Subsidiary vs Branch office.
We often suggest to our potential clients that "Subsidiary is preferable to Branch office".
However your best position is depending on your company's environment. you should consult with your tax advisor before hand.
Subsidiary vs Branch
|Subsidiary (Kabushiki-Kaisha)||Japan Branch|
|1. Capital.||No minimal capital figure. At least JPY 1.||N/A|
|2. Dividends / Profit.||Remittance Subject to withholding tax at 20% (or reduced rates under tax treaties).||Not imposed.|
1)Intra-company (Loan form the head office).
2) Inter-company (Loan form affiliated companies).
2) Interest is deductible.
Note: 'Thin Capitalization' rules.
|1) Interest is not deductible.
2) Same as left.
|4. Annual administration.||Annual shareholders meeting.
||No annual procedure. Registration is required when registered items of the head office is changed.|
|5. Tax Return Submit by the subsidiary.||No requirement to the parent company.||Submit by the branch with the accounting reports prepared by the head office for worldwide bases.|
|6. Director||Not required for a representative director who is a resident of Japan. previous rule was abolished.||Submit by the branch with the accounting reports prepared by the head office for worldwide bases.|
|7. Local tax (capital per levy)||Depending on capital amount etc||Disadvantage? (If the capital amount of the head office is huge.)|
|8. Loss of starting up||Cannot setoff by the parent company||Can setoff by the head office|
PE (Permanent Establishment) issue should be investigated with a tax specialist before setting up a Japan office.
The essential issue which type of vehicle (Rep office, Branch or Subsidiary) would be appropriate for a Japan office of a foreign company is whether the Japan office do sales activities or not.
If sales activities are required for the Japan office by Japanese customers, it is suggested to set up Branch office or Subsidiary rather than Representative office so that to avoid any PE risks.
|Issues||Representative office (Rep office)||Branch office|
|1. Representative office's activities.||A foreign company can establish a presence in Japan as a Rep office. The purpose of the Rep office is limited to gathering information etc.
- Market research
- Other preparatory and supplemental tasks.
Rep office is NOT permitted to engage in sales activities.
|If a Japan office engage in sales activities, they would be recognised as a Branch office from the tax point of view and required to file corporation tax return on their Japan source income.|
|2. Tax perspective||Do NOT be recognised as a PE of a foreign company
In connection with a definition of PE (Permanent Establishment) of a foreign company, please refer Article 141 of Japanese corporation tax law for detail.
<Refer =comment of P328/1126>
(translation is prepared by sozeishiryokan.or.jp)
If a Rep office recognised as "Agent PE" of a foreign company, the Rep office would be a Branch under the Japan tax perspective and has to file corporation tax return on their Japan source income of the foreign company.
Sales activities (including negotiation with customers, visit with price list and etc.) by a Rep office may cause any PE risk.
|Branch has to file corporation tax return on their Japan source income.|
（Generally speaking）Subsidiary is suggested.
We suggest Subsidiary due to the below reasons.
1. From the capita per levy point of view, subsidiary is reasonable. (In case your head office's paid in capital figure is huge, you have to pay huge amount of local tax even though your Japan branch were a loss situation.)
2. Sized tax would be chargeable in case your paid-in capital exceeds JPY 100M.
3. Financial Statement of head office is required to file for Branch office when BO submit a tax return to the tax office. Subsidiary is not required to file shareholder's FS.
4. If your Japan branch is sued to a court, representative of Japan branch can attend the court in Japan. In case of subsidiary, director of Japan subsidiary should attend.
5. Tax advisor's total fee for a Branch office would be expensive due to the additional jobs 2 and 3 above.
6. It tends to be thought that "a branch is easily liquidated than a subsidiary", however there is actually not so different of time scale and costs.
Business perspective in Japan（Kabushiki Kaisha - Joint stock company)
KK is much more reliable from Japanese customers point of view as GK is not familiar to Japanese people yet which was introduced in 2006.