I. Types of Business Entities
■ Types of Business Entities
Depending on a foreign corporation’s objectives, purpose, needs and resources, it may establish its business presence in Japan either through a representative office, a branch office or a subsidiary. Each type of business entity is briefly discussed as follows:
<Representative office>
A representative office represents its foreign head office in particular activities, but it is not authorized to engage in business activities in Japan. It cannot engage in any commercial or sales activities, and its activities are usually limited to market surveys, information gathering and general liaison with its foreign head office. It is not required to obtain commercial registration in Japan.
As it does not engage into any commercial activities, a representative office is normally not liable for any Japanese income tax. However, in case it engages or undertakes transactions involving any business or commercial activities, including, but not limited to, the execution of contracts, acceptance of orders, invoicing and collection, it will be subject to taxes and other statutory requirements.
<Branch >
A foreign corporation may also opt to establish a branch office in Japan. A branch office is usually an extension office of the head office. A branch office of a foreign corporation must be established in compliance with the legal requirements of the Japanese Companies Act. Unlike a representative office, a branch office can engage in sales or commercial activities without restriction.
In relation to the taxation of a branch office, the international taxation principle in Japan was revised in the 2014 tax reform from an entire income principle to the attributable income principle. Under the new regulation applicable from fiscal year beginning on or after April 1, 2016, a Japanese branch and its head office will be treated separately as independent corporations, and each will be subject to taxation. Thus, the taxable income of a Japanese branch will be the income specifically attributable to its operations independent from the operations of its head office. As such, foreign income attributable to the Japanese branch office will also be taxed in Japan. As for foreign income earned by the branch office, foreign tax credits may be applied to eliminate double taxation.
<Subsidiary>
A foreign corporation may also opt to put up a new corporation or a subsidiary in Japan. To establish a Japanese subsidiary, it must comply with the legal requirements of the Japanese Companies Act. There are four types of incorporated companies under the Code. Kabushiki Kaisha (limited stock corporation) is the most common form. A subsidiary is authorized to do almost all business activities, including, but not limited to, manufacturing, trading and services in Japan.
Generally speaking, a Japanese subsidiary is subject to tax on its worldwide income. Foreign tax credits, however, may be applied to eliminate double taxation on income.