Setting up with a KK kabushiki kaisha

Setting up with a KK kabushiki kaisha

Japanese traditionally consider the kabushiki kaisha company, often abbreviated to KK, as the most prestigious of the available Japanese company types.

• A Japanese KK kabushiki kaisha company is similar to a US ‘C’ Corporation, UK Company Limited, etc.
• Non-residents can own 100% of a Japanese KK kabushiki kaisha company’s shares (except in certain regulated industries such as energy, banking and transportation).
• A KK kabushiki kaisha company can have a Board of Directors with 3 or more directors (including at least one representative director) and an auditor, or can forgo a Board and just have one or more directors (each of whom must be a representative director).
• A Japanese KK company does not need a director resident in Japan (unless it operates in certain regulated industries) but a high-street bank such as MTUFJ (Bank of Tokyo Mitsubishi UFJ), SMBC (Sumitomo Mitsui Banking Corporation) , Resona Bank or Mizuho Bank, might refuse to open a domestic bank-account for a Japanese KK kabushiki kaisha company without a resident director, and a landlord might refuse to lease an office to such a KK kabushiki kaisha.
• A KK kabushiki kaisha company must have a registered office address in Japan.
• A KK kabushiki kaisha can register its name in English, but must include the Japanese characters 株式会社 at the start or end (such as Venture Japan 株式会社).
• A Japanese KK kabushiki kaosha only needs JPY1 paid-in capital, but we recommend JPY1,000,000 or more as the KK will spend that much on incorporation and in the first few months of business.
• To sponsor any working visa, whether an employee’s visa or its owners Business Manager visa, a KK kabushiki kaisha must have paid-in capital of JPY5,000,000 or more.
• A KK kabushiki kaisha can register for “Blue Form” tax status, which allows it to carry forward losses to offset against income taxes for up to 9 years after the year in which it incurred the loss (up to 10 years for losses incurred in financial years starting on or after April 1, 2017).

Many companies and young Japanese entrepreneurs considering company formation in Japan, traditionally viewed a KK kabushiki kaisha as an overly-expensive and time-consuming entity for setting up in Japan: that changed when Japan introduced the Company Law (sometimes called the Corporation Law or Companies Act) in 2006. Before those changes, a KK kabushiki kaisha needed JPY10million paid-in capital at incorporation and a full Board of three Directors plus an auditor. The changes reduced the minimum paid-in capital at incorporation to just JPY1 and in addition to the traditional Board and auditor, allowed sole-director KKs. In many ways, a sole-director sole-shareholder KK kabushiki kaisha is now the simplest and least time-consuming of all Japan’s business entities.

Let’s take a look at the main attractions of a Japanese KK kabushiki kaisha for companies setting up business in Japan:

1. A KK kabushiki kaisha is an independent Japanese legal entity, so its liabilities are local and personal to it and do not automatically become the liabilities of its parent.
2. A KK kabushiki kaisha with a Board and auditor provides a good level of corporate governance protection for its shareholders, as major decisions such as increasing equity capital, approving directors’ fees, and selling or transferring shares, can only be made with shareholder or Board approval.
3. Other than regulations applicable to listing on a public exchange, a KK kabushiki kaisha is relatively unrestricted in its ability to sell shares to raise operating capital.
4. Shareholders must approve a KK kabushiki kaisha’s annual financial statements at an Annual General Meeting.
5. It is sometimes easier to attract Japanese employees to a KK kabushiki kaisha than to a branch-office or GK godo kaisha.
6. A sole-director sole-shareholder KK kabushiki kaisha is relatively simple to administrate because most matters only need shareholder consent.

In my experience (having been the President of several KK kabushiki kaishas), the main disadvantages of a KK kabushiki kaisha for a foreign company doing business in Japan are:

1. All directors of a KK kabushiki kaisha share joint and several liability, meaning that if any one director is negligent, a plaintiff can recover damages from all directors regardless of their involvement.
2. A representative director has authority to bind a KK kabushiki kaisha to an obligation, even without Board approval. Even now, there are true horror stories of KK kabushiki kaisha representative directors who have created irrevocable agreements with distributors in which they or their family members held controlling interests, used the KK to guarantor personal loans, used the KK’s cash for personal gain, and so on.
3. A KK kabushiki kaisha’s directors’ terms are usually fixed two-year agreements, although the Company Law allows for up to ten years if shareholders approve. Note that removing a director mid-term, even with cause, is sometimes very expensive, because in principle a KK kabushiki kaisha must pay each director’s fees until his or her director’s term expires.
4. Structuring performance-linked compensation for directors can have expensive tax consequences, because even if the KK kabushiki kaisha operates as a cost-center, bonuses or commissions paid to directors can create notional pre-tax profits for corporate income tax calculation purposes.
5. The only way for a KK kabushiki kaisha to get profits back to its foreign parent is to pay post-tax dividends, which are then subject to 20% withholding tax less any tax treaty relief (this is not an issue for US companies holding 50% or more of a KK kabushiki kaisha’s shares for six-months or longer). This means a KK must carefully structure its transfer fees, inter-company management fees, etc.

Careful planning can overcome all of a KK kabushiki kaisha’s disadvantages and overall the KK kabushiki kaisha remains the recommended entity for most non-US companies considering company formation in Japan. It is worth mentioning that most of Venture Japan’s clients chose a KK, many after extensive independent evaluation of the available Japanese corporate entities.