Foreign Company Regulations in Japan

Published on October 31, 2025 and written by Cyril Jarnias

As Japan continues to play a crucial role on the global economic stage, its complex and nuanced regulations concerning foreign companies are generating increasing interest among international investors and entrepreneurs. This legal system, often perceived as a bureaucratic maze, requires a thorough understanding to avoid various legal pitfalls, but it also offers exceptional opportunities for those who know how to navigate it carefully.

By exploring the subtle control mechanisms, rigorous compliance requirements, and sectors where foreign investment is encouraged or limited, this article aims to demystify the issues and illuminate pathways to benefit from the Japanese business environment.

Understanding the Basics of Foreign Company Regulations in Japan

Definition of Foreign Companies in Japan

There is no clear legal definition of “foreign companies” (or foreign-capitalized companies) in Japan, but generally, this refers to entities meeting the following conditions:

• A foreign investor holds at least one-third of the shares or equity, and is the main contributor with a 10% or greater stake.
• A Japanese entity created by a foreign company or a branch operating in Japan.

Main Purpose of Regulation Enforcement

Regulations targeting foreign companies primarily aim to:

• National Security: Limit influence on key industries such as social infrastructure and telecommunications.
• Public Safety and Order Maintenance: Prevent inappropriate external interference in certain sectors.

For example, the Radio Law and the Broadcasting Law limit foreign participation in the broadcasting sector to less than 20%, and the Foreign Exchange and Foreign Trade Act (FEFTA) requires reporting for the acquisition of more than 10% of shares in a company related to social infrastructure.

Main Regulatory Bodies and Their Roles

1. Ministry of Finance and Bank of Japan:
   – Review and management of inbound direct investment reports under FEFTA.
2. Competent Ministries for Each Sector:
   – Oversight of specific industries (telecommunications, aviation, etc.). For example, the Ministry of Internal Affairs and Communications is responsible for telecommunications regulation.
3. Fair Trade Commission:
   – Implementation of unfair transaction prevention policies and antitrust policies.

These bodies each have the authority to oversee foreign company activities in their specialized fields.

Registration, Establishment Procedures and Management Requirements

When establishing a company in Japan by a foreigner or foreign entity, the following steps are necessary:

1. Drafting of articles of incorporation and obtaining notarization.
2. Application for registration after capital deposit (a minimum of 5 million yen is recommended).
3. Obtaining necessary permits (depending on business activities) and submitting declarations to competent authorities.
4. Application for management and control visa (if applicable).

Specific documents such as founder information, bank account details, and signed contracts are required. Additionally, appointing a representative in Japan is mandatory.

Example of Impact in Case of Non-Compliance

In case of rule violations, severe measures such as fines or business suspension orders may be applied. For example, some broadcasting stations faced management improvement orders after exceeding foreign ownership thresholds were discovered.

To avoid such situations, implementing a rigorous and continuous compliance system is essential. Thus, entering the Japanese market requires extensive legal compliance and careful planning.

Registration Process for Foreign Company Subsidiaries

Legal Framework Applicable to Subsidiary Establishment by Foreign Companies in Japan

Main Applicable Laws

• Foreign Exchange and Foreign Trade Act: When a foreign company establishes a subsidiary in Japan, prior notification is required for certain specific sectors (e.g., cybersecurity, electrical industry). Generally, a post-facto report is also mandatory.
• Companies Act: Legal forms in Japan include stock companies (Kabushiki Kaisha) or limited liability companies (Godo Kaisha). These legal entities are independent, and the parent company assumes only limited liability for debts and obligations resulting from their activities.

Subsidiary Creation Procedure

1. Determination of Essential Elements
   – Decision on trade name, headquarters location, business activities, and management composition.
2. Document Preparation
   – Drafting and authentication of articles of incorporation
   – Parent company registration certificate, representative signature certificate, sworn statement, etc. (if necessary).
3. Capital Deposit
   – Capital amount is deposited into a bank account. No minimum capital is required by law, but setting a sufficient amount is recommended to enhance credibility.
4. Registration Application
   – Commercial registration at the legal affairs bureau. A “certificate of deposit” and “beneficial ownership declaration” are required for this.
5. Compliance with Foreign Exchange Act
   – Submission of prior notification or post-facto report depending on the sector.

Competent Authorities and Timelines

– Registration Application: Submitted to the competent legal affairs bureau of the headquarters location, completed in approximately one week.
– Foreign Exchange Act-related matters: There are deadlines for notification submission and review periods (within 30 days).

Comparison with a Branch

Characteristics	Subsidiary	Branch
Legal Personality	Independent entity	Foreign company entity
Scope of Liability	Limited to invested capital	Full parent company liability
Establishment Procedures	Articles authentication, capital deposit, etc.	Relatively simple
Taxation	Autonomous taxation	Parent company taxation

In the case of a branch, it is treated in Japan as an integral part of the parent company and lacks autonomy. Thus, it can be created through a simpler process than a subsidiary but may often be disadvantaged in terms of taxation and credibility.

Tax Aspects and Minimum Capital Requirements

– Subsidiaries are generally subject to corporate tax and local taxes according to Japanese standards. For “large capital” companies (e.g., over 500 million yen), they may be subject to audit requirements and additional taxes.
– Although no minimum capital requirement is imposed, setting a sufficiently high amount often helps improve credibility.

For all these aspects, collaboration with experts is essential.

Distinctions Between Subsidiaries and Branches in Japan

When a foreign company enters the Japanese market, choosing between a subsidiary and a branch is an important decision. There are many differences between the two, particularly in terms of legal status, taxation, and scope of liability.

Legal Status

A subsidiary is a company with independent legal personality established according to Japanese laws. It typically takes the form of a stock company or limited liability company. In contrast, a branch is a department of the foreign company and does not possess independent legal personality.

A subsidiary is created based on the Japanese Companies Act, requiring creation of articles of incorporation, capital deposit, and registration of establishment, while a branch must be registered as a branch of a foreign company, but the procedures are relatively simple.

Legal Liability

As an independent entity, the subsidiary assumes its own debts and legal liabilities. The parent company’s liability is limited to its capital contribution. In the case of a branch, the foreign parent company assumes all legal responsibilities arising from its operations.

For example, Toyota Motor North America, Toyota’s American subsidiary, operates as an independent entity, and its debts do not affect Toyota’s headquarters.

Tax Treatment

A subsidiary is taxed on its worldwide income as a Japanese entity. In the case of a branch, only income generated in Japan is taxable.

The subsidiary maintains independent accounting and prepares its financial statements according to Japanese accounting standards. The branch is considered part of the parent company’s accounting, but records compliant with Japanese accounting standards are necessary for Japanese tax filing.

The 2023 tax reform strengthened the foreign subsidiary tax regime (CFC regime), introducing a stricter framework to include foreign subsidiary income in the Japanese parent company’s income.

Scope of Business Activities

As an independent entity, a subsidiary can conduct an extensive range of business activities. A branch can generally conduct similar activities, but in certain regulated industries, activity deployment through a branch may be limited.

For example, in the banking sector, creation of a Japanese entity (subsidiary) is generally required. Major Japanese banks like Mizuho Bank or MUFG Bank often establish local subsidiaries when expanding overseas.

Financing

As an independent entity, a subsidiary can raise funds by issuing shares or bonds. A branch will depend on funding injections from the parent company.

SoftBank Group’s American subsidiary, SoftBank Group Capital Limited, independently issues bonds to raise funds.

Strategic Business Considerations

• Market Reliability: The Japanese market tends to view subsidiaries as more reliable than branches, which can be an advantage in establishing relationships with business partners and customers.
• Decision-Making Autonomy: As an entity with its own management, a subsidiary can make decisions quickly and in alignment with the local market, while a branch must follow parent company directives, which can slow decision-making.
• Ease of Withdrawal: A branch is easier to close than a subsidiary, for which liquidation procedures can be complex.
• Brand Image: A subsidiary can easily create its own brand, while a branch directly uses the parent company’s brand.

Recent Legislative Changes

The 2023 revision of the Companies Act introduced an electronic provision system for general meeting documents, influencing subsidiary management. Starting April 2024, the electronic invoicing system will be implemented, requiring adequate response from both subsidiaries and branches.

When a foreign company considers entering the Japanese market, the choice between a subsidiary and a branch should be determined by considering various factors such as business size, sector, and long-term strategy. It’s essential to carefully examine legal and tax impacts and consult experts for advice.

Legal Considerations for Foreign Companies Operating in Japan

The regulatory, registration, and compliance requirements that foreign companies must adhere to when expanding their operations in Japan are detailed below.

1. Impact of the Foreign Exchange and Foreign Trade Act (FEFTA)

FEFTA is the primary legislation regulating foreign investments made in Japan. From national security and economic policy perspectives, under certain conditions, prior notification or post-facto reporting is required.

• Prior Notification: When investing in or acquiring shares in designated sectors (communications, aviation, defense, etc.), a 30-day review by the Minister of Finance and competent minister is necessary. Notably since the 2019 revision, certain strategic companies must notify for a 1% or greater stake acquisition.
• Regulation by Specific Sector Laws: The Telecommunications Business Act, Aviation Act, etc., also limit foreign capital share in certain industries to prevent excessive dependence on elements critical to national security.

2. Foreign Ownership and Joint Ventures

In Japan, establishing a 100% foreign-owned subsidiary is often possible, but certain industries (such as telecommunications and broadcasting) impose restrictions on voting rights and management composition. On the other hand, the joint venture format is effective for establishing collaborative relationships with local partners, although even in this case, strict contract drafting and compliance with applicable laws are required.

3. Tax Obligations

Foreign companies are subject to corporate income tax on income generated in Japan. In the case of a branch, only Japan-source income is taxed, while for a subsidiary, all its income is subject to taxation. Additionally, attention should be paid to consumption tax and the withholding tax system.

4. Technology Transfer and Data Protection Regulation

Technology transfer is subject to strict control under the export control system. For example, exporting advanced technologies requires an authorization application process. Moreover, the Act on the Protection of Personal Information (APPI) defines in detail consent requirements and appropriate management methods during data transfers, thus requiring multinational companies to prepare compliance strategies.

5. Choice of Legal Form: Branch vs Subsidiary

• Branch: Simple procedure but limited business scope. Unlimited parent company liability.
• Subsidiary: Independent legal entity offering greater freedom. However, establishment procedures are complex and maintenance costs may increase.

6. Recent Examples of Legislative Revisions and Reforms

In recent years, as part of COVID-19 response measures, FEFTA revisions were implemented to strengthen oversight of acquisitions in the medical device sector. Additionally, strengthened antitrust policies to promote digital market competition have also been emphasized.

In this reform context, it’s essential to enhance forecasting capabilities for new business risks. Specific challenges include the risk of unexpected authority intervention due to uncertainty and increased procedural burden requiring specialized knowledge, hence the recommendation to seek expert assistance.