Introduction
The Japanese market, with its scale, consumer purchasing power, and high technological capabilities, is an attractive investment destination for many companies, including overseas startups. However, Japan’s legal system and business practices can differ significantly from those abroad. Choosing the right base structure for market entry is a crucial strategic decision that can significantly impact future business development.
This column explains the characteristics, advantages, and disadvantages of four main forms that foreign companies should consider when entering Japan: establishing a subsidiary, setting up a branch office, opening a representative office, and acquiring a local corporation. We hope this serves as a useful reference for startups considering Japan entry to make the appropriate choice.
1. Establishing a Subsidiary (Japanese Corporation)
Establishing a subsidiary involves creating a new, independent legal entity in Japan under Japanese corporate law. The primary options are a Kabushiki Kaisha (K.K.) or a Gōdō Kaisha (G.K.), both of which operate under a limited liability structure where liability is limited to the amount invested.
A subsidiary possesses separate legal personality from its parent company, enabling it to enter contracts, open bank accounts, lease real estate, and perform other actions in its own name. This independence directly contributes to gaining trust from business partners and is advantageous for conducting business within Japan. Additionally, accounting and tax obligations are handled separately from the parent company, and the subsidiary is subject to corporate tax within Japan.
However, establishing a subsidiary requires multiple procedures, including Articles of Incorporation notarization, registration, and capital payment. Setup costs exceed ¥200,000, and the process typically takes more than one or two months. Furthermore, ongoing legal obligations such as financial statement disclosure and accounting audits persist after establishment, resulting in relatively high costs and management burdens.
Advantages
- Demonstrates a long-term commitment to the Japanese market, making it easier to gain trust from business partners and financial institutions.
- Facilitates fundraising and recruitment as a Japanese entity.
- Limits the parent company’s risk arising from the subsidiary to the scope of limited liability.
Disadvantages
- High costs for establishment procedures and ongoing maintenance.
- Requires fulfillment of periodic legal and accounting obligations.
2. Branch Establishment (Japan Branch)
Establishing a branch office involves registering a part of a foreign corporation in Japan to enable business activities. Unlike a subsidiary, a branch office does not have independent legal personality; the parent company ultimately bears direct responsibility for the branch’s debts and obligations.
A branch can be established by appointing a representative in Japan and completing the registration. No capital payment is required, making it a faster and lower-cost entry method compared to establishing a subsidiary. Opening bank accounts and signing real estate contracts are possible in the branch’s name, and there are no restrictions on the business activities themselves.
However, since a branch is treated as part of the parent company, it may be perceived as lacking independence. Moreover, the branch office does not have their own separate bookkeeping, so, the parent company has to handle the bookkeeping by themselfe. This create complications in the accounting and tax management for the parent company. Furthermore, the fact that the parent company bears unlimited liability represents a significant disadvantage in risk management.
Advantages
- Lower establishment costs and shorter setup time compared to subsidiaries.
- Direct access to the parent company’s creditworthiness.
- Business activities and contracts can be conducted under the branch’s name.
Disadvantages
- The parent company bears unlimited liability.
- Complicated accounting and tax managent
- Compared to establishing a subsidiary, it has lower independence and may have inferior creditworthiness.
- Not common in Japan
3. Representative Office
Representative offices are established as preparatory bases for market research and information gathering prior to full-scale business operations in the Japanese market. While advertising, purchasing goods, and business communications are possible, profit-generating business activities are legally prohibited (Company Law Article 818).
Representative offices lack legal personality and cannot hold bank accounts or sign real estate contracts in their own name. Typically, the contracting party is either the head office or the individual expatriate. Establishment requires no registration and incurs minimal costs, offering the advantage of rapid setup.
However, since no business activities are permitted, it is positioned solely as a “preparatory stage for entering the Japanese market.” To conduct business operations in earnest, transitioning to a subsidiary or branch office is ultimately necessary.
Advantages
- The simplest and straightforward way to establish with low cost.
- Can be flexibly utilized as a base for market research and other preparatory activities.
Disadvantages
- Cannot conduct business activities and has low credibility.
- Difficult to open bank accounts or sign real estate contracts in its name.
4. Acquisition of a Local Subsidiary
Acquiring an existing Japanese corporation is gaining attention as a rapid entry method into the Japanese market. Management control is obtained by concluding a share transfer agreement and acquiring shares from existing shareholders. After the acquisition, the Japanese corporation can be operated as a subsidiary.
The primary advantage of this method is the ability to immediately inherit the existing business foundation, including customers, employees, business partners, licenses, and permits. Compared to establishing a new entity, it enables faster market entry, making it suitable for companies prioritizing speed.
On the other hand, it also entails inheriting the existing corporation’s debts and potential labor disputes, making pre-acquisition due diligence critically important. Furthermore, in Japanese banking practice, it is often required that the account manager be a resident in Japan, necessitating changes to the representative or account manager after an acquisition. It is important to note that if such a person cannot be provided as the representative or account manager, it is often impossible to maintain a corporate account.
Advantages
- Enables rapid market entry.
- Leverage existing infrastructure, including customers, employees, and licenses.
Disadvantages
- Assumption of debt and legal risks.
- Due diligence prior to acquisition is generally necessary, which can be costly.
- Requires compliance with Japan-specific requirements regarding banking practices and management systems.
5. Conclusion
There are various options for entering the Japanese market, such as establishing a subsidiary, setting up a branch office, opening a representative office, or acquiring a local company. Each option carries distinct characteristics in terms of establishment costs, creditworthiness, and the scope of legal liability. The optimal form will vary depending on the company’s strategy and risk tolerance. At GVA Global Law Office, we leverage our extensive practical experience to examine and propose the most suitable market entry structure for our clients. Please feel free to contact us for a consultation.
| Form | Legal Entity | Business Activities | Registration | Establishment Costs and Period | Parent Company Liability Scope | Bank Accounts* and Real Estate Contracts | Advantages | Disadvantages |
| Establishing a Subsidiary | Independent Legal Entity | Possible | Required | High cost, approximately 1 or 2 month | Limited liability within the scope of capital investment | Possible (under subsidiary name) | High creditworthiness, suitable for full-scale entry | High establishment and maintenance costs |
| Branch establishment | No independent legal status (part of parent company) | Possible | Required | Moderate cost, relatively quick | Parent company bears unlimited liability | Possible (under branch name) | Easy to establish and can commence operations quickly | Direct liability extends to parent company and complicated accounting and tax management. |
| Representative Office | No legal personality | Not permitted (only for research, advertising, etc.) | Not required | Minimal cost/short timeframe | Parent company assumes responsibility | Not permitted (only under individual name) | Simplest and most flexible establishment | Profit-making activities prohibited, low creditworthiness |
| Acquisition of local subsidiary | After acquisition, becomes Japanese corporation (independent legal entity) | Possible | Not required (utilizes existing entity) | High cost, possible in a short period to enter the market | Limited liability as a subsidiary | Possible (Requires Japanese residency for banking operations) | Immediate market entry possible by leveraging existing infrastructure | Assumes debt and labor risks, possibly high cost for due diligence |
* Opening corporate accounts is subject to the bank’s internal rules.
