Key Considerations before Setting Up a Japanese Subsidiary

With the Japanese yen remaining weak against the US dollar and other major currencies in recent years, the cost of establishing a Japanese subsidiary has significantly decreased compared to the 2010s. Below are three essential considerations for foreign companies when establishing a subsidiary in Japan.

1. Corporate Structure: KK or GK

Advantages of a GK are:
- The incorporation process is slightly simpler and less expensive.
- A more straightforward corporate structure, as ownership (membership) and management are not separated, unlike in a KK where shareholders and directors are distinct entities.
- No obligation to reappoint directors periodically.
- No requirement for annual public disclosure of financial statements.

Disadvantages of a GK are:
- The process of transferring membership interests (equivalent to KK shares) is more complex.
- GKs cannot be listed on stock exchanges, and converting to a KK structure will be necessary for public offerings. Such restriction also makes it difficult for GKs to accept investments from venture capitals which expect future public offerings.
- Decision-making can be cumbersome if there are multiple members, as all members have equal voting rights. This can be solved by appointing “managing member”(s) whose role is similar to a director of a KK, then the structure of the company becomes more similar to KK.
- GKs, introduced after 2006, are relatively new and may be less familiar to business partners or customers in Japan.

A GK is a suitable choice if your foreign company intends to hold 100% ownership of the Japanese subsidiary, plans to retain long-term ownership, and Japanese business partners and customers in your industry do not care about an uncommon suffix of “GK” to be attached to the company name.

2. Local Representation in Japan

Although regulations by the Ministry of Justice have been relaxed since the late 2010s—allowing for the incorporation of a Japanese company without resident directors—foreign companies are still strongly advised to have a reliable local partner in Japan who is a Japanese citizen or a foreign national holding a valid work visa. This arrangement is encouraged for two main reasons:

Banking Procedures in Incorporation
During the incorporation process, an incorporator or representative-director-elect must receive the subsidiary’s capital from the foreign parent company into a personal bank account (since the company’s bank account does not exist yet). Japanese banks generally require the use of a domestic bank account for this transfer, and most banks will not open an account for foreign nationals without a visa or citizenship, due to strict anti-money laundering regulations.

Opening a Corporate Bank Account
Even after incorporation, it is challenging for a new company to open a corporate bank account if the representative director is not a resident or citizen of Japan, also due to anti-money laundering regulations. As having a bank account is essential for starting business operations, involvement of a representative with residency status can help avoid delays.

It is important to note that appointing a local representative only as a formality may raise compliance concerns under anti-money laundering regulations. The local partner should be a person who will be substantially involved in the business. If it is not feasible to find a local partner to independently manage the business alone, you may appoint both yourself and the local partner as joint representative directors, where either party can act on behalf of the company. In either case, it is advisable to sign an agreement outlining the local partner’s responsibilities and rights.

3. Capital Requirements

While it is legally permissible to incorporate a company in Japan with as little as “1 yen” in stated capital, in practice, most companies opt for a minimum capital of 1,000,000 yen. Many major Japanese banks don’t accept requests to open an account for companies with capital below this threshold.

Moreover, if you plan to obtain a work visa as the representative director of the new company, you must consider the requirements of the Immigration Services Agency (ISA). To qualify as a visa sponsor, the company must have a capital of at least 5,000,000 yen, unless the company employs at least two full-time employees who are either Japanese citizens or permanent residents. (Visa of permanent resident is necessary, and individuals holding “Engineer/Humanities/International Services” visas do not satisfy this requirement.)

For further information and questions, please contact Ms. Masako Banno, who is in charge of this article, via her email address or the following link.
https://www.okunolaw.com/en/contact/