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FAQs - 1. Procedures for establishing a business
1-1) We’ve heard that various configurations (such as representative offices, branch offices, and corporations) are possible when establishing a business in Japan. Please tell us more about the advantages and disadvantages of each configuration.
A) Representative office
(Advantages)
- No need to submit registration and tax forms when establishing business.
- Expenses are deducted from income of the head office in the home country. This lowers taxes in the home country.
(Disadvantages)
- Permissible work is limited to information gathering, PR activities, market research, etc. Sales activities are not permitted.
- If a lawsuit arises in Japan, the representative office is considered a foreign corporation, and responsibility thus extends to the corporation in the home country.
B) Branch office
(Advantages)
- The branch office’s profit & loss are calculated in combination with the head office’s income. If the branch office runs at a loss, this lo
- wers taxes in your own country. Overhead expenses arising at the head office can also be allocated to the branch office.
- Branch office profit remitted to the home country is tax-exempt even in the home country, in principle.
(Disadvantages)
- Since profit & loss are calculated in combination with the home country, if the branch office runs at a profit, taxes in your own country will be higher.
- Calculating together with income from the home country incurs greater accounting processing.
- Inspection rights of the home country’s tax authority also extend to the branch office.
- If a lawsuit arises in Japan, responsibility extends to the head office in the home country.
C) Subsidiary corporation
(Advantages)
- Higher level of trust within Japan.
- If a lawsuit arises, responsibility does not extend to the corporation in the home country.
(Disadvantages)
- Losses incurred by the local corporation do not count against the income of the corporation in the home country.
- Profits remitted from the local corporation are considered dividends, requiring 20% for taxation at source (mitigation measure may be applied under Tax Treaty).
- Possibility of transfer pricing taxation problems.
- Possibility of undercapitalization problems.
- Accounting procedures of liquidation are less simple than representative offices or branch offices.
