Doing business in Japan information
by Venture Japan
A Japanese branch-office is much the same legal entity as any other branch-office you may already have in your domestic market or overseas. A branch office is simply an additional location from which your employees do business and even though they are in separate legal jurisdictions, a Japanese branch office is not a separate legal entity from its foreign parent company. All liabilities (whether debt, employee or otherwise) of a branch-office are ultimately liabilities of its parent and similarly when a branch-office sells a product or service to a customer (or distributor) it does so simply on behalf of the parent. Other than geographic location your Japanese branch-office is no different than your Dallas branch, your Boston branch or (if you are a German company) your Munich branch.
Japan's Commercial Code imposes strict statutory responsibilities on directors of companies and likewise representative managers of Japanese branch-offices (and their overseas corporate parents). In the US, directors and stockholders have become accustomed to being shielded by the corporate veil and being protected from personal liability for a company's failure and resulting liabilities. Japanese judges (there are no jury trials in Japan) have a 99.5% conviction rate and traditionally tend to rule to the letter of Japan's written statutes which often favor creditors and employees. Directors of failed companies can face substantial liabilities and severe (including jail) penalties.
Japan also has an 'Application of Laws' statute which requires a Japanese judge to rule based on the law of a foreign jurisdiction if a plaintiff can show that disputed contracts or agreements are reasonably subject to that foreign jurisdiction's statutes. In the event of a branch-office's failure, it is conceivable that a Japanese court could rule that directors and/or stockholders of the foreign parent are liable for Japanese debts and any statutory damages imposed by that foreign jurisdiction (although Japanese courts are traditionally reluctant to award punitive damages). A further concern is the possibility of a disenchanted Japanese branch office employee seeking punitive compensation from the parent in the parent's domestic courts - especially if the parent is a US company where levels of such labor-related compensation may be substantially higher than a Japanese judge would award.
While legally similar, there are substantial administrative differences between a domestic branch-office and any international branch-office. A Japanese branch-office is not a separately incorporated entity but must be registered with Japan's Ministry of Justice, must have a registered representative resident in Japan and must have a registered business address in Japan (which can be the representative's residential address). Also, a Japanese branch-office must file audited financial statements (which will become public record) at the end of each financial year just as Japanese companies must.
If you are entering the Japanese market through a distributor you will benefit by having (and the distributor may anyway demand) a direct presence in Japan to support and manage the distributor's activities. A Japanese branch-office is the fastest way to achieve that presence and can also be a simple solution to start direct sales in the Japanese market if your Japanese business expenses are relatively high. The problem is that a Japanese branch office creates Japanese corporate income tax exposure on all of its foreign parent's Japanese business income, whether received through the branch or directly by the parent (i.e., from distributors). If your Japanese market expenses are low then your Japanese profits will be artificially high because they do not properly reflect your product's costs - with a branch-office you would lose 41% in income tax.
If you cannot initially justify the JPY 3.3m cost (including statutory JPY 3m capital) of setting up a yugen gaisha, then consider the following:
A branch-office is allowed to file a "blue form" Japanese income tax return which means that it can roll-up and carry forward losses to offset against profits in subsequent years.
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