Setting Up a Branch vs. a Subsidiary in Japan: A Comparison

When an overseas company sets up a presence in Japan, both establishing a branch and setting up a subsidiary (a Japanese corporation) are options that are commonly chosen in practice. They may look similar at first glance, but they differ greatly in legal, tax, and practical terms.

This article compares branches and subsidiaries from multiple angles and explains which type suits which kind of situation.

What Is the Difference Between a Branch and a Subsidiary in the First Place?

A branch is where a foreign company (the head office) establishes a business base in Japan as itself. A branch is legally one and the same as the head office and is not an independent corporation. It is registered with the Legal Affairs Bureau as a “branch of a foreign company.”

A subsidiary is where a new corporation (a joint-stock company [KK] or a limited liability company [GK]) is set up within Japan, separate from the head office. A subsidiary is an independent corporation under Japanese law and is legally separated from the head office.

This question of “whether or not there is legal independence” is the most fundamental difference between a branch and a subsidiary.

Scope of Legal Liability

Subsidiary

Any debts or legal liabilities incurred by a subsidiary are, in principle, limited to the extent of the subsidiary’s own assets. The head office (parent company) does not directly bear the subsidiary’s debts (unless a guarantee agreement has been entered into). For the head office, this is a major advantage in terms of risk management.

Branch

All transactions a branch enters into and all debts it incurs belong to the head office. Because a branch is not an independent corporation, even if the branch suffers damages or a matter develops into litigation, the head office bears the ultimate responsibility. The fact that business risk in Japan flows directly back to the head office can be called the biggest drawback of establishing a branch.

Differences in the Setup Procedures

Setting Up a Subsidiary (Joint-Stock Company)

The process runs through drafting the articles of incorporation and having them notarized, paying in the capital, and applying for registration of incorporation with the Legal Affairs Bureau. When a foreign national or a person residing overseas sets up the company, obtaining a signature certificate or an apostille may be required. From incorporation to the completion of registration usually takes around one to two months.

Registering a Branch

You register with the Japanese Legal Affairs Bureau as a foreign company. You prepare the head office’s articles of incorporation, certificate of registration, documents concerning its officers, and so on, and file them with Japanese translations attached. Because obtaining, translating, and authenticating foreign-language documents takes time, this usually takes around one to two months even when things go smoothly.

A branch must also designate a “representative in Japan,” and that person is required to have an address within Japan.

Comparison of Setup Costs

Cost Item	Subsidiary (Joint-Stock Company)	Branch
Registration and license tax	Capital × 0.7% (minimum ¥150,000)	¥90,000
Articles of incorporation notarization fee	Approx. ¥30,000–50,000	Not required
Translation and authentication of foreign-language documents	Depends on the case	Almost always required (tens of thousands to over a hundred thousand yen)
Judicial scrivener fee	¥50,000–150,000	¥50,000–150,000
Approximate total	Approx. ¥250,000–400,000	Approx. ¥200,000–350,000

Looking at setup costs alone, a branch can sometimes come out slightly cheaper, but once the cost of translating and authenticating foreign-language documents is added in, the difference often turns out not to be large.

Tax Treatment

Subsidiary

Because it is independent as a Japanese corporation, Japanese corporate tax is levied on income arising within Japan. Dividend remittances to the head office are subject to withholding tax in accordance with the terms of the applicable tax treaty. Financial closing and tax filings are carried out under Japanese accounting standards.

Branch

As with a subsidiary, income earned within Japan is taxed. However, the treatment of internal transactions with the head office (cost allocation between head office and branch, transfer pricing) tends to become complicated, and tax risks may arise. In addition, remittances of profit from the branch to the head office (the movement of funds between head office and branch) are treated not as dividends but as internal transactions, so the tax handling differs.

Ease of Obtaining Licenses

Depending on the industry, a difference can emerge between a branch and a subsidiary when it comes to obtaining licenses.

Many licenses (construction, real estate brokerage, food service, staffing, and so on) can be applied for whether you are a Japanese corporation (subsidiary) or a branch of a foreign company. That said, some licenses make “being a Japanese corporation” a requirement. Also, because license reviews place importance on the substance and stability of the business, there are cases where being a subsidiary—an independent corporation—works to your advantage in the review.

In relation to the Business Manager visa, both a subsidiary and a branch count as the underlying corporation that serves as a precondition, but depending on the details of the application, setting up a subsidiary may be judged easier to get through the review.

Credibility in the Eyes of Business Partners and Financial Institutions

For Japanese business partners and financial institutions, a “Japanese corporation (subsidiary)” is in many cases easier to deal with than a “branch of a foreign company” when it comes to contracts, transactions, and financing.

Especially in dealings with small and mid-sized Japanese companies, the other party is sometimes unaccustomed to dealing directly with a foreign company, and setting up a point of contact as a Japanese corporation can make transactions go more smoothly. With respect to opening bank accounts and applying for financing as well, there tends to be a greater number of financial institutions willing to work with a Japanese corporation (subsidiary).

Ongoing Administrative Costs of Operation

As an independent corporation, a subsidiary must manage its financial closing, tax filings, social insurance, registration of changes to officers, and so on in accordance with Japanese law. These are ongoing administrative costs that arise every fiscal period.

A branch likewise requires tax filings and various notifications within Japan. On top of that, there is the added complexity of managing internal transactions with the head office and ensuring consistency with the head office’s financial closing. In particular, for global enterprises whose head office operates across multiple countries, the impact of the Japanese branch’s tax treatment on the head office’s consolidated accounts must also be taken into account.

Both involve operating costs, but from the standpoint of simplicity of administration, a subsidiary has the advantage of being more self-contained as a set of procedures within Japan. Furthermore, should the scale of the Japanese business expand in the future, a subsidiary offers the benefit of making additional fundraising (capital increases) and business reorganization easier.

Which Should You Choose—a Branch or a Subsidiary?

Perspective	Cases Suited to a Subsidiary	Cases Suited to a Branch
Risk management	You want to avoid risk spilling over to the head office	You want to operate as one with the head office
Credibility	You place importance on relationships with Japanese partners and financial institutions	You want to put the head-office brand front and center
Licensing	Industries that require a license	Industries that do not require a license
Tax	You want to keep your taxes in Japan simple	You prioritize integrated management with the head office
Cost	You want stable operation over the medium to long term	You want to keep initial costs somewhat lower

In many cases, if you are aiming for full-fledged business development in Japan, setting up a subsidiary is the default. A branch is suited to leveraging the head-office brand or to establishing a temporary base, but from the standpoint of risk management, licensing, and credibility, it is not uncommon for companies to consider transitioning to a subsidiary over the medium to long term. Because the decision made at the start of the business has a major bearing on later operations, we recommend examining it carefully together with a specialist before entry. The key is to find the best solution for your own company, taking into account the characteristics of the Japanese market and the regulations of your industry.

Is It Possible to Switch from a Branch to a Subsidiary, or from a Subsidiary to a Branch?

It is possible to “start with a branch and later transition to a subsidiary.” However, rather than a “transition,” this takes the form of setting up a subsidiary in parallel with the branch and handing the business over to the subsidiary. When you cancel the branch’s registration and transfer operations to the subsidiary, practical work arises—taking over contractual relationships, reapplying for licenses, sorting out employees’ employment relationships, and so on.

Because starting with a subsidiary from the outset is in many cases smoother over the medium to long term, it is important to choose your initial structure carefully. On the other hand, some companies adopt a phased entry strategy of “first running the business on a trial basis through a branch, and setting up a subsidiary once they get a positive response.”

Relationship with the Business Manager Visa

To obtain a Business Manager visa (the “Business Manager” status of residence), the existence of a corporation established in Japan is required. Both a subsidiary and a branch are recognized as the “place of business in Japan” for a Business Manager visa application.

That said, the review places importance on the substance, stability, and continuity of the business. In the case of a branch, the head office’s financial condition may also be taken into account in the review, and if the head office is in the red or in an unstable financial state, this can affect the review. In the case of a subsidiary, the substance of the business within Japan is the main subject of review.

Furthermore, at the renewal of a Business Manager visa, your business track record in Japan (sales, tax payments, employment, and so on) is given weight. On this point as well, a subsidiary—which makes it easier to build up business substance independently within Japan—has the advantage of being easier to manage in terms of ongoing visa upkeep.

When an Overseas Parent Company Has Multiple Bases in Japan

When a major overseas enterprise develops multiple business divisions in Japan, there are cases of combining a subsidiary and a branch. For example, the main business is made independent as a subsidiary, while a specific function (sales or marketing) is established as a branch.

 

Q. Can you set up a company without ever having been to Japan?

The setup procedures on paper are possible. However, since actual management activities in Japan are required after obtaining the Business Manager visa, coming to Japan is unavoidable. The flow of “first just setting up the company, and coming to Japan once the visa is obtained” is realistic, and many of our clients adopt this approach. Also, because building up business substance after setup affects the review at visa renewal, it is important to have things ready so that you can begin business activities promptly after arriving in Japan.

For small and mid-sized overseas companies, the need to have multiple bases is low, and in most cases they operate with a single subsidiary. Deciding early on which structure to start with, and concentrating your preparations toward that, is the first step to a successful expansion into Japan.

Summary

A subsidiary and a branch differ in many respects—legal independence, risk management, tax, licensing, credibility, and more. Which is best changes depending on the nature of the business, the purpose of entry, risk tolerance, and whether a visa is needed, so it cannot be said in blanket terms that “this one is the right answer.”

If you would like to determine “which is right for my company—a branch or a subsidiary,” please make use of the free initial consultation at Touch Immigration Law Firm. After hearing about your business, your purpose for entering Japan, and your risk-management approach, we will concretely explain the optimal structure and the reasons for it. Because the choice of structure is hard to change later, carefully making the initial decision together with a specialist is the shortest path to a smooth expansion into Japan. We can also accommodate multiple languages, so please feel free to consult us even from overseas.