a challenging process. To prevent money laundering, Japanese banks are very strict with Know Your Customer (KYC) requirements, the primary purpose of which is to identify customers and verify their suitability for investment products.
In-person interviews with the company representative might be required for the opening of a bank account. And although a local director is not required under the Companies Act, a local bank might require a local director.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
