Foreign Company Regulations in Japan

Published on October 31, 2025 and written by Cyril Jarnias

Japan, recognized for its robust economy and technological appeal, presents a complex regulatory framework for non-resident foreign companies seeking to establish themselves there. While the country aims to attract more international investment, understanding and mastering the current rules becomes essential to successfully navigate this dynamic market. These regulations, often perceived as rigid, are designed not only to protect local economic interests but also to encourage corporate transparency and accountability. Through this article, we will unveil the nuances of this legislative system, highlighting key challenges and opportunities available to foreign players wishing to penetrate the Japanese market.

Understanding Tax Rules for Non-Resident Companies in Japan

Definition and Assessment Criteria for Non-Resident Company Status Under Japanese Law

A non-resident company refers to a foreign legal entity that has neither its head office nor principal place of business within Japanese territory. This assessment is based on the principle of the location of the head office and is determined from the company’s registration or articles of incorporation. Furthermore, for tax purposes, an individual without a domicile or residence in Japan for more than one year is also treated as non-resident.

Domicile is the center of life, while residence represents the actual place of stay, with these concepts determined by objective facts. In the case of countries that have concluded a tax treaty, non-resident status is determined individually between these countries. For companies, not only the location of the head office is considered, but also the place of business management and incorporation, with these being considered holistically, and the final decision potentially subject to bilateral consultations.

Main Tax Obligations of Non-Resident Companies

• Tax Liability – Income earned by non-resident companies within Japanese territory (Japanese-source income) is subject to taxation. However, in the absence of a permanent establishment (PE) in Japan, a large portion of income is not taxable.
• Withholding at Source – In principle, Japanese-source income is subject to withholding for income tax and the special reconstruction tax. If a PE exists, it is necessary to declare and pay taxes on income attributable to that establishment.
• Local Taxes – For the supply of goods or services including local tax, it is mandatory to declare and pay to local authorities.
• Filing Procedures – Under Japanese tax law or tax treaties, it is necessary to submit a final tax return before the payment deadline. Even when applying exemption measures, submission of relevant documents is required.

Double Taxation Avoidance Mechanism and Tax Treaties

• Tax treaties (Double Taxation Agreement: DTA) exist between Japan and many countries, so tax is generally levied in only one of the two countries.
• In cases where applying the tax treaty allows for a reduction or exemption, it is necessary to submit a “tax treaty notification” to the competent authorities through the beneficiary.
• For example, dividends or royalties may be subject to a reduced withholding rate under certain conditions.

Available Exemption System and Documentation Requirements

For foreign legal entities with a PE, a special system for issuing an “exemption certificate” is available. After presenting this certificate, it is not necessary to withhold tax on subsequent payments during the validity period:

• Rent, real estate lease
• Royalties, compensation for transfer of rights

However, a rigorous response including updating formalities is essential. If there is a history of fraud, there is a risk of losing qualification.

Typical Example: Simulation of Impact Based on Presence or Absence of PE

Company A (headquarters abroad):

1. PE not established → Permission to deduct profits from market research activities
2. Subsidiary established → Obligation for full declaration due to consistency of economic value creation system

Registration of Foreign Companies: Process and Requirements

Important Steps

1. Creation and Certification of Company Articles:
   • When establishing a company in Japan, it is necessary to draft articles of incorporation and have them certified by a notary.
   • The articles must specify the company name, head office location, business purpose, etc.
2. Appointment of a Representative:
   • A representative in Japan is mandatory. At least one person must have an address in Japan (this also applies to branches).
3. Capital Contribution:
   • Capital is deposited into a bank account by founders or investors, then a certificate of contribution is submitted during the registration application.
4. Obtaining Business Number and Tax Office Declaration:
   • The business number is automatically assigned after registration. Then, tax declarations must be made to the Japanese National Tax Agency or local authorities.
5. Registration Application at Legal Affairs Bureau:
   • Items to be registered include the head office address, business purpose, information of the representative in Japan, etc.
   • Required documents include an affidavit, the original foreign company documents and their translation, among others.
6. Establishment of a Branch or Office (Optional):
   • Even in the case of a branch, it must be registered as an office at the Legal Affairs Bureau. This also includes information about the foreign parent company and announcement methods, requiring particular attention.
7. Obtaining Permits (If Applicable):
   • In certain industries, a permit or license from the administration may be necessary.

Registration Duration and Costs

The typical processing period is approximately 10 days to several weeks. However, this may be extended in case of deficiencies or requests for additional documents.

Cost Examples:

Type of Fee	Amount (in yen)
Articles Certification Fees	50,000 to 100,000
Registration Tax	150,000

Additional fees for experts (such as a notary) may apply.

In Case of Non-Compliance

If registration is not completed within the required timeframe, continuous business activities in Japan are prohibited, and heavy fines may be imposed. Furthermore, in this violation situation, there is a risk of disadvantages in business contracts.

Success Examples and Best Practices

Foreign Company A: chose the subsidiary form (KK). Success factors include establishing a partnership base with a local partner and conducting early market research.

Best Practices:

• Collaboration with a trusted notary or legal consultant
• Using a checklist for preparing necessary documents
• Prior verification of Japan-specific market regulations (such as the Foreign Exchange and Foreign Trade Act).

Impacts of Japanese Regulations on International Businesses

Specific Impact of Japanese Regulation on International Businesses

1. Compliance Requirements
   • In Japan, it is necessary to comply with various laws (e.g., Labor Standards Act, Antimonopoly Act, Consumer Contract Act, etc.) and social standards. In particular, it is also required to meet standards of ethics, morality, public order and good morals.
   • For example, regarding labor standards, foreign companies may be compelled to adapt to strict working hour management and Japan-specific social benefit schemes.
2. Entry Barriers
   • Foreign investment regulations (such as the Foreign Exchange and Foreign Trade Act) are implemented for national security and economic policy purposes. Recent amendments expanded the prior notification target from “more than 10% of shares” to “more than 1%.” These regulations make entry into certain industries (such as pharmaceuticals, advanced medical devices) difficult.
   • Furthermore, in the Japanese market, national standardization rules like JIS (Japanese Industrial Standards) are also important, requiring adaptation to differences with international standards.
3. Tax Policy
   • The principle of corporate independence in transfer pricing regulations poses a challenge to ensuring fairness in transactions between multinational companies. Due to this principle, complex adjustments are necessary, making investment in specialized knowledge and resources essential for multinational companies operating in the Japanese market.

Case Studies and Concrete Examples

Company	Challenge	Implemented Solution
Amazon Japan	Investigation for antitrust law violation in 2017	Revision of contract terms with suppliers and modification of operating policies
Fuji TV	Issue of violating foreign investor voting rights ratio	Creation of a prudent and transparent system for investor relations

Strategic Adaptation by International Companies

1. Strengthening Internal Structure
   • Flexible and continuous measures are implemented to meet Japan-specific requirements, such as conducting compliance training and building internal controls. Creating dedicated teams for certain divisions is also common.
2. Utilizing Partnerships
   • By partnering with local partners, companies compensate for lack of cultural and legal understanding while effectively penetrating the market. This includes various forms, not only manufacturing partnerships but also establishing joint ventures.
3. Introduction of Technological Innovation
   • There is a growing effort to use technological advancements such as AI implementation and to ensure following an adaptive improvement process for gradual changes in related fields.

Future Perspectives and Forecasts

• In the future, development of more rigorous monitoring frameworks related to emerging technological areas (AI, cybersecurity) is envisioned.
• There is also expectation for simplification of export-related procedures following re-evaluation of existing items in free trade agreements/RCEP.