Company Establishment for Foreigners
(Company Formation,Company Set up)

Company Establishment for Foreigners
FULL SCALE SUPPORT IN ACQUIRING [ BUSINESS MANAGEMENT VISA ]

About Company Formation for Foreigners

First, we would like to explain about establishing a company. (Company Formation, Company Start-up, Company Set up)

Do you think it is difficult for foreigners to Incorporation of the company?

The procedures for foreigners to establish a Company or set up in Japan are the same as those for Japanese.
It is important to obtain the necessary visa status to become a company president.
We will explain regarding visa later.


1. Business Type

There are 2 types: Personal and Corporate Business. (Here we will explain about Corporate Business)


2. Types of Corporate Business

Corporate Business can be divided into two broad categories. One is PROFIT CORPORATION and the other is NON-PROFIT CORPORATION. There are Incorporated Non-Profit Organization (NPO ), General Incorporated Association and General Incorporated Foundation.


3. Types of Company and Forms

There are 4 types of corporations: Limited company, Limited Liability Company(LLC), General Partnership, Limited Partnership.
If there are no special circumstances, we would recommend Limited Company; however, general partnership is becoming popular these days. Please refer to the table comparing Limited company, Limited Liability Company(LLC) and General Partnership for further details.

Company Forms Comparison Table

  KK (Limited, Incorporated Company) LLC (Limited Liability Company) LLP (Limited Liability Partnership・General Partnership)
Type Company with shares Company without shares Company without shares (Limited Liability Partnership、General Partnership)
Investor 1 or more shareholder(s) 1 or more member(s) 1 or more partner(s)
Legal Person yes yes no
Setting up the Structure Shareholders' meeting,
Rules about setting up board of directors
Can be set up freely by Articles of Incorporation Can be set up freely by Articles of Incorporation
Internal Regulations 1 General Director,(Company Law) 1 Auditor General members' meeting, no restrictions
(Decision is made with majority of the members)
Partner's general meeting
Directors Term of Office Longest 10 years
(reelection is required)
None None
Public Sales of Shares Allowed Not Allowed Not Allowed
Announcement of Financial Statement Required Not required Not required
Initial Articles of Incorporation Certification Certification by a Notary public is required Certification by a Notary public is not required Certification by a Notary public is not required
Initial Articles of Incorporation Certification  Fees AoI Certification / ¥50,000- 0 0
Revenue Stamp fee / ¥40,000- ¥40,000- ¥40,000-
Registration (Registration Certificate Tax) ¥150,000- ¥60,000- ¥60,000-
Indirect limited liability and limited liability partner Limited liability partners will be liable only within the amount of shares invested All members are limited liability partner (indirect limited liability partner) and  will be liable only within the amount   invested All members will be liable to a debtor without limitation(General Partner).
Profit and Authority Distribution
or Taxation System
Profit, authority will be proportionated with invested amount Profit, authority can be freely distributed Profit, authority can be freely distributed
The capital (investor) from investors invested within limited scope of liability and the management (manager) are separated. Profit gained from the management will be distributed to the investors Members are  both investor (shareholder) and director (executive).
*1. Can change into a company with shares in the future
*2. US system options (pass-through taxation) to choose profits flow through the business (orgatization tax) or through investors (individual tax) is not available. Only legal person (organization tax) is allowed.
*1. Not subject to corporate tax, but will be subject to individual tax of each member/partner (pass-through taxation).
*2. Can not change into company with shares.
Aggregation of Profit and Loss /Carry-Over System of Losses Allowed Allowed Not allowed, however, profit and loss from a member's business can be summed up.
It is same for Carry-Over System of Losses.
Performing Business 1 person or more member(s) member(s)
Social Insurance Allowed, required in some cases Allowed, required in some cases
However, in case of one-man company, public health insurance+public pension enrollment is allowed
Allowed

4. Comparison Table of Cases of Foreign Corporations coming to Japan

  Representative Office Branch in Japan Japanese company (subsidiary company)
Name no restriction same as the head company no restriction
Legal Person status no yes yes
Registration no yes yes
Articles of Incorporation no
(employees business activites will be in accordance with that of head company)
no
(branch business activites will be in accordance with that of head company)
yes
(as its own Articles of Incorporation)
Capital no no from 1 yen
Rights and Duties the representative will bear responsibility, if a contract is concluded in his/her name the head company in originated
country will bear responsibility
the Japanese company
will bear responsibility
Business Activities not allowed, except: data collection, advertisement, market research, purchase and storage of goods allowed allowed
Decision Making Conform with the head company in the originated country Conform with the head company in the originated country Decided by the Japanese company (subsidiary company)
Lawsuit In general, office representative will be responsible, but there are exception depends on details. The head company in originated
country will be responsible
In general, the head company in originated
country will not be responsible
Representative's visa Intra-company transferee visa
*Business manager visa in some cases
Intra-company transferee visa
*Business manager visa in some cases
Business manager visa
Corporate
Bank Account
Not allowed; however, opening an individual account adding trade name might be able in some banks.
*trade name means company name or office name. Opening an account as [trade name+representative] is possible, but please be aware as there are some cases that are not allowed.
Allowed Allowed
Remittance to the Originated Country No problem Profits remitted to the originated country, in general, will not be taxed. Profits of the Japanese company remitted to the originated country will be subjected to 20% tax, but the rate could be lowered depends on taxation agreement.
Fiscal Year Conform with the head
company in the originated country
Conform with the head
company in the originated country
Decided by the Japanese
company (subsidiary company)
Tax Declaration
and Financial Statement
Since expenses are included in the head company's account book, journalization will be carried out under accounting regulations of the originated country. Subject to corporate tax, resident tax and business tax
*1.However, there is an exceptional system that allows paid Japanese corporate tax to be deducted from corporate tax of the originated country (foreign tax credit)
*2.Foreign corporate's (Japan branch) international tax duty is very complicated. Please consult with a specialist for details.
Income from all over the world will be taxed. Japanese company (subsidiary company)'s statement will be included in the overseas company(head company)'s account settlement book Such cases are called consolidated accounting.
*With exceptional cases
Aggregation of Profit and Loss /Carry-Over System of Losses Allowed in principle (the loss can be offsetted with the profit of the head company) Allowed (Profit and loss can be managed with the income of the head office) Not allowed (Accounting process is completed at the Japanese company, therefore, setoff with the head foregn company is not allowed)
It is same for Carry-Over System of Losses.
Social
Insurance
Optional, but must enroll, in case of 5 or more employees Must Must
Worker's Accident
Insuarance
Must Must
The representative can not
Must
The representative can not
Employment
Insurance
Must Must
The representative can not
Must
The representative can not

5. Benefits of setting up Limited Company (Company Formation, Company Set up)

① You gain high public credibility , earn trust with a financial institutions and business partners. Advantageous when recruiting employees.
② There are various income deductions permitted such as expenditures, financial loss etc. compared to individual proprietorship
For example: Retirement allowance, life insurance (there is a limit on the amount), term insurance
③ You can also enroll in government-managed health insurance and welfare pension.
④ The effective statutory tax rate can be reduced.
⑤ A corporation has a longer carry over and refund carryback of tax losses.
⑥ It is relatively easy for foreign empoyees to acquire a business manager visa status.
⑦ As general rule, company officer's remuneration can be considered as expenses.
⑧ The representative can be changed, and the stocks can be splitted and transferred according to circumstances.

Glossary

Aggregation of Profit and Loss Aggregation of profits and losses is a method of calculating taxable income from multiple sources, to determine overall net profits and/or losses. A tax consolidation is a system in which the profits and the losses of the affiliated companies are aggregated and consolidated to determine taxable income. With this system, one can enjoy tax reduction when loss is incurred in one of the affiliated companies as they cancel out the profits. However, tax consolidation or its benefits does not apply to resident tax and corporate tax.

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Pass-Through Taxation Pass-through taxation is a method in which a firm’s profit flows to its owners and/or investors (flow-through entity) who are then the sole subject to income tax. It is also known as the flow-through entity taxation. It may take several processes before the profit reaches the flow-through entity, and during such process the profit is not taxable, thus preventing double taxation. Currently in Japan, the pass-through taxation is applied to businesses that are in a Limited Liability Partnership (LLP).

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Consolidated Accounting A corporation is typically made up of a parent company and its subsidiary or affiliated company (domestic or overseas). At the end of a fiscal year, a “closing entry” is prepared, which reflects the corporation’s business performance over the course of one year. A closing entry of an individual company in a group corporation is known as un-consolidated accounting, whereas, the closing entry of a parent company and its subsidiaries combined is called consolidated accounting. In order to obtain a financial statement of the entire corporation, closing entries of individual companies are first created and then merged with one another. During this process, profits and losses between the parent company and its subsidiaries are canceled out, yielding a new balance sheet and profit and loss statements that indicate consolidated financial statement of the entire group corporation. (Updated September 2019)

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Intra-Company Transferee Visa Intra-Company Transferee Visa is a work visa that allow foreign-affiliated companies to transfer its employees (non-Japanese national) from overseas branch to a Japanese office. The business field of this type of status of residence is same as the following occupational fields’ visa: engineering, humanities, and international services.

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General Partner A general partner is a member with unlimited responsibilities concerning company affairs. This means that if the company goes into bankruptcy and unable to pay off its liabilities, the liabilities must be paid by the general partner on the company’s behave. This is contrary to the limited liability partner whose liability is limited to the amount of capital contributed to the business. While the risks associated with a general partner may be large, they hold managerial position and power to actively participate or intervene in daily operations of the company. The law stipulates that unlimited partnerships and limited partnerships have a general partner as a member. In other forms of companies, generally a company’s liability is considered to be a limited liability.

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Limited liability Partner Limited liability partner is a member who is responsible for liabilities proportional to their investments in the company. For this reason, if the company goes into bankruptcy, their liability is restricted to the amount of investment in the company. This is in contrast to the general partner. Under law, a shareholder of a joint-stock company, a member of what is formerly known as a limited company, and limited liability partner of a limited partnership are recognized to have limited liability. In 2006, a new Japanese corporation law was established, which abolished all forms of limited companies and unified them as joint-stock companies. Moreover, new form of company known as Limited Liability Company was established.

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Carry-Over System of Losses A deficit or loss occurs when the total amount by which money spent by a business or government is more than the money it receives. A “carry-over system of loses” is a system, where businesses are allowed to even out the loss with profit from future 9 years’ accounting period (10 year if loss occurred after April 1st, 2018, 7 years if before April 1st, 2018). Close observation will be required since the carry-over period, permitted carry-over amount and other details are often changing.

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Foreign Tax Credit Foreign Tax Credit is a system that enables certain amount of foreign income tax to be deducted from the domestic (Japan) income tax to prevent double taxation. A resident or corporation’s income, domestic and/or overseas income, is subjected to taxation by respective local governments. Hence, if you have domestic and international income, you will be subjected to pay income tax to both Japan and overseas authorities, resulting in double taxation. Foreign Tax Credit eliminates this double taxation, by reducing the amount of income tax on domestic earnings, in the presence of overseas income tax obligations.

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Articles of Incorporation Certification Articles of Incorporation is a document that establishes a company’s constitution and defines the nature of its enterprise. In order to prevent fraud or disputes regarding the document, it must be authenticated by the notary (Corporation Law Article 30 section 1) to fully come into effect. Under Japanese law, a corporation is established with the articles of incorporation that is created and signed (digital signature acceptable) or sealed by the incorporator (Corporation Law Article 26 sections 1~2).Generally, the articles of incorporation that was used at the foundation of company is called Initial Articles of Incorporation.

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For more information

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