Do you need a Resident Representative Director?
Deciding its KK company’s Japanese resident representative director, its Japanese branch-office’s resident representative manager, or its GK company’s resident representative manager (often referred to as its executive manager or functional manager), used to be a key decision facing every company starting a Japanese company or branch-office. “Used to be”? Yes, because except for a branch-office in Japan, which must have a resident representative, a Japanese GK or KK company no longer needs a resident representative. At least, not to satisfy the Ministry of Justice’s requirements.
Until early 2015, every Japanese KK company needed at least one representative director resident in Japan, which provided relatively easy, though sometimes high-risk income for service providers such as Venture Japan. Some service providers were known to charge monthly fees of JPY250,000 or more to provide a nominee resident representative director to keep the KK in good legal standing. But in March 2015, Japan’s Ministry of Justice implemented a radical change to the rules for incorporating KK kabushiki kaisha companies and GK godo kaisha companies by removing the need for a representative resident in Japan.
The Ministry of Justice implemented the change to simplify starting a company in Japan and to encourage more foreign investment. That explanation is slightly ambiguous though; a KK kabushiki kaisha company still needs a resident incorporator (who must hold at least one share at incorporation which he or she can transfer to the beneficial shareholder immediately after incorporation) to establish it, whereas no such restriction applies to a GK godo kaisha (which can be incorporated by one or more non-residents). Also adding to the ambiguity, branch-offices in Japan of foreign companies must still have a resident representative.
Regardless of ambiguity, the Ministry of Justice’s removal of the need for a resident representative director of a KK or resident representative manager of a GK, has limited benefit for active KKs or GKs. Problems such as the general refusal of banks to open accounts for new companies that don’t have a resident representative, and landlords’ general refusal to lease property to such KKs and GKs, means foreign companies still need to hire a representative (or use a nominee representative director service) if they intend to do active business in Japan.
Japanese society is very conservative. Japanese companies always hire a representative director who is resident in Japan and understands the company’s business, thus in a sense, hiring a resident representative director is expected; it shows customers that the foreign company understands and is committed to the Japanese market and its Japanese customers. For consumer companies, not hiring a resident representative director destroys the opportunity to build PR and market awareness on his or her audience appeal. For a business to business company, not hiring a resident representative director destroys the opportunity to build lasting and profitable relationships with clients’ directors and senior managers. In my experience, this latter point is very important; I’m embarrassed to admit that many of the sales I made were made because I had excellent relations with the client’s Japanese President. If I had not (at that time 25 years ago) been the “boy President” of a foreign company’s Japanese subsidiary KK, and if I had not had the trust of the most senior executives at the clients I dealt with, I know at least one US software vendor that would not have IPO’d.
There is no law forcing a Japanese company to hire a resident representative director (or retain a nominee resident representative director) so as to comply with Japan’s anti-money laundering law (specifically the Act on Prevention of Transfer of Criminal Proceeds, Act No. 22 of 2007), but you might be excused for thinking there is. The problem is a disparity between the Ministry of Justice’s desire to make it easier to start a company in Japan and the Ministry of Finance’s desire to make it harder for criminals to use companies as fronts to launder money or finance illegal schemes or groups. We presently apply to SMBC Bank, MUFG Bank, and Mizuho Bank to open bank accounts for 2 – 3 new companies every month, and the rejection rate for companies without a resident representative director is 100%. Similarly, leasing an office or office equipment is very difficult for a Japanese company without a resident representative director.
One issue with hiring a resident representative director is his or her access to the company’s representative seal. It’s a generally unknown fact that a company’s representative seal is registered in the name of the specific representative director authorized to use it, and only he or she is so authorized. If the seal is used by any other person, including a shareholder or an attorney, without the representative director having first provided a Power of Attorney authorizing the use, the company will be irrevocably bound to the terms of whatever document was sealed and the representative director could sue for fraudulent use. There have been dramatic instances, even in recent Japanese automotive industry news, of purportedly fraudulent use of representative seals by the authorized representative, so this is not an imaginary problem. If a company must retain a resident representative director (which most Japanese KK and GK companies do, despite the Ministry of Justice’s good intentions), a trusted nominee representative director might be the best option to ensure that use of the representative seal complies with your company’s corporate governance policies.
Under Japan’s Tax Code, all irregular payments made to a director, including performance-related bonuses, are not tax-deductible, which can make paying a high-earning representative director very tax-inefficient. Assuming it does not clash with the point made above regarding losing close business relationships with clients’ senior executives, the relatively low (JPY75,000 – JPY150,000 a month) fees typically paid for a nominee representative director service can be much more tax-efficient because the payment is regular and fully tax-deductible.
Under Japan’s Company Law, all directors have joint and several liability for their actions; if a director faces a claim for negligence, all directors are held equally liable for damages regardless of whether they knew or disapproved of the negligent action. Further, the Supreme Court of Japan has vowed to prosecute cases against non-resident directors, including non-resident representative directors, meaning a non-resident representative director could be required to appear in a Japanese court to defend his or her company. Retaining a resident representative director relieves the need for head-office officers to travel to Japan and prepare for and appear in court, and this also the reason why many nominee representative service providers are more cautious now regarding the companies they agree to represent.