When a foreign company enters the Japanese market, it can either establish a Japanese subsidiary or register a branch office. In either case, registration is required to conduct business in Japan on an ongoing basis.

However, the legal status of these two structures differs.

A Japanese subsidiary is a separate legal entity from its foreign parent company. Therefore, the rights and obligations arising from its business activities belong to the Japanese subsidiary itself.

A Japanese branch office, on the other hand, is not a separate legal entity. It is part of the foreign company. Because the foreign company itself conducts business in Japan through the branch office, the rights and obligations arising from the branch’s activities belong directly to the foreign company.

In practice, foreign companies are far more likely to establish a Japanese subsidiary than a branch office.

Why do so many foreign companies choose a subsidiary? There are two main reasons.

1. A Subsidiary Limits the Parent Company’s Liability

The scope of legal liability is one of the most important differences between a Japanese subsidiary and a branch office.

Japanese Branch Office

Because a Japanese branch office is part of the foreign company, the foreign company is directly liable for obligations arising from the branch’s business activities in Japan.

For example, the Japanese business could incur substantial liabilities due to a large-scale product recall, patent infringement, or a serious employment dispute. In such cases, the foreign company itself—not the Japanese branch office as a separate entity—would be legally responsible.

Consequently, problems arising from the Japanese business could affect the foreign company’s assets and even its core operations in its home country.

Japanese Subsidiary

A Japanese subsidiary is a separate legal entity from its foreign parent company. Therefore, liabilities arising from its business activities are, in principle, borne by the Japanese subsidiary itself.

Even if the Japanese subsidiary becomes insolvent, the parent company’s losses are generally limited to its capital contribution, loans made to the subsidiary, and other amounts invested in the subsidiary.

Establishing a Japanese subsidiary therefore allows the foreign company to separate the risks associated with its Japanese operations from the parent company and limit their potential impact on its overseas assets and core business.

2. A Subsidiary Does Not Require a Representative Residing in Japan

One particularly important consideration is the residency requirement for the company’s representative in Japan.

Japanese Subsidiary

The representative of a Japanese subsidiary is not required to reside in Japan.

For example, a representative of the foreign parent company may remain overseas while also serving as the Representative Director or Representative Member of the Japanese subsidiary.

Japanese Branch Office

A foreign company with a Japanese branch office must appoint at least one representative in Japan who has an address in Japan, as required by Article 817 of the Companies Act.

A representative of the foreign company who resides overseas may also serve as a representative in Japan. However, the company must also appoint at least one person with an address in Japan.

Establishing a Japanese branch office therefore requires the foreign company to find a suitable Japan-based individual who is willing and able to assume responsibility for representing the foreign company. For a foreign company without a trusted person in Japan, this can be a significant practical obstacle.