Doing Business Between the US and Japan: Advice for US Companies

CLE presented on March 19, 2015 by John Shanahan (Atsumi & Sakai) and Naoko Inoue Shatz (Shatz Law Group)
Summary prepared by Jonathan M. Lloyd, WSBA IPS CLE Chair, 2014-15

 

John Shanahan and Naoko Inoue Shatz, along with Hidehiko Watanabe, a Japanese-licensed attorney, provided an informative presentation focusing on issues United States companies may face in doing business in Japan.  As Mr. Shanahan noted at the beginning of the presentation, Japan offers an increasingly attractive environment for foreign investment or business due to several factors, including the current government’s pro-growth fiscal and monetary policies (Abenomics), the Trans-Pacific Partnership being negotiated, and the award of the 2020 Olympics to Tokyo.

A US company looking to set up a Japanese subsidiary can choose from several different entity forms.  A Kabushiki-Kaisha (KK) is the most popular type of company, similar to a US C-corporation – it bears the highest credibility and shields the foreign parent from the subsidiary’s liabilities, but requires significant cost, time and effort to establish and maintain.  A Godo-Kaisha is a new type of corporate entity, similar to a US LLC – it offers slightly less credibility, along with less bureaucracy and cost, and while losses can be carried forward to the foreign parent, it is subject to tax at the entity level.  A branch office can be established quickly and can make sales, but has low social credibility and the foreign parent has unlimited liability for its obligations.  A representative office can only perform preparatory activities for business transactions (e.g., market research and advertising) and cannot make sales.

The only formal requirements to establish a Japanese subsidiary are a business address (a physical office location, though it can be temporary) and capitalization (no specific amount is required, but if the entity plans to sponsor the visa of an investor-owner, it should be as high as possible).  The amount of the company’s capital and debt, and its share transferability restrictions determine the internal management structures the company may adopt.  Most companies are “small” – i.e., with capital of less than 500 million JPY and debt of less than 20 billion JPY – “closed” companies, with shareholder or director approval requirements for the transfer of shares.  While there are a number of corporate positions that Japanese companies commonly use – boards of directors, statutory auditors, corporate officers (who are actually directors on corporate committees) and accounting auditors – none of them are required in order to establish a Japanese company.  One unique and common position in Japanese companies is the representative director, a non-employee (who works on a fixed term agreement) who represents the company externally, executes business agreements, and decides day-to-day operational matters.  Directors, including the representative director, have a duty of loyalty to the company and may not be prospectively indemnified for future liabilities or damages to the company, but may be indemnified for specific actions taken in their representative capacity based on a shareholder or director vote, particularly in situations where a director acted without knowledge or gross negligence.

A Japanese corporate entity can be established in a couple of different ways.  The traditional formation process for a KK is a document-intensive process than typically takes between 4-8 weeks to complete.  However, it is typical to expedite this process through a share transfer agreement, which reduces the time to 2-3 weeks, and can be done by having a Japanese lawyer or “judicial scrivener” serve as the incorporator, who then gifts the company’s shares to the client.  Among other formal requirements for a corporation, it must have an official company seal – in fact, companies will often have one formal bank seal, and another formal seal for use with other parties.

One particular area of difference between the US and Japan involves the two countries’ very different approaches to employment.  Unlike the US, Japan has no concept of “at will” employment – instead, dismissal must be done for “objectively reasonable causes” and be “socially acceptable.”  And while Japan recognizes term employment, termination is still challenging, as an employer’s decision not to renew term employment is subject to the same requirements as dismissal if the employee has a reasonable belief his employment will be renewed.

Mr. Shanahan and Ms. Shatz also covered a number of other topics that US companies may face in doing business in Japan, including the ability to transfer employees from the parent to the subsidiary (only employees with 1 year of employment), the treatment of business profits and dividend payments under the US-Japan income tax treaty, and transfer pricing for commodities purchased or sold between parent corporations and subsidiaries.

 

The preceding summary discusses certain key points discussed during the CLE presentation, all of which were outlined in greater detail in the accompanying written materials.  This summary is a publication of the WSBA International Practice Section, and is posted with the approval of the speakers and the WSBA International Practice Section executive committee.  It is designed to inform members of the WSBA International Practice Section of recent legal developments, and may not be used to claim CLE credit.  This summary is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations. If you have specific questions about this topic, please feel free to contact John Shanahan by email at john.shanahan@aplaw.jp or Naoko Inoue Shatz at ninoue@shatzlaw.com or 206-829-2723.

 

For the original announcement of this CLE, please visit HERE.