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Starting Up in JapanEstablishing a Presence in Japan What Form of Business Entity? The Representative Office The Branch The Subsidiary The Joint Venture Visa Issues Establishing a Presence in Japan Times have certainly changed. In the 1980s, many Japanese corporations and individuals were in a rush to "internationalize" by investing overseas, and Canada was one of a handful of foreign destinations that benefited from a large influx of Japanese investment. Since the late 1990s, however, the trend has been in the opposite direction. Canadian and other foreign businesses are investing in Japan at unprecedented rates, and the number of foreign residents in Japan has hit historic highs. If you are comfortable with current arrangements for your business in or with Japan, this article will not interest you. On the other hand, if you have thought about the advantages of establishing a physical presence in Japan, the following information may be useful. Material for this article is based on two presentations given in Osaka and Tokyo during the Team Canada Trade Mission to Japan in September 1999, and focused on the most common methods for establishing foreign businesses in Japan. What Form of Business Entity? One of the first questions facing a Canadian company planning to enter the Japanese market is, "What form of business should we establish in Japan?" Several options are available. The most common forms are a representative office, a branch, a subsidiary and a joint venture. Licensing or distribution agreements are also used by Canadian and other foreign companies to gain exposure in the Japanese market for products or services; however, this is usually only a first step toward establishing a physical presence in Japan. Other methods for setting up in Japan include unlimited liability incorporated partnerships (gomei gaisha), limited liability partnerships (goshi gaisha), limited liability incorporated private corporations (yugen gaisha), unincorporated partnerships (kumiai and tokumei kumiai), and sole proprietorships (kojin jigyosha). This article will only deal with the four most common forms. The Representative Office A representative office must restrict its activities to market research, providing information for the foreign parent corporation, advertising, purchasing or holding assets for the parent corporation, or other activities of an ancillary nature on behalf of the foreign parent. The representative office cannot engage in sales activities in Japan and no income tax is payable in Japan. A representative office cannot have a "permanent establishment" in Japan such as a factory or warehouse. The parent corporation can transfer operating funds to the representative office without foreign exchange restrictions. In most cases, no approvals or permits are required for a representative office, and registration at the Legal Affairs Bureau is not required. If you wish to open an office and sell goods or provide services in Japan, you must establish a branch or subsidiary corporation. The Branch The establishment of a branch in Japan qualifies as a direct domestic investment. The Canadian investor must report to the Bank of Japan within 15 days after setting up the branch. A more detailed notification or review system is applicable to foreign investment areas relating to national security and cultural industries. It is easier to establish a branch than a subsidiary corporation. Except for the requirement of a resident representative, there are no statutory requirements for management of the branch. A corporation, on the other hand, requires directors, auditors and meetings of directors and shareholders. The procedure to establish a branch generally requires the following: 1. At least one Japanese resident to act as a representative. 2. Preparation and filing of an "Application for Registration of the Establishment of Business Office" at the Registry Office of the Legal Affairs Bureau. 3. Supporting documents including (a) a certificate of status or similar document, (b) a letter or contract from the Canadian company appointing the representative and (c) corporate documents, including a notarized copy of the articles of incorporation. 4. A company seal, or hanko (its impression must be affixed to the application in 1 above). 5. Notarized translations of English documents. 6. A registration fee of ¥90,000 per office. Once the Legal Affairs Bureau registers the branch, a copy of the certificate of registration is taken to a local bank to establish a bank account. The Subsidiary The "Kabushiki Kaisha" (KK), or joint public stock company, is the main form of corporate entity in Japan. The KK is the only form of business organization that can make public share offerings or be listed on Japanese stock exchanges. Establishing a KK subsidiary is more complicated than incorporation in Canadian jurisdictions, and generally requires the following: 1. An incorporator must be appointed, affix his or her seal or signature on the articles of incorporation and subscribe to at least one share. Incorporators may transfer their shares after incorporation and step aside. 2. A corporate name search must be conducted. The name must be expressed in Japanese characters but an English translation may be provided for in the articles of incorporation. 3. The articles of incorporation must be prepared and notarized, share subscriptions paid, and directors and statutory auditors elected by the shareholders. The representative director files an application for registration of incorporation at the local Legal Affairs Bureau. The filing fee is currently 0.7 per cent of paid-up capital, or a minimum of ¥150,000. At least ¥10 million in share capital must be paid on incorporation. 4. A minimum of three directors must be elected. There is no restriction on the nationality of directors, but at least one director must reside in Japan. The board of directors must elect one or more representative directors, at least one of whom must be resident in Japan. In addition, at least one statutory auditor (kansa-yaku) must be elected. If the subsidiary has capital of ¥500 million or more, at least two statutory auditors are required. The same Bank of Japan notice requirements for a branch will also apply to the purchase of shares in the KK. In addition, notices must be sent to tax authorities, the labour standards inspection office, the public employment security office and the social insurance office. Although the KK is considered to be a more prestigious form of business entity, it is possible to carry on business as another type of entity such as a yugen gaisha (limited liability private company). The main differences between a joint stock corporation (KK) and yugen gaisha (LLC) are: no more than 50 LLC members are allowed; the minimum capital requirement is ¥3 million; one director is sufficient; and no statutory auditor or public notice of financial results is required. The Joint Venture Another way to establish a presence in Japan is to enter into a joint venture agreement with a Japanese company. The corporate structure of a subsidiary corporation and a joint venture (JV) corporation is the same. The difference lies in the fact that a JV begins with an agreement between the Canadian and Japanese companies, and involves either establishing a new corporation, or purchasing shares in an existing corporation in Japan. Before entering into a joint venture with a Japanese company, the Canadian side should ensure that its interests are properly reflected in the joint venture agreement (e.g., Canadian management control, shareholder rights and exit strategies) and that the agreement as drafted by the parties will be enforceable under Japanese law. Visa Issues Getting a visa for your Canadian representative is a crucial step in establishing a presence in Japan; the lack of a proper visa can affect your representative's ability to register the new entity in Japan and to enter into agreement leases. The most common and practical approach is to obtain an Investor/Business Manager visa before entering Japan. This article was provided through the cooperation of John D. Davis, Resident Partner, Davis Law Office - Tokyo. About Davis Law Office Davis Law Office is the second Canadian law firm to establish an office in Japan. Our Tokyo office opened in March 2001, while our Canadian office is located in Toronto. John Davis is registered in Japan as a Gaikokuho Jimu Bengoshi (Registered Foreign Lawyer), licensed to practice international law and the laws of our home jurisdiction. We work extensively with local Japanese legal counsel, such as Asahi Law Offices, allowing us to provide a full range of legal services to our Canadian and other foreign clients. The foregoing article is an overview of issues concerned with establishing a presence in Japan, and does not constitute legal advice or the opinion of any lawyer at Davis Law Office. Qualified legal counsel should be consulted before making decisions on the subject matter of this article. |
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