Company troubles in Japan 🇯🇵

Japanese taxes on foreign capital gains

First up, the individual filing tax deadline in Japan of March 15 is coming up! Hope everyone is smoothly progressing towards filing by this deadline. I wrote about some useful general tips for filing in my last post. I did learn some “fun” things though about the tax implications of receiving and selling foreign RSUs as well as other foreign investments:

• Foreign capital gains / losses affect your taxes, even as a non-permanent tax resident and even without remitting the money to Japan. The exception to this is if you are a non-permanent resident and you acquired the shares of a publicly listed company before you moved to Japan. If the company is not listed, it doesn’t qualify under this exemption as foreign-sourced income and you must pay tax. For more details, see this article.

• Even if there was no gain in foreign currency terms for a stock sale, if there was a change in the value denominated in Japanese yen using the exchange rate on the dates of acquisition and sale, this is taxable. For example, if I acquired a stock for $100 USD when the USD/JPY was 100 JPY/USD, then later sold the same stock for $100 USD when USD/JPY is 150 JPY/USD, you would pay tax on the 15000 - 10000 = 5000 in JPY capital gains even though the USD capital gain is $0.

• Foreign exchange gains/losses as well as cryptocurrency gains/losses are counted as miscellaneous income and are taxed at marginal rates, not the lower capital gain rates. Losses cannot be deducted from the rest of your income. For an illustration on how the different types of income can combine or not, see this chart from the NTA. Also see this Reddit post in r/JapanFinance by one of the gurus there:

I am “enjoying” the opportunity to earn tons of credit card points from paying my taxes via credit card though. 💸 Of course, for official tax advice I would seek out an accountant, such as from this list of English speaking accountants in Japan.

Table of Contents

• Lessons learned when forming a company in Japan

• Lessons learned when forming a company in Japan

  • Structure with foreign members

  • Structure with foreign members

  • Form the company before engaging in any transactio …

  • Registered Capital

  • Bank accounts

  • 25% rule US, Specified persons

• Conclusions

Lessons learned when forming a company in Japan

I wrote previously about forming a GK (合同会社), the equivalent of an LLC in Japan. It’s been half a year down the line, and we’ve certainly run into some hiccups along the way. If I had to start over with my company formation process in Japan, this is what I would do. Note that none of this is official legal advice, you should consult a judicial scrivener (司法書士) that is familiar with Japanese corporations for official advice.

Structure with foreign members

It turns out having members not living in Japan in your GK complicates some processes, especially when you need to get some form of consent. For members living in Japan, if official consent is needed then a stamp and the associated seal certificate is generally enough. While we were able to form the GK just with signatures for the foreign members, we ran into some procedures where official consent was needed, and for foreign members that is generally a notarized affidavit.

For the foreign member who was to become a Representative Member (代表社員), we needed to get that notarized, and initially he was asked to go to the Canadian embassy, but they said no for some reason, and we ended up going to the Shibuya public notary which ended up being acceptable.

The registered address in the Articles of Incorporation (定款) matters. One of our members actually moved to Japan after formation, but because his address was still registered abroad, instead of allowing his registered stamp and seal certificate, he still had to go to a notary to show official consent for some procedure.

So for all non-Japanese resident members, I would actually form an offshore company and then have the offshore company be a member of the GK. A non-natural person like a company requires someone to be appointed to represent it, this role is called a shokumu shikkosha (職務執行者). Though technically the shokumu shikkosha doesn’t have to reside in Japan, it would smoothen procedures if they did live in Japan, due to the consent process.

Getting consent for transactions between a member and the company

We ran into a funky situation buying a house for the purpose of the company, as we started negotiations and signed the real estate contract before the company was formed. Thus, the real estate contract was actually signed under my name. When it came time to do the title transfer from the seller to the company, we needed to do a procedure to transfer the buyer in the real estate contract from my name to the company’s name.

However, due to default language in the Companies Act as well as no overriding language in our Articles of Incorporation (定款), we were required to get written consent from every member of our company, which involved getting notarized affidavits from all of our members. The lawyers refused to accept a Japanese public notary or an online notary, forcing all foreign members to go to our respective consulates and embassies and pay expensive fees to get an affidavit notarized. The reasoning was as follows:

I’m assuming the law defaults to this to prevent members from unilaterally conducting conflict of interest transactions. However, this procedure was very time consuming, and expensive. If you are not too concerned about rogue members and want to avoid the consent process for these transactions, then you could add the following language to your Articles of Incorporation (定款) (have your judicial scrivener / 司法書士 translate this to Japanese!)

Form the company before engaging in any transactions

We also could have avoided the above issue if we had just formed the company first before signing the real estate contract. Then no transfer of buyer process would have been needed.

Registered Capital

In terms of registered capital, there’s no actual need to incorporate with the maximum amount of initial capital you need, as you would just pay more tax for the additional registered amount. The reasons that companies incorporate with extra registered capital are either to give an appearance of legitimacy or to fulfill the business manager visa requirements. A registration tax is mandatory when a company is registered, which is 0.7% of the initial capital, minimum 60,000 JPY for a GK and 150,000 JPY for a KK. Thus for a GK, if you put in over 8,571,428 yen you are paying extra registration tax.

Capital can be added later without tax, the tax is only on the initial registered capital. You could technically change the registered capital by amending the Articles of Incorporation (定款) but there would be fees involved and you would probably have to pay more tax. We had one member put in 5,000,000 JPY to qualify for the business manager visa, but there was no need to put in too much additional capital over the amount that would cost more in registration tax.

According to my research (see Reddit), members can add in extra money over the registered capital to the company without registration tax. This would be logged in the company books as a company debt to members (役員借入金). The good part is that this debt has no required fixed repayment date or interest to repay. Since there’s a 21% tax on dividends to members, but repaying a debt is not taxed, this could also be a way to pass profit to members without tax, up to the amount owed to them. Obviously, you should seek out the advice of an accountant to see if this strategy will work.

Bank accounts

This article from freee (Japanese only) compares the relative pros and cons of various types of business banking accounts. The advice we got was to get a net bank for day to day operation and cheaper fees, then potentially later pair with a regional bank in the area we are doing business to get local business support and possibly loans. We decided to go for a net bank first for ease of use and cheaper interbank transfer fees. Unfortunately it seems like most business banks don’t have any way of having some number of interbank transfer fees waived per month, aside from SBI Net Bank, which runs various promotions to waive transfer fees for an initial time period.

We wanted to set up a company bank account eventually as continuing to run company business through my personal bank account makes things messy and banks don’t like it.

It seems like to open a bank account, most banks want some proof of your business operating, your Articles of Incorporation (定款) are not enough. WE were deciding between SBI Net Bank and GMO Aozora, and decided to first go for GMO Aozora as they support Pay-easy (ペイジー) while SBI does not. However, they wanted proof of our business in various ways, such as a website with our address showing we’ve been operating for at least 3 months, a business permit, contracts or invoices to and from the company, etc. Ultimately they decided they wouldn’t open an account for us at this moment for unknown reasons, possibly related to me being a US person as part of the management of the company. We are currently in the process of trying to create an account with SBI Net Bank and will report back on if that is successful or not.

Reporting “effective controllers” (実質的支配者)

There’s the concept of an “effective controller” (or 実質的支配者) for companies, which also applies to Japan. When establishing financial accounts for companies, these “effective controllers” need to be declared, especially if they have American nationality or Green Cards for FACTA compliance. This article explains more on how to determine who is an “effective controller”, but my understanding is:

• Anyone who exceeds 50% ownership of the company is default considered an “effective controller.”

• Otherwise, members who exceed 25% ownership of a company with no person owning more than 50% as in the case above are considered “effective controllers.”

• Otherwise, if no members qualify under the ownership percentage requirements, members who execute the business (業務を執行する社員) such as Representative Members (代表社員) are considered to be “effective controllers”

In our case, we have 4 members in our company, so no one exceeds 25% ownership. However, I am a Representative Member (代表社員) as well as a US person, so this fact needs to be reported on various forms when establishing a bank account.

Conclusions

Running into all these complications with Japan’s tax code as well as company structuring was certainly a headache. But hopefully I can reduce some of the headache for people. Feel free to reach out [email protected] if you have any questions, though for any official legal or financial advice I would contact an accountant or a judicial scrivener who is familiar with Japanese companies! Remember, you can also support this publication by becoming a paid subscriber or a Patreon.