Setting up an Entity in Japan

You’ve performed your market research in Tokyo or entire Japan and have determined it is time to set up an entity. We recommend the following steps for business startups:

1. Business Model Determination

Determine the types of business models the startup Japanese entity (“JPE”) has available, preferably through the advice of one of the Big Four accounting firms. It is critical at this stage that the engaged firm provide advice from both Japanese and shareholder perspectives. The model should be established in a way to create global tax savings. Please refer to Determining your Business Model section for a description and general requirements for each type of business model. Based on the business model, the ideal entity type is determined.

2. Legal Procedures

After the appropriate business model and entity type are determined, the JPE must register a fixed place of business (note: major business support centers in Tokyo are usually acceptable). You should engage an experienced Japanese law firm to establish the entity. Setting up a branch is becoming more restrictive (proposed statute – Article 821 of Japan’s Corporation Law). Also, you will need to confirm whether your business is subject to any regulatory requirements with the Japanese law firm.

3. Accounting and Payroll Set up

Following the establishment of JPE, engage a professional accountant or firm to:
(a) Coordinate with your parent’s accounting department in setting up an accounting system, which would be compatible with reporting requirements of the parent and also comply (or minimize differences) with the Japanese accounting standards and tax regulations.
(b) Complete the initial tax and payroll filings with the relevant governmental authorities.
(c) Review your employment agreements for compliance with the Japanese Labor Laws and tax filing requirements.
Depending on the category/status of your employees, the scope of taxable income, tax rates and the method of tax payments are different. In general, for employees earning under 20 million yen, the employer is responsible in recomputing income taxes to be withheld at each calendar yearend. Whether the startup is a corporation or branch, the filings for Employee’s Health Insurance and Employee’s Pension Insurance are mandatory and should be filed as soon as possible.
If an employee(s) is to be on an expatriate arrangement, we recommend experienced HR/tax professionals review the relevant employment agreements not only from a Japanese labor law compliance perspective, but from the corporate and individual income tax perspective. Although some of the procedures above may seem onerous at the beginning, it is critical that the JPE commence its operations with the most effective and efficient structure. Insufficient planning may result in irreversible implications in the future.

See more at Doing Business in Japan (Kreston International) >>