Types of operation in Japan
When you intend to start operation in Japan, there are 3 options you can choose.
They are “Representative office”, “Branch office” and “Subsidiary company”.
And furthermore “Subsidiary company” consists of “Kabushiki Kaisha (KK)”, Godo Gaisha (GK) and other forms.
As Representative office is not business operation, we will compare “Branch office” with “Subsidiary company” from the viewpoint of taxation merit.
Please refer to below website (JETRO) regarding the legal differences between “Branch office” and “Subsidiary company”.
Legal and business risk (Subsidiary company is better)
Foreign company which is shareholder of Subsidiary company in japan does not have responsibility for business operations in Japan by Subsidiary company.
Meanwhile, as Japan branch office is a part of Foreign head office, Foreign head office is directly responsible for business operations in Japan by Japanese branch office.
Tax Benefits (Subsidiary company is better)
Whether the company can enjoy tax benefits on Japanese corporate tax and consumption tax is decided by capital amount of the company.
If it’s small capital amount, the company may be able to enjoy a lot of tax benefits.
In case of Subsidiary company, basically the company is able to freely decide its capital amount.
But in case of Branch office, as it’s basically decided based on Head office’s capital amount, it’s difficult for Branch office to receive tax benefit in Japan.
For more details, please refer to article below.
Corporate income tax return in Japan
Offset of losses in Japan (Branch is better)
When the Japanese entity has net operating loss,
in case of Subsidiary company, as it’s different entity from Foreign company which is shareholder, Foreign company cannot offset the loss in Japanese subsidiary at their accounting and taxation.
Meanwhile, in case of Branch office, as it’s a part of Foreign head office, Foreign head office will be able to offset its loss in Japanese branch in their tax calculation. This is, it will be tax merit at the Foreign company’s side.
Money remittance between Head office and branch/subsidiary (Branch is better)
In case of Branch office, money remittance with Foreign head office can be freely done, as it’s a part of Head office. And withholding tax would not be levied.
Meanwhile, money remittance between Foreign company and Japanese subsidiary can be scope of withholding tax. Whether withholding tax is levied or not is depending on the nature (loyalty, dividend or other services etc.) of its remittance.
If loss is not expected in Japanese entity, we would like to recommend “Subsidiary company”, because you may be able to enjoy tax benefits in Japan.
For more comparison, please contact us.