KK vs Branch
KK/GK vs Branch
It is relatively simple for a Japanese resident to set up a business in Japan. However, for international companies who wish to enter into the Japanese market for the first time, there are a number of considerations for choosing the right entity to meet your business needs. The most common business entities available in Japan are KK/GK and branch office. Many people seek advice from lawyers to choose the best form of entity, however, there are a number of important tax considerations that will impact your choice of business entity. VentureINQ’s tax and accounting expertise can help you decide the right form of entity for your business.
Branch as Business Entity
It is generally considered that choosing a branch office is an easy way to start business in Japan. However, based on our experience, selecting a branch office is the best choice in a very few situations. A branch office is generally suitable for the Japan branch of an NPO, NGO, governmental body, or Financial Institute which are not allowed to have a ‘corporation’ status outside of its home country. We have also seen cases in the international traffic industry since corporate taxes for branches in such industries may be exempted due to tax treaties. Below are advantages and drawbacks that you should be aware of when considering the branch designation:
Advantages of a Branch Designation
- Registration expenses of a branch entity to be paid to the government are slightly lower than KK/GK.
- The head office (outside of Japan) may benefit from offsetting a loss at the Japan branch office if the Japan branch is a pure cost center.
Disadvantages of a Branch Designation
- Registration fees paid to lawyers may be higher because the process of registration is not standardized. This is especially likely when the overseas organization has a complicated structure .
- Branch offices are viewed by many as less credible than KK/GKs, which can lead to denied applications to open a Japanese bank account.
- Office owners may also reject lease agreement applications due to the less credible image.
- The Japanese government’s permission to conduct a certain type of business is restricted to KK/GK entities, a branch office designated-entity cannot legally conduct business in Japan.
- The registration and amendment procedures for a branch office of a foreign corporation requires time-consuming updates. For example, small changes to the registered information of the parent company, such as who is serving as a director, needs to be updated with the Japanese government by the branch office.
- There are few professionals in Japan who can deal with taxation for branch offices, which is categorized as “taxation for foreign corporations”, one of the most difficult areas of taxation in Japan.
KK or GK as Business Entity
KK/GK is suitable for almost all foreign corporations in general industries which wish to operate a business in Japan. For example, Microsoft Japan and Facebook Japan have a subsidiary in Japan with the form of KK. Apple Japan and Walmart Japan are doing business in Japan in the form of GK. Due to the complexity of branch office registration and taxation, combined with the inexpensive cost of KK/GK options, most companies choose a KK or GK designation. Below are advantages and disadvantages of a KK/GK designation:
Advantages of a KK or GK Designation
- The process of company formation is standardized, which allows KK/GK to be incorporated with less time and cost
- KK/GK is the most widely used entity form and viewed as more credible than other entity types.
- The parent company’s shareholders will bear a limited liability as an equity participant for all debts and credits related to the Japan KK/GK’s activities.
- If the capital amount of a KK/GK is over 5 million yen, a Representative Director can apply for an Investment and Management VISA
- Office owners are more likely to accept lease agreement applications because of the higher credibility compared to other types of entities.
Disadvantages of a KK or GK Designation
- Dividends to the parent company will be subject to withholding taxes. Such taxes may be reduced or exempted based on tax treaties.
- There are a number of required procedures, such as shareholders meeting, and registration at the Legal Affairs Bureau.
Comparison of Business Entity Types
The following table compares the three entity types from a number of different perspectives to further assist you in making the decision that best fits your needs. Choosing a KK or GK is a strongly recommended option, and the only choice when the Japanese government’s permission is dependent on a KK or GK designation.
Comparison by type of entity
| Business Entity Type | Corporation (KK/GK) | Branch Office |
| Scope of Business Operation | -No restriction (Prior/ post notification to Bank of Japan may be required for certain industries) | -No restriction (Prior/ post notification to Bank of Japan may be required for certain industries) – Government permission for certain businesses is restricted to KK/GK (i.e. staffing service provider) |
| Registration at Legal Affairs Bureau | -Required | -Required |
| Fiscal Year End | -Can select any date as fiscal year end | -The same date as parent company |
| Capital Amount | -Minimum amount is 1 Japanese Yen | -Capital amount of parent company is registered (Corporate Taxes and Local Taxes are calculated based on the capital amount of the parent company) |
| Corporate Governance | -At least one representative director is required -Can choose a more complicated governance, such as a board of directors, and corporate auditors |
-Corporate governance of the parent company needs to be registered |
| Articles of Incorporation | -Required. Articles of incorporation should be notarized at the time of incorporation |
– Not required |
| Statutory Audit | -Not required If the capital amount is equal or larger than 500 million yen, or the total liability is equal to, or larger than, 20 billion yen, a statutory audit is required for KK’s |
– Not required |
| Name of Entity to be Registered | -Any name is available unless the same company name exists in the same city | – Need to register the same name as the parent company |
| Liability | -The parent company’s shareholders will bear a limited liability as an equity participant for all debts and credits related to the Japan KK’s activity | -The parent company is directly liable for acts of the Japan branch because it is viewed as the same entity |
| 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 |
| Opening Bank Accounts | – Legally possible to open bank account in the name of the KK/GK | – Legally possible to open bank account with a name of Japan branch – Japanese banks may reject applications because of this less credible type of business entity |
| Lease of Office Space | – Legally possible to enter into the lease agreements | – Legally possible to enter into the lease agreements – Office owners may reject lease applications because of this less credible type of business entity |
Accounting and Taxation
| Business Entity Type | Corporation (KK/GK) | Branch Office |
| Scope of Profit Subject to Corporate Taxes | -KK/GK is subject to corporate tax on worldwide income | -Branch is subject to corporate tax on all profit attributed to the Japan office |
| Taxation | – Similar to KK/GK owned by a Japanese resident, tax filing for corporate tax, local tax, and business tax is required once a year – There are special considerations for 100% owned subsidiaries of foreign corporations |
– Tax filing for corporate tax, local tax, business tax is required once a year -Taxation for Japan branch requires expertise and experience for international taxation – The financial statement of the parent corporation needs to be submitted to tax authorities along with the tax return of the Japan branch – Local taxes (i.e. size-based tax and inhabitant tax) on capital amount is calculated based on the capital amount of parent company – Inter-branch transactions should be determined at arms-length, and documentation for the transactions are required |
| Accounting | -Financial statement under Japan GAAP is required for the tax filing purpose in addition to one under the group policy (e.g. IFRS/USGAAP) – Public disclosure of the financial statement is required (KK only) – A Statutory audit is required for KK’s with capitalization over 500 million yen |
– Bookkeeping is required at both Japan branch and headquarters The parent company needs incorporate all transactions in their parent company’s books |
Comparison of Set-up Procedures and Costs
| Business Entity Type | Corporation (KK/GK) | Branch Office |
| Time Required to Complete | ●1-1.5 month *depends on how fast the parent company can arrange for the notarization of an affidavit |
●1-1.5 month *depends on how fast the parent company can arrange for the notarization of an affidavit |
| Required Documents | – Copy of registration certificate of parent company – Affidavits of the parent company’s profile – Signature certificate (Representative director of KK/GK) – Signature certificate (CEO of parent company) – Articles of Incorporation – Corporate Seal *Affidavits and signature certificates need to be attested by notary public |
– Copy of registration certificate of parent company – Affidavits on parent company’s profile – Seal impression certificate of representative of Japan branch – Corporate Seal *Affidavits need to be attested by notary public |
| Registration Expenses | KK（capital amount less than 10 million yen） ●Registration tax：150,000 yen ●Notarization：53,000 yen ●Certificates：3,000 yen Total 206,000 yen GK（capital amount less than 10 million yen） ●Registration tax：60,000yen ●Notarization：- yen ●Certificates：3,000yen Total 63,000 yen |
●Registration tax：90,000yen ●Notarization：- yen ●Certificates：3,000yen Total 93,000 yen |
| Professional fee | From 100,000 yen *Varies depending on the scope of documentation prepared in English |
From 150,000 yen *Varies depending on the complexity of parent company’s profile |