You do not have to live in Japan to be a director when establishing a Japanese corporation. This is a relatively recent revision.
Legal Corrections | Non-resident as Director
As of March 16, 2015, it has become possible to establish a company in Japan even if all of the company’s representative directors are non-residents. With this amendment, non-Japanese and overseas residents who do not live in Japan can also become directors of Japanese companies.
Previously, at least one of the representative directors of a domestic company had to be domiciled in Japan. However, this requirement has been abolished so that a company can be established without problems, even if all representative directors are non-residents.
However, some particular documents are required when a non-resident incorporates a company. For example, a signature certificate must be provided instead of a seal certificate.
In addition, the applicant must obtain a “Business Manager Visa” and so on to come to Japan to manage the business.
This amendment will make it easier for people to enter the Japanese market. This is a great advantage for companies and individuals considering international business development.
Create a branch office or establish a Japanese corporation?
You should compare whether you should establish a branch office or a Japanese corporation because you can become a director without leaving Japan. Here is a simple comparison.
| Easy access to funds from the parent company | Japan Corporation | Japan Branch of U.S. Corporation |
|---|---|---|
| Establishment Cost | high | low |
| Creditworthiness | High (easy to obtain credit in Japan) | Low (credit may be inferior in Japan) |
| Taxation Business | Tax returns must be filed in Japan | It may be double-taxed. |
| Fundraising | Easy to obtain bank loans | Easy access to funds from parent company |
| Operational Complexity | Complex (many procedures related to establishment and operation) | Relatively simple (no need for certification of articles of incorporation, etc.) |
| Duty of the Law | Responsible as an independent legal entity | Parent company assumes responsibility |
| Market Access | Easy direct access to the Japanese market | Easy access to funds from the parent company |
Considering these points and making the best choice based on the business’s objectives, size, and long-term strategy is essential.
For example, if reliability in the Japanese market and financing from banks are essential, it is better to establish a Japanese corporation. On the other hand, if you value cooperation with the parent company while keeping establishment costs low, a U.S. branch may be more suitable.
Using a branch, you may save the capital needed to establish a Japanese corporation.
The method of returning funds, should be determined.
How funds are sent outside of Japan should be considered. For example, consider the case where an American corporation establishes a Japanese corporation as its approach to Japan.
Several options are available, but each method has its own advantages and disadvantages for tax purposes, and the most appropriate method should be chosen according to the situation. Below is a table comparing the significant techniques.
| Method | Description | Tax Considerations |
|---|---|---|
| Dividend | A common method of distributing profits to shareholders. | In Japan, 95% of dividends received are exempt from taxation due to the non-taxable inclusion of dividends from foreign subsidiaries. However, withholding tax may be imposed on dividends in the U.S. |
| Interest | A method in which a parent company makes a loan to a subsidiary and receives interest on the loan. | Interest received is subject to taxation in Japan, but may be exempt from withholding tax in the U.S. (according to the U.S.-Japan tax treaty). |
| Royalty | Paid as consideration for licensing of intangible assets. | Royalties are taxed in Japan and may be subject to withholding tax in the US. However, the withholding tax may be reduced or exempted under the Japan-U.S. Tax Treaty. |
| Stock buy-back | A method whereby a subsidiary repurchases its own shares to return funds. | Unlike dividends, they are treated as a return of capital and may not have specific tax benefits. |
| Purchase of inventories | Add royalties when the parent company sells inventory to its subsidiaries. | Transfer pricing taxation needs to be taken into account. |
Each of these methods has a different tax impact.
For example, loan interest may not be deductible in Japan under certain conditions. Careful treaty review is also necessary. In many cases, tax rates are reduced by the Japan-U.S. tax treaty, so it is also essential to check the application of the treaty.
Trustworthy Person
Even if the representative director is located outside of Japan, it is essential to have a trusted agent or responsible person in Japan to ensure prompt and appropriate decision-making. When selecting a reliable person, it is important to make sure that he/she has a deep understanding of the company’s policies and business model and is familiar with Japanese laws and culture.
In terms of management, you need someone you can trust in Japan.
If the representative director is outside Japan, be careful how you decide on essential matters.
Having such a person in place will ensure the company is well-positioned to respond quickly to everything from minor day-to-day management issues to major strategic decisions. In addition, by clarifying the approval process and defining in advance what matters should be reported to and approved by the head office, the extent to which decisions can be made locally and management risks can be minimized.
With a reliable representative, local legal and tax matters can be handled smoothly, and business stability can be enhanced.
One point to note is that the person you have placed your trust in may not always be faithful. This is especially remote when the representative director is located outside of Japan. Even if you give proper instructions, it is essential to manage the “execution” part of the business, which is to ensure that they are carried out. The risk of embezzlement or other misconduct cannot be ignored.
Therefore, when selecting a trustworthy person, you should focus not only on knowledge and skills but also on long-term reliability, past performance, and ethics. To deter fraud, regular audits, dual approval processes, and, if necessary, external third-party checks can be introduced.
Even if an audit is impossible, dual approval is easy to obtain internally. It may slow down the process a bit, but be proactive.
Non-resident Representative Director
The salary of a director of a Japanese company is income earned in Japan. Even if you are a non-resident of Japan, the place where the company is located is considered the place where the income was earned.
Therefore, you are required to file an income tax return in Japan. Please be aware of this.
In addition, since income tax withholding is also required, the company must adequately deduct taxes on the executive’s remuneration and pay them to the tax authorities. Be careful not to ignore your tax obligations in Japan, even if you are a non-resident.
Even if you reside abroad, you should also be aware of the risk of double taxation, including Japanese income tax and inhabitant tax. To avoid this, you may want to consider whether you can take advantage of tax treaties.
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Non-resident Director