How Foreigners, Foreign Companies Establish Japanese Subsidiaries

When a foreign corporation serves as the founder to establish a subsidiary in Japan, specific considerations unique to foreign corporations must be addressed.

Advance Notification and Post-Reporting

Foreign investors wishing to acquire shares in Japanese companies or establish companies in Japan must sometimes notify the Bank of Japan or other organizations in advance for national security reasons.

The industries that require advance notification include information technology, telecommunications, and software manufacturing, with a broad scope of coverage. Particularly for IT-related companies, the parameters can be ambiguous, which may lead to confusion in compliance.

The types of business that require advance notification include:

• Weapons
• Aircraft
• Space-related industries
• Cybersecurity
• Power utilities
• Information and communications
• Software manufacturing

While the foreign investor is responsible for submitting the prior notification if the investor is a non-resident or a foreign corporation, a resident agent must submit it on their behalf. The review process typically takes two to four weeks, and company registration cannot proceed without approval.

For an overview of the advance notification system, please see our Guide to the Prior Notification System for Foreign Investors.

Securing a Company Address

The application must include the company's address when applying for company registration. However, since the company does not exist, it cannot lease an office.

Common solutions include:

• A Japanese director or partner signs the lease contract in their name and transfers it to the company after its registration.
• The foreign corporation acting as the founder directly contracts with a serviced office that allows English-language contracts (such as Regus, Servcorp, or WeWork), and the contract is transferred to the Japanese subsidiary after registration.
• The personal address of a Japanese director or partner is listed in the application, and after the Japanese subsidiary's registration is completed, an office is leased in its name.

Preparation of Articles of Incorporation

The Articles of Incorporation, "Teikan", is the basic document that must be decided upon at the time of incorporation. For example

• Name of the company
• Type of company (Kabushiki Kaisha or Godo Kaisha)
• Closing date
• Amount of capital
• Corporate body
• Address of head office
• Existence or non-existence of share transfer restrictions
• Method of public notice of financial results

For those unfamiliar with Japanese laws and customs, please read my article, Key Decisions for Establishing a Subsidiary in Japan, which explains what aspects should be considered in making decisions.

Preparation of an Affidavit

When establishing a kabushiki kaisha, it is necessary to have the articles of incorporation notarized at the registry office to ensure their validity.

When notarizing the articles of incorporation, a corporation acting as an incorporator must submit a certified copy of the company's registry and a seal registration certificate.

Foreign corporations acting as an incorporator usually do not possess the company registry nor seal registration certificate, in which case an affidavit must be submitted instead.

The affidavit must affirm details similar to those recorded in the Japanese company registry and must be authenticated by a notary public or a similar institution in the home country.

There is no fixed format for the content of the affidavit. For specific requirements, it is recommended that you consult the Japanese notary office, where the articles of incorporation will be notarized.

As a general rule, all incorporators must attend the notarization of the articles of incorporation. However, if only Japanese incorporators attend, they must hold a power of attorney from the other incorporators.

Notes:

1. If establishing a Godo Kaisha, notarization of the articles of incorporation is unnecessary; therefore, preparing an affidavit is unnecessary.
2. Articles of incorporation notarization refers to having a notary public at a notary office verify the legality of the articles.

Signature Certificate

When submitting an affidavit, a certificate of signature for the representative of the foreign corporation acting as a promoter must be authenticated by the home country. In addition to notarizing the articles of incorporation, this certificate of signature is also necessary when registering a seal during the application for company registration.

Declaration Regarding Beneficial Owners

When a company opens a bank account, the bank requires submission of a list of ultimate beneficial owners. This requirement allows the bank to verify the backgrounds of individuals or entities involved and to prevent money laundering by confirming the list of ultimate beneficial owners.

In 2022, the "Ultimate Beneficial Owner List System" was introduced to certify a company's list of ultimate beneficial owners officially. Under this system, the Commercial Registry verifies the list prepared by a Kabushiki Kaisha (K.K) and issues a certificate.

This certification system applies specifically to kabushiki kaisha and does not include godo kaisha. There is no set requirement for when certification must be obtained; however, it is convenient for Kabushiki Kaisha to obtain certification under this system at the time of establishment.

An ultimate beneficial owner is defined as follows:

1. An individual who holds more than 50% of the voting rights in the company being established.
2. If there is no such individual, an individual who holds more than 25% of the voting rights.
3. If no individuals meet criteria 1 or 2, an individual who controls the company's business activities through investment, financing, transactions, or other relationships.

For foreign corporations acting as incorporators, the shareholder registry and identification documents for the ultimate beneficial owners must be prepared. It is advisable to confirm these details in advance with a notary office.

Please refer to the Ministry of Justice's website for more information on this system.

Securing a Capital Payment Account

Capital must be paid to establish a company, and the method differs depending on whether it is a Kabushiki Kaisha (K.K.) or a gōdō kaisha  (G.K.). For a kabushiki kaisha, the payment must be made through a bank account (per Article 34 of the Companies Act). A bank account is not necessarily required for a gōdō kaisha, and a receipt issued by the representative partner certifying the payment of capital will suffice.

If a bank account for depositing capital cannot be prepared, establishing a kabushiki kaisha will be impossible, limiting the establishment to a gōdō kaisha.

The capital payment is generally deposited into the founder's personal bank account for a kabushiki kaisha. Acceptable banks for this include:

• Domestic banks' branches and headquarters in Japan
• Foreign banks' branches in Japan (authorized by the Prime Minister)
• Overseas branches of domestic banks

Since a foreign corporation typically does not hold a bank account in Japan, the question of how to secure an account to deposit capital arises. In such cases, depositing the capital into the director's bank account at the time of establishment is permissible. If the director does not have one, a third party's bank account may be used.

Thus, a third party willing to temporarily accept the capital deposit must be secured. For example, Japanese directors, employees hired in Japan, or specialists such as tax accountants, judicial scriveners, or lawyers who assist with the incorporation process may agree to have the capital paid into their accounts.

Opening a Corporate Bank Account

After the company is successfully established, a corporate bank account must be opened. However, if the directors of the Japanese subsidiary are all foreigners, many banks, excluding online banks, may refuse to open an account. This is because there is concern that foreign directors may not be able to read the bank's terms and conditions or fully understand banking transactions.

As of June 2024, there have been instances where Japanese directors have been refused to open corporate bank accounts, even when they are physically present. The reason remains unclear, but it may be related to concerns about appointing a Japanese director who is not actively involved in the business and serves only in name.

For businesses such as restaurants and dealerships, where foreign managers may not be fluent in Japanese, bank accounts are generally opened without issue. However, companies engaged in the sales of used cars for export from Japan to other countries face more challenges. This suggests that banks are more likely to open accounts when they can easily verify the company's active operations in Japan. When such verification proves difficult, they may decline the account request.

In cases where a corporate bank account cannot be opened, the business may need to operate temporarily using the owner's personal account. After the business has been established and operational for a period of time, it may be easier to successfully request the opening of a corporate bank account.

Preparing a Company Seal

In recent years, company seals have been phased out across various sectors. However, as of 2024, some uncertainty remains around relying solely on digital signatures for all business matters. Therefore, it is generally advisable for a company to still possess an official seal (jitsuin).

A corporate seal must be filed with the Legal Affairs Bureau when registering a company. At this time, the company's representative's registered seal is required. If the representative is a foreign national, a certified signature document from their home country may be submitted in place of the personal seal.

Since February 2021, it has become possible to file incorporation documents online using an electronic certificate issued by the Legal Affairs Bureau instead of submitting a physical seal.

Conclusion

Establishing a subsidiary in Japan involves navigating various legal and procedural requirements tailored to foreign corporations. From securing capital payment accounts to managing corporate bank account restrictions, each step demands careful attention to Japan's regulatory landscape. While it may seem complex, understanding these requirements can significantly streamline the process.

Consulting with local experts, such as notaries and tax professionals, can provide valuable support, helping ensure compliance with Japanese laws and facilitating a smoother path to success in the Japanese market.