setting up in Japan


Requirements for starting a kabushiki kaisha 'KK' Japanese corporation

7.  requirements for starting a kabushiki kaisha 'kk'.

PLEASE NOTE - Japan's revised Commercial Code and new Company Law take effect on May 1, 2006. From that date it is possible to establish sole director kabushiki kaishas and the paid-in capital requirement is effectively eliminated. This site will be extensively revised in the next few days to include the effects of these changes.

In the previous section introducing the kabushiki kaisha for doing business in Japan, I mentioned that in 2006 your customers are unlikely to be concerned about the corporate entity you use for doing business in Japan - more likely they will be far more interested in the quality of your product or service and the quality of your local team. Many customers will simply be impressed that you are making the commitment to start a direct presence in the Japanese market - it is a fact of Japanese business culture that even Japanese believe that doing business in Japan is difficult and therefore often have considerable respect for foreigners who make the effort!

Due to its statutory requirements, there are certain situations where you should use a kabushiki kaisha for doing business in Japan:

  • if your corporate doctrine requires that you have enforceable corporate governance at subsidiary levels,
  • if you anticipate separately listing your Japanese subsidiary on one of the Japanese stock exchanges,
  • if you anticipate the subsidiary being used as a joint-venture vehicle.

In any of those situations the kabushiki kaisha is the entity of choice.

If you do not have a quantifiable reason to incorporate as a kabushiki kaisha then don't - you will spend a lot of cash and valuable management resource administrating it. I managed the kabushiki kaisha subsidiary of a small US software vendor whose financial department seemed to spend almost as much time in Japan administrating the kk as they spent in the US administrating the head-office. Worse still, they were spending US$10,000 - US$15,000 per month with a big-5 accounting firm's Tokyo office and an international law firm's Tokyo office. I estimated they spent around US$250,000 a year administering that subsidiary - that is enough base salary for 3 - 4 good salespeople!

If you really must setup as a kabushiki kaisha then carefully consider how best to reduce its administration costs and burden on your head-office resources before you proceed. Alternatively, start as a yugen kaisha and then convert the yugen kaisha to a kabushiki kaisha (if you need to) as your needs and understanding of the Japanese market evolve. Entering any new market and building a strong enduring brand is resource consuming and all companies, large and small, have resource constraints. My advice is to maximize your resources on generating revenue and not on creating an unnecessarily complex administrative structure.

In summary, the key administrative and statutory requirements for a kabushiki kaisha 'kk' are:

  • a kabushiki kaisha must:
    • be registered with the Japanese Ministry of Justice,
    • have at least 3 registered Directors, one of whom is the representative director and is resident in Japan,
    • have an appointed auditor,
    • have Articles of Incorporation,
    • have a registered office in Japan,
  • a kabushiki kaisha is a public company and can have an unlimited number of shareholders,
  • on the day of initial registration a KK must issue a minimum of 200 shares and each share must be paid-for in cash or other valid contribution at a minimum price (par value) of ¥50,000 per unit (i.e. a total starting capital of ¥10,000,000),
  • a KK is governed by Japan's Commercial Code and must also adhere to the requirements of the Labor Standards Law and other relevant statutes,
  • a kabushiki kaisha is a Japanese resident corporation and under normal circumstances (i.e. without piercing the corporate veil) any litigation and liabilities will be local to the kk in Japan and will not extend to its parent,
  • a KK must file annual financial statements and an annual report which is made publicly available, stating its total revenues (including non-Japan revenues) and will be taxed on its profits,
  • other than 'leasing' equipment and staff to the KK, the parent cannot assign any part of its G&A expense to the kk to offset the kk's corporate taxes,
  • a KK can 'roll-up' any year's losses and carry them forward for a maximum of 5 years to offset against profits when calculating corporate taxes,
  • a kabushiki kaisha can distribute post-tax profits to its stockholders as dividends, which will incur an additional 20% withholding tax (often relieved by tax treaty and for US parents will be eliminated in the new US-Japan tax treaty) if the stockholder is non-resident in Japan,
  • it costs $4,500 - $6,000 (excluding paid-in capital) to setup and register a KK using a typical Japanese paralegal but can easily cost 2x - 3x that sum if you use a bilingual law firm or accounting firm.

8.  starting a Japanese company with 1 capital >>

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