Doing business in Japan
- How quickly can I set up a business?
- What is the minimum investment needed?
- How can I raise finance?
- What are the legal requirements for setting up my business?
- What structure should I consider?
- What advice can you give me in regards to payroll and taxation requirements?
- Is there anything else that I should know?
How quickly can I set up a business?
The procedures to set up a company or a branch in Japan are complicated and need to be conducted in the Japanese language. You may generally take three months to complete.
What is the minimum investment needed?
It depends on your scale of projects.
How can I raise finance?
Raise funds from investors by issuing stocks and bonds
Raise funds by borrowing from financial institutions, etc.
What are the legal requirements for setting up my business?
To set up as a location to carry out preparatory and supplemental activities in order for foreign companies to engage in full-scale business operations in Japan.
This is the easier option for a foreign company to establish a location for business operations in Japan. You may start business operations by securing an activity location as a branch office, appointing a representative of the branch office, and registering the necessary information.
When you set up the subsidiary company, you can choose company types, such as a joint-stock company (Kabushiki Kaisha (“KK”)), limited liability company (Godo Kaisha (“GK”)), or similar entity under the Japanese Companies Act.
You can establish all types of the company by completing the required procedures stipulated by the Japanese law and then registering the company.
What structure should I consider?
There are advantages and disadvantages to all of them, and there is no one correct answer, it’s all dependent of your specific business circumstances and needs. A brief overview of the main structure is below:
• The representative office can carry out activities such as market research, information gathering, purchase of goods and advertising, but the office cannot carry out direct sales activities.
• Not necessary to register the establishment of a representative office.
• No notification need be provided to tax offices, as representative offices do not engage in business operations in Japan and thus are not subject to corporate tax except for some financial institutions.
• It is usually not possible to open a bank account or rent real estate in the name of a representative office. So, an individual such as the head office of a foreign company or a representative of the representative office need to sign these contracts as an agent.
• Not a separate legal entity but an extension of the overseas company
• The head office of the foreign company is ultimately responsible for all debts and credits generated by the activities of its Japanese branch
• If you are considered to have a permanent establishment in Japan, then profits from the branch are liable for Japanese Corporation taxes
• Not required to file parent company accounts, but are required to report on the financial situation of the company itself
• Must register necessary information such as a representative resident in Japan and a business address in Japan with the Legal Affairs Bureau.
• Provides limited liability to Japanese operations
• Gives a perception of a local business with longevity.
• Must choose a company type to establish a subsidiary in Japan as a joint-stock company (Kabushiki Kaisha (“KK”)) which is the most common company type, limited liability company (Godo Kaisha (“GK”)) which is not pass through entity for Japanese tax purposes unlike the U.S. LLC, or similar entity recognized by the Japanese Companies Act.
• National corporation tax to be paid on company profits as well as company size.
• Must register necessary information such as a representative and a business address in Japan with the Legal Affairs Bureau.
• KK is required to give public notice of its accounts and reassignment of directors, but not required for GK.
• Accounts require an audit if the company is listed or the entity is considered a large company whose capital stock exceeds JPY500M or whose total liabilities exceeds JPY20B, etc.
What advice can you give me in regards to payroll and taxation requirements?
• The taxes levied in Japan on taxable income of a company include corporate tax (national tax), local corporate tax (national tax), corporate inhabitant tax (local tax), enterprise tax (local tax), and special corporate enterprise tax (national tax). The company with paid-in capital of more than JPY100M are subject to enterprise tax on a pro forma basis by income, added value, and capital.
• The effective tax rates (standard tax rates basis) of the large company (companies with paid-in-capital of more than JPY100M) are 29.74% in 2021.
• The corporate tax rate of the large company is 23.20%.
• Net tax losses under income in each business year are carried forward for the next ten years. In the case that a company has paid-in capital in excess of JPY100M or is a wholly owned subsidiary of a large company with paid-in capital of at least JPY500M including foreign companies, the amount of tax loss that may be deducted from income cannot exceed 50% of income.
• Consumption tax, similar to Value Added Tax in Europe, is applicable to most transactions in goods and services consumed/rendered in Japan and goods imported into Japan.
• The current consumption tax rate is 10%. The reduced tax rate of 8% will be applied to sales of food and beverages, except for alcoholic drinks and dining out.
• Financial transactions, capital transactions and certain transactions in the areas of medical care, education and welfare are deemed non-taxable. Export transactions and export-like transactions are exempt from consumption tax.
Transfer pricing taxation:
• Japan follows internationally recognized Transfer Pricing rules where cross-border trading and financial transactions between affiliated entities have to be conducted on an arm’s length basis. The price and terms should be the same as if the transactions had been between completely independent parties.
• Companies belonging to certain multinational enterprise groups have to submit a prescribed report from the fiscal year of their ultimate parent company beginning on or after April 1, 2016.
• TP documentation rules within Japan are basically in line with the OECD’s Base Erosion and Profit Shifting (BEPS) project Action 13.
• Residents are those who have a domicile in Japan and those who have lived in Japan for more than a year. Residents’ worldwide income is subject to income tax regardless of the source of their income.
• Individual taxable income is essentially their gross income less their various income deductions. There are a number of tax credits against income taxes owed.
• Individual tax amount is calculated by multiplying the taxable income by progressive tax rate from 5% to 45%.
• A person who is not qualified as a resident is called a non-resident. Japanese income tax on non-residents is calculated based on the income from sources in Japan. Taxation on non-residents is currently generally completed only by withholding procedures.
• Taxable income is calculated within the range of income set for each classification.
Japan’s social security system:
• With few exceptions, employers and employees have to pay into social insurance and labour insurance programs.
• Social insurance consists of Health Insurance and Nursing Care Insurance, Pension Insurance. Labour insurance consists of Employment Insurance and Worker’s Compensation Insurance.
• The company usually pays insurance premiums by deducting the portion of the premiums payable by employees from their salary, and paying these together with the portion of the premiums payable by the company to the relevant authorities.
Is there anything else that I should know?
Japan’s strong economy is helped by its economic sophistication and pro-business policies. Japan is the third-largest economy in the world and the most complex according to the Economic Complexity Index. The nation’s largest industries include automobiles, automotive parts manufacturing, electronic equipment, machine tools, chemicals, textiles, and processed foods. Japan’s top export destinations are China, the United States, South Korea, Taiwan and Hong Kong, giving the nation strong economic ties to its surrounding Asia-Pacific neighbours. The Global Competitiveness Report for 2019 ranked Japan the sixth most globally competitive country in the world, citing the nation’s business sophistication, quality of local suppliers, and strong international distribution controls as some of its most outstanding business features. Of the Fortune Global 500 companies, 53 are headquartered in Japan (Source – 2020 JETRO). The Summer Olympic and Paralympic Games will be held in Tokyo from 23th July to 8th August 2021 and from 24th August to 5th September 2021, respectively.
Our firms in Japan
How can Kreston grow your business?
Select your business type:
Kreston Global has welcomed new member firm Kreston GSiA Thailand to the Kreston network.
Kreston SNR will be taking part in the International Climate Summit 2022 – Opportunities for Green Hydrogen in India, scheduled to be held in Bergen, Norway on 30 and 31 August 2022.