Deciding on the right entity that will meet your business needs is the first step for international companies that plan to enter into the Japanese market. As mentioned in our other articles, a branch designation is not likely to be the best option for companies in general industries, instead KK and GK are more realistic options for international companies that plan to establish a subsidiary in Japan. There are several unique processes for international companies to establish an entity in Japan such as preparing the affidavits of the parent company, and the signature certificate. However, the process of registering a company is relatively standardized, so once you narrow down the options, you need to carefully consider the pros/cons between KK and GK. In this article, we will highlight the different features of KK and GK so that you can make the choice that best fits your situation.
Kabushiki Kaisha (KK)
A Kabushiki Kaisha, commonly abbreviated “KK” or “K.K.”, is a type of corporation defined under Corporate Law in Japan. This type of corporate structure is similar to C-Corporation in the US, and the most important aspect of KK is its limited liability. KK is the most credible and widely used legal form in Japan. Roughly 90% of existing companies were established with the form of KK. For example, Toyota and Sony follow the KK structure, and their legal names are shown as Sony KK or Toyota KK.
When a foreign company establishes a subsidiary as KK, it becomes a separate entity from the foreign parent company. The parent company serves as a shareholder and bears limited liability as an equity participant for all debts and credits related to the KK’s activity.
The minimum requirement for the corporate governance structure is the combination of one shareholder and one Representative Director. KK’s can increase the level of corporate governance by adding a Board of Directors, Audit Committee and External Auditor. Unlike other Asian countries, a statutory audit is only required for companies whose capital amount exceeds 500 million yen, or whose total liability exceeds 20 billion yen.
As for the taxation, KK is double taxed as corporations under Japanese Tax Law (i.e. the company’s profits are taxed at corporate tax rates, and dividends are subject to withholding taxes of 20%.) The effective corporate income tax rate in FY 2019 for small- and medium-sized companies is 34.59%.
Godo Kaisha (GK)
A Godo Kaisha, commonly abbreviated “GK” or “G.K.”, is a new form of entity introduced in 2006, modeled after the LLC in the US. Similar to KK, GK is a legal form of a company that provides limited liability to its owners. The primary characteristic that GK shares with KK is this limited liability. GK’s are generally used as personal asset management entity or an entity for sole-proprietors doing freelance work.
The GK has a simplified internal structure similar to that of a partnership. A GK is formed by articles of incorporation signed between its members who provide a capital contribution and designate one person as their executive. This executive member can be either an individual or a corporation, including foreign corporations. However, in the case a corporation is designated as the executive member, there must also be an executive manager to perform the actual management activities. Regardless of the size of GK, a statutory audit is not required.
In contrast to many other countries, both KK and GK are taxes are levied at the same rate in Japan and pass-through income taxation is not applied to the GK at the Japan side. The effective corporate income tax rate in FY 2019 for the small- and medium-sized companies was 34.59%. Under United States tax law, the “check the box” rule is applied for GK’s (i.e. GK’s can be a disregarded for US tax purposes). The GK is taxed like a KK in Japan, and therefore is not a disregarded entity for Japanese tax purposes.
Qualitative Factors Impacting the Decision between KK and GK
In most cases of our consulting history, we have recommended international companies entering the Japan market to establish themselves as a KK because of the higher level of credibility that comes with the KK designation. It is generally understood among Japanese professionals that the GK is used as personal asset management entity or a sole-proprietor doing freelance work. On the other hand, publicly-listed corporations need to be designated as KK’s, and carries the feeling of a large corporation. In turn, GK sounds like a less credible entity or something people are unfamiliar with, which can cause hesitation from partner companies and clients. There are even many professional businesspeople who do not recognize that a GK is a type of corporation. Given that GK is regarded as less credible entity, GK is not suitable for business-to-business activities. In addition, GK’s may have a disadvantage when recruiting high quality employees who may feel that a GK is small company or less reliable.
The following are some stories that we’ve heard from our clients regarding the perception of GK’s in Japan.
“Every time our sales representatives visit our customers, they are always asked ‘what is Godo Kaisha (GK)? The explanation of GK works as ice-breaking talk at first. However, they are fed with explaining what a GK is.”
“I personally did not think GK is good for our company. When I joined the company, the legal department at our parent company had already set up a GK, to work with law firms. With our brand recognition , the name of GK is an obstacle to efficiently build client relationships in B2B. Potential clients first only focus on the name of company (including the GK) rather than our product.”
Aside from the legal and taxation perspective, we would like to point out the importance of the impression given by the designation. GK’s prestige is increasing these days as more companies are being formed under the GK designation. It is true that GK’s can get a slight cost benefit due to the simplified structure of GK, one example is that GK’s do not need to prepare minutes of shareholder’s meeting, which will save the lawyer fees. Our recommendation is for you to ask your local director or sales representative candidates if they like KK or GK. It is important to rely on the opinion of the local staff in this decision. In our view, additional costs required for KK’s will easily be paid off by the increased credibility leading to sales by forming a KK. Some well-known global companies such as Apple, Wal-Mart, and Amazon have chosen to form GK’s in Japan, but this does not necessarily mean it is the right choice for your company. These corporations’ very strong brand recognition makes up for the lower credibility of the GK designation without impacting their business. Smaller operations with less brand recognition in Japan would surely suffer from following the same path.
Comparison of Business Forms
The following table compares the two entity types from several different perspectives to further assist you in making a decision that’s appropriate to your needs.
Comparison between KK and GK
|Business Entity Type||Kabushiki Kaisha(KK)||Godo-Kaisha(GK)|
|Minimum Capital Requirement||1 yen||1 yen|
|Liability for Investors||Limited to amount of equity participation||Limited to amount of equity participation|
|Transfer of Shares/Membership||Approval at shareholders meeting is generally required (In a KK, the transfer of shares is unlimited by default.)||Unanimous approval of members is required|
|Credibility||Widely known, the most credible form of company in Japan
90% of Japanese corporations are incorporated in this form
|New form of corporation in Japan since 2006.
Not appropriate for most B2B businesses due to reputation. Can be successful if the company has a strong brand recognition.
|Representative||Only the Representative Director represents the company.||All members are representatives of the company by default, unless managers have been appointed.|
|Governance||Appointment of 1 or more directors is required. Establishment of a “board of directors” is optional||GK has greater freedom of self-government through their articles of association (No GK board is required)|
|Name of Entity to be Registered||-Any name is available unless the same company name exists in the same city||-Any name is available unless the same company name exists in the same city|
|Shareholders /Members meeting||Required once a year||Not required|
|Registration of Representative||-At least one Representative Director needs to be registered||– Need to register one director who resides in Japan as a representative of the Japan branch|
|Publication of Financial Statements||Legally required||Not required|
|Director’s Term of Office||1 to 10 years with possibility of re-election (which needs to be registered)||No fixed term|
|Tax on Profit in Japan||Yes (Effective tax rate is 34.59% in FY 2019)||Yes (Effective tax rate is 34.59% in FY 2019)|
|Withholding Tax on Dividends||Yes (20%. The rate can be reduced or exempted depending on tax treaty)||Yes (20%. The rate can be reduced or exempted depending on tax treaty)|
|Consideration for US Entity||“check the box” rule is not applied.||“check the box” rule is applied for GKs (i.e. a GK can be a disregarded entity for US tax purposes)
The GK is taxed like a KK in Japan, and therefore is not a disregarded entity for Japanese tax purposes.
|Cost Required for Incorporation||About $2,000 (excluding professional consulting fee) depending on the capital amount||About $1,000 (excluding professional consulting fee) depending on the capital amount|
|Time Required to Complete Registration||Generally takes 1-2 months (dependent on time required to notarize documents on the parent company’s side)||Generally takes 1-2 months (dependent on time required to notarize documents on the parent company’s side)|
|Case||Facebook, Twitter, Google, Salesforce, Microsoft, Yahoo, Dell, IKEA, GE, Oracle, Uber||Apple, Cisco, Wal-Mart, Amazon, Exxon Mobil|