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Navigating Entity Management in Japan
Japan has one of the world’s largest economies and remains a popular destination for many multinational companies to set up operations. With the government’s active promotion of foreign direct investment, Japan offers an attractive business environment and skilled workforce.
In many ways corporate governance in Japan has evolved and it is steadily becoming an easier place for multinationals to operate in. Japan is also among the 120 countries that recognize and issue apostilles in accordance with the Apostille Hague Convention, abolishing the need for lengthy and costly legalization processes for foreign documents.
However, obstacles remain for foreign companies such as limited digitalization; a complex and often-bureaucratic regulatory environment; and a distinct business culture with unique and nuanced norms. These challenges require careful navigation and local expertise.
Digitalization Drive
Japan has been slow to adopt digitalized processes into company law and many traditional business practices remain. For example, many Japanese businesses still require official corporate documents to be endorsed using a ‘hanko’ (a carved stamp that serves as a personal seal or signature) despite efforts to phase them out.
In 2020, the Government announced a ‘digital transformation’ and a cabinet level Digital Agency was established in 2022 with goal of closing the countries digital deficit and strengthening their infrastructure.
Some steps have been made to streamline company law and adopt digital tools. For example, general Meetings of Shareholders and Board of Directors can now be held virtually (i.e. through a teleconference system). In June 2024, the government finally eliminated the use of floppy disks. Until then, many of Japan’s government procedures required individuals to submit documents using this outdated technology.
The success of digital transformation centres on integrating technology seamlessly into daily company operations. This requires trust in the safety and reliability of digital tools and the data they handle. Although this may seem straightforward, achieving this level of confidence necessitates a fundamental shift in many traditional Japanese business and social practices. Whilst further regulatory changes aimed at streamlining company law procedures and making online filings more accessible are anticipated in the future, it will take time.
Risk of non-compliance
Ultimate Beneficial Ownership Reporting
As of 31 January 2022, Kabushiki Kaisha (KK) companies in Japan can register their Ultimate Beneficial Owners with the Legal Affairs Bureau. Registration is optional therefore there are currently no penalties for non-compliance.
Japanese stock companies are required to send information about beneficial owners to notaries, who in turn, verify that the beneficiaries are not members of organized crime or terrorist networks.
Companies who fail to send beneficial ownership information face some consequences, for instance, there may be some obstacles to completing paper work and filings with authorities as they may request additional information/documents.
Financial Statements and Annual Accounts
Companies in Japan are obliged to publish Financial Statements for tax purposes. However, there is no obligation to file these with local authorities. Therefore, there are no penalties for delays or non-compliance.
For the most common entity type (KK) annual accounts only require board and shareholder approval.
Key considerations for Entity Management in Japan
1. Take care selecting entity structures
When incorporating in Japan, companies have a variety of entity structures to choose from. The most common types are Godo-Kaisha (GK), Kabushiki-Kaisha (KK) and Registered Branch.
Each structure will have different requirements for directors, annual accounts approval/filing, disclosure of directors/officers/shareholders identity. This should be considered when selecting the best entity structure for the company.
2. Appoint a Representative Director
For the most common type of entity in Japan (KK) it is mandatory to appoint a representative director. The representative director possesses the authority to sign legal documents on behalf of the company and use the company seal.
The local residency requirement for representative directors was abolished in March 2016.
3. Use a Company Seal
In Japan, it is traditional practice to use a ‘hanko’ or company seal in place of signature for many corporate documents. There are three different types of seals, although only one (the Representative Seal) is legally required.
The Representative seal must be registered at the local Legal Affairs Bureau, along with the name of the company representative who is authorised to use it. A second seal can only be issued if a second representative director is appointed.
4. Ensure you have the correct documentation for director changes
The process involved in director appointments and resignations in Japan can be complex to navigate.
For changes to be enacted, the original document including individual directors notice of resignation needs to be submitted to the Legal Affairs Bureau. When the original cannot be provided, a PDF copy is sufficient.
5. Be aware of Japan’s business culture and language requirements
Japan has a rich and unique relationship orientated business culture. While documenting contractual relationships is now more common, substantial value is based on trust, verbal discussion and relationship building in business.
Whilst there is no official language stipulated by law, Japanese is most the widely used in businesses. Corporate documents should be in Japanese, however translation to English is very common.
Inesa Kliukaite
Legal Officer, Mercator by Citco, Citco Mercator, UAB
