FAQ

Corporate / M&A

What types of legal entities exist in Japan?

Businesses are typically set up as corporations in Japan. For corporations, the following two types exist:

(1) joint stock corporations (Kabushiki-Kaisha/K.K./ 株式会社)
(2)limited liability companies (Godo-Kaisha/G.K./合同会社)

Both of them have a legal personality and the liability of the shareholders is limited to the amount of capital invested. While most businesses use joint stock corporations, there has been a trend towards the establishment of limited liability companies more recently. In particular tech companies such as Google and Amazon are making increasing use of limited liability companies. One of the reasons is the lower operational costs for a limited liability company compared to a joint stock company and pass through taxation for US investors.

If you plan to raise capital from third parties you should use joint-stock corporations, since the process is more straightforward and easier to implement.

If you conduct investment activities, it is common to choose partnerships. For partnerships the following forms exist:

(1) limited liability partnerships (Yugen Sekinin Jigyo Kumiai/有限責任事業組合)
(2) partnerships under the Civil Code
(3) limited partnerships for investment
(4) silent partnerships

The latter two are only used for investment purposes. For further details see Q&A on common fund structures below.

Are there any alternatives for setting up a subsidiary for foreign companies?

Foreign companies may also set up a branch office or a representative office in Japan. None of them has a legal personality, however. Representative offices are further limited to certain activities (e.g. market research) and may not engage in sales activities in Japan.

In addition, it is also possible to appoint distributors in Japan. Compared to setting up a representative office or a branch this requires the least commitment but proper planning is still required to evaluate the capabilities of the Japanese distributor and its network.

Are there any restrictions on foreign investments in or acquisitions Japanese companies?

Under the Foreign Exchange and Foreign Trade Act, investments in companies engaging in certain industries concerning national security, including software development and information processing, are subject to prior notification requirements in Japan as foreign direct investment or a specified acquisition. This generally applies to the acquisition of shares issued by both listed and unlisted companies (1% or more in case of listed companies).

 

You can find the full list of listed companies subject to investment restrictions here.

What types of legal entities are most commonly used by startups?

Startups typically use joint stock companies (Kabushiki-Kaisha/K.K.) and limited liability companies (Godo-Kaisha/G.K.). The same applies to foreign companies while there is a tendency to use joint stock companies more frequently for their Japanese subsidiaries. Compared to joint stock corporations limited liability companies are more flexible and corporate housekeeping is easier.

As the name suggests, the liability of all shareholders is limited to the amount of capital invested in both cases.
Unlike for limited liability partnerships (Yugen Sekinin Jigyo Kumiai), it is further possible to change the status of a limited liability company to a joint stock corporation, which is necessary if a company wants to go public.

Is it possible to convert one type of legal entity into another type at a later stage?

This depends on the type of entity that wishes to convert and the type the entity wants to convert to. The conversion from limited liability companies (Godo-Kaisha/G.K.) to a joint stock corporations (Kabushiki-Kaisha/K.K.), for example, is possible while the conversion of a limited liability partnership (Yugen Sekinin Jigyo Kumiai) into a joint stock corporation is not.

Is it necessary to have local shareholders or directors under Japanese laws?

Generally no.

Is it necessary to set up a board of directors or other corporate bodies?

Even for joint stock companies (K.K.) it is generally not necessary to set up a board of directors or to appoint statutory auditors. Something different applies for companies that want to go public or obtain certain licenses.

Is it necessary to appoint an accounting auditor?

An accounting auditor is required for (i) listed companies (ii) joint stock companies with an auditing committee (Kansatou Iinkai Secchi Kaisha) or certain committees (Iinkai Secchi Kaisha) and (iii) large joint stock companies (Dai Kaisha), i.e. companies with JPY 500 million or more share capital or more than JPY 20 billion of total liabilities.

What is the minimum capital to incorporate a company in Japan?

It is generally possible to incorporate a limited liability company (Godo-Kaisha/G.K.) or a joint stock corporation (Kabushiki-Kaisha/K.K.) with JPY 1. In practice, a company must often meet higher capital requirements to apply for licenses, work permits etc.

How long does it take to incorporate a company?

From the submission of the documents, it takes 1-2 weeks to incorporate a company in Japan. Since all documents must be submitted as originals the whole process usually takes around 1 month for Japanese residents and more for foreign residents. In particular, for foreigners who do not speak Japanese, the process typically takes longer, as it might be necessary to translate certain documents into English. To streamline the incorporation process, a company may be incorporated by a professional service provider first. Once the company is established the shares etc. are transferred.

What are the costs of forming and operating a company?

The costs for incorporating a joint stock corporation are JPY 50,000 for the notarization of the articles of incorporation and JPY 150,000 for the stamp duty for the incorporation. The costs for setting up a limited liability company are JPY 40,000 for the notarization and JPY60,000 for the stamp duty.

The legal fees vary depending on the amount of legal advice required.

Are there any government subsidies or tax incentives?

There are numerous incentive programs both on a state and prefectural level. A good overview of government incentives is provided on the page of the Japan External Trade Organization (JETRO). If you need tax advice, we can introduce tax advisors.

Why is a co-founder agreement advisable?

A co-founder agreement helps you to structure your thoughts and to clearly set out the obligations of each co-founder, be it contribution of cash, services or something else. It defines the roles and responsibilities of all co-founders and spells out management and decision making. Provisions on equity, vesting, compensation, removal or departure of founders, IP and dispute resolution are equally important. In the best case, a co-founder agreement helps you to align the interests of all co-founders, optimize processes in the company and reduce friction among the co-founders. In the worst case, it allows you to handle disputes among the co-founders in an efficient way.

Digital Assets / Crypto Assets / Cryptocurrencies

Are crypto assets regulated under Japanese laws?

Yes. The definition of crypto assets under the Payment Services Act includes cryptocurrencies such as bitcoin (type I crypto asset) and utility tokens (type II crypto asset). Investment tokens, i.e. tokens that allow the token holder to participate in the cash flows of a project, are not crypto assets but are generally covered by the definition of electronically recorded transfer rights under the Financial Instruments and Exchange Act.

What are the regulations for investment tokens?

Investment tokens allow token holders to participate in the cash flows of a project and typically represent traditional securities. The sale of security tokens to the public is generally subject to disclosure requirements and must be registered with the Financial Services Agency (FSA). Entities involved in the sale or providing other intermediary functions must generally register with the FSA as Financial Instrument Business Operators (FIBO).

What is the relationship between security tokens and crypto assets?

The definitions of crypto assets and security tokens are mutually exclusive. A token that is classified as a security under the Financial Instruments Exchange Act cannot be a crypto asset at the same time and vice versa.

What are the regulatory requirements for raising funds via a security token offering (STO) in Japan?

The requirements vary depending on whether the tokens are offered to the general public or in a private placement. Broadly speaking, public offerings are subject to much stricter regulations and require the preparation of a sales prospectus and the registration of the offer with the Financial Services Agency (FSA). Companies issuing their own tokens may further have to register as a type II financial business operator (FIBO) depending on the design of the token or sell their tokens via cooperation partners which are registered as type I FIBO.

In case of a private placement, it is not necessary to prepare a sales prospectus and to register as a FIBO.

In case of a private placement, it is not necessary to prepare a sales prospectus and to register as a FIBO.

What is a public offering?

A public offering of security token (Type I securities) is understood as a solicitation to offer or sell newly issued securities to at least 50 persons which is not considered a private placement. The term solicitation is interpreted broadly and generally includes offers via the internet. The use of the Japanese language is not necessary.

What is a private placement?

Private placements of security tokens are offers to qualified institutional investors (QII), specified investors, or a small number of investors (less than 50). An offer to QII and less than 50 other investors is considered a private placement as well.

Are there any regulations for the handling of security tokens in Japan?

Most activities involving security tokens may only be carried out by financial instrument business operators (FIBO). Depending on the design of the token and the activities carried out by the respective entity, it might be necessary to register as a type I or type II FIBO with the Financial Services Agency (FSA).

Are stable coins regulated under Japanese laws?

This depends on the stable coin model. Some stable coin models might be considered crypto assets under the Payment Services Act, others may be money orders. Stable coin models involving more than one token may further involve collective investment schemes and are often subject to securities laws.

Is it possible to list stable coins on a regulated exchange?

It is theoretically possible to list stable coins on a regulated exchange. Only one coin has, however, been listed for experimental purposes. The regulations applicable to stable coins differ depending on the design of the respective coin. Stable coins that are considered crypto assets under the Payment Service Act can be listed the most easily.

Investment Funds

How are funds commonly structured in Japan?

In Japan funds may be set up as (i) trust-type (e.g. unit trust), (ii) corporation-type (e.g. investment corporation (toushi houjin) like J-REIT) and (iii) partnership-type funds.

Partnership-type funds may take the form of (i) partnerships under the Civil Code, (ii) silent partnerships under the Commercial Code, (iii) limited partnerships for investment under the Limited Partnership Act for Investment, and (iv) limited liability partnerships under the Limited Liability Partnership Act.

Are there any registration requirements for the solicitation of interests in funds?

Yes, different requirements apply depending on how a fund is structured. You can find a high-level overview here.

Are there any registration requirements for managers of partnership-type funds in Japan?

For funds investing more than 50 percent of the assets under management in securities, the partner (GP)/the investment manager must generally register as an investment management business operator.

License requirements apply to investment managers of funds that primarily invest in commodities or real estate.

For funds investing in other asset classes, no similar requirement exists.

What is a Business Operator Engaging Specially Permitted Business for Qualified Institutional Investors, etc.?

The partner (GP) of a fund engaging in (i) the “self-offering” (jikoboshu) of interests on a private placement basis and/or (2) the “self-management” (jikounyo) of the fund’s assets must generally be registered as a type II Financial Instruments Business Operator (FIBO) and an Investment Management Business Operator respectively. There is, however, an exemption from the registration requirement for “ Business Operators Engaging in Specially Permitted Business for Qualified Institutional Investors, etc.” (so-called the Article 63 Exemption) for GPs.

Under this exemption, the investor must belong to the following group(s) of investors: (i) one or more Qualified Institutional Investors (QIIs) and (ii) no more than 49 non-QII investors. Please note that if there are any non-QII investors investing through the QII or non-QII, the GP may not rely on the Article 63 exemption anymore.

Furthermore, after the amendment in 2015, non-QIIs are limited to certain types of investors including listed companies and companies whose capital is 50M or more.

What is a public offering?

A public offering of securities is generally understood as a solicitation to offer newly issued securities to at least 50 persons in case of type I securities. The term solicitation is interpreted broadly and generally includes offers via the internet. The use of the Japanese language is not necessary.

What is a private placement?

Private placements of securities are offers to qualified institutional investors (QII) only, specified investors or a small number of investors (less than 50 in case of type I securities). An offer to QII and less than 50 other investors in case of type I securities considered a private placement as well.

In a private placement, it is not necessary to register the securities with the Local Finance Bureau and to provide a prospectus to investors.

Are there any disclosure requirements for funds?

The solicitation of interests in an investment fund investing 50% or more of its assets into securities is generally subject to disclosure requirements. In case of a public offering, the issuer must also file a securities registration with the Local Finance Bureau and provide a prospectus to investors.

The definition of public offerings and private placements vary depending on the type of securities offered (i.e. type I securities under Article 2(1) with generally high liquidity, and type II securities under Article 2(2) with less liquidity). For more details on public offerings and private placements see the Q&As below.

The solicitation of interests in partnership type funds is generally subject to disclosure requirements under the Financial Instruments and Exchange Act where the fund’s interests are offered to 500 or more investors.

For interests sold in a private placement, there are generally no disclosure requirements.

Are there safe harbor provisions for LPs getting involved in the limited partnership to ensure a LPs limited liability?

If a LP has led a third party to believe that it is authorized to execute the business of the partnership, the LP has the same responsibilities and liabilities as the GP vis-a-vis such third party who entered into a transaction with the partnership on the basis of such misunderstanding. Thus, in order to ensure a LP’s limited liability, a LP should not take any action which is likely to make a third party believe that it is authorized to execute the business of the partnership.

Since the laws do not clarify what type of action is likely to cause such misunderstanding, this must be decided on a case-by-case basis. Furthermore, you should also make sure that a limited partnership agreement does not include any provisions giving LPs the authority to execute business on behalf of the partnership.

What are the tax implications for the different types of funds?

In general all the structures are tax transparent provided certain requirements are met. Foreign investors may however be subject to withholding tax.

Do you also provide tax advice for structuring funds?

We do not provide tax advice on our own but work closely with long-term partners on these matters.