When a foreign company starts doing business in Japan, two common options are a Japan branch and a Japan subsidiary. For companies entering Japan with a small local team—often just one to five people—the choice can have a meaningful impact on legal liability, accounting, tax compliance, and dealings with the overseas head office or parent company.
The decision should not be based only on setup cost. The more important question is how each structure will work after the Japan operation is up and running.
Key differences: Japan branch vs. Japan subsidiary
| Japan Branch | Japan Subsidiary (KK / GK) | |
|---|---|---|
| Legal status | Part of the foreign head office | Separate Japanese legal entity |
| Liability | The foreign company is responsible for the Japan branch | Shareholder liability is generally limited to the amount invested |
| Capital | No separate share capital for the branch | Capital / equity contribution required |
| Representative in Japan | At least one representative in Japan must have an address in Japan | No equivalent statutory requirement that at least one representative have an address in Japan |
| Japanese taxation | Taxable in Japan as a foreign corporation on income attributable to its Japan PE | Taxable in Japan as a domestic corporation |
| Head office / parent transactions | Same legal entity, but certain internal dealings are recognized for tax purposes | Transactions between separate legal entities |
| Profit repatriation | Repatriation of branch profits to the overseas head office (no dividend withholding tax) | Dividends to the foreign parent company (generally subject to Japanese withholding tax, with possible treaty reduction or exemption) |
1. The starting point: same legal entity or separate legal entity?
A Japan branch is part of the foreign company itself. Once the required foreign-company registration is completed, the branch can conduct business in Japan, but the foreign head office remains legally responsible for the Japan operation.
A Japan subsidiary—typically a Kabushiki Kaisha (KK) or Godo Kaisha (GK)—is a separate Japanese legal entity. The foreign parent is generally liable only up to the amount of its investment.
There is also an important difference in representative requirements. A foreign company operating through a Japan branch must appoint a representative in Japan, and at least one such representative must have an address in Japan. A Japanese subsidiary does not have the same statutory address requirement for its representative.
A branch has no separate share capital. A KK or GK requires a capital or equity contribution, with the practical amount determined based on the business plan, funding needs, and any licensing requirements.
2. A branch is not necessarily simpler for accounting and tax
A Japan branch is part of the overseas head office, but for Japanese corporate tax purposes it is generally treated as a Permanent Establishment (PE), and Japan taxes the income attributable to that PE.
In calculating PE-attributable income, the functions performed, risks assumed, and assets used by the Japan branch and the overseas head office must be considered. Certain internal dealings between the head office and the branch may also need to be recognized and valued on an arm's-length basis.
For example, this may be relevant where the head office provides support to the Japan operation or where the Japan branch uses systems, assets, or other resources managed by the head office.
Shared head-office costs—such as IT, accounting, tax, and legal expenses—may also need to be allocated to the Japan branch using a reasonable allocation method. Supporting documentation for the nature of the costs and the allocation basis should be maintained.
So, a branch is not automatically simpler just because it is part of the same legal entity. PE-attributable income, internal dealings, head-office cost allocations, and supporting records can all become important in practice.
For more detail on Japan branch tax filing, PE-attributable income, internal dealings, and head-office cost allocation, see our guide onwhether a Japan branch needs to file a corporate tax return.
3. A subsidiary deals with the parent as a separate entity
A Japan subsidiary is legally separate from its foreign parent. Transactions with the parent are therefore accounted for as transactions between separate entities.
Examples include management or support services from the parent, software or other licensing arrangements, and intercompany financing. Depending on the nature of the transactions, Japanese transfer pricing rules may also need to be considered.
In practical terms, a branch requires management of PE attribution and internal dealings, while a subsidiary requires management of related-party transactions with the foreign parent.
4. How does profit repatriation differ?
Japan branch
A Japan branch and its overseas head office are the same legal entity. Branch profits can therefore be repatriated to the overseas head office without being treated as a dividend distribution and without dividend withholding tax.
However, the amount remitted to the head office and the amount of income taxable in Japan are separate issues. Japanese taxable income is determined based on the income attributable to the Japan PE—not simply on how much cash is transferred overseas.
Japan subsidiary
A common way for a Japan subsidiary to distribute after-tax profits to its foreign parent is by paying a dividend.
Dividends paid by a Japanese company to a foreign parent are generally subject to Japanese withholding tax. For ordinary dividends on unlisted shares, the domestic-law withholding rate is generally 20.42%. However, an applicable tax treaty may reduce the rate or provide an exemption if the relevant conditions are met.
The actual treatment therefore depends on factors such as the parent company's jurisdiction, ownership percentage, holding period, and the applicable treaty requirements.
5. Which structure should you choose?
There is no fixed rule such as "use a branch below a certain headcount" or "form a subsidiary once sales reach a certain level." For a company entering Japan with a team of one to five people, the following questions are often more useful:
When considering a Japan branch
- Is the foreign head office comfortable assuming direct legal responsibility for the Japan operation?
- Can the company appoint a representative in Japan who has an address in Japan?
- Can head-office / branch internal dealings and head-office cost allocations be properly managed?
- Is the branch structure suitable for the contracts and business activities planned in Japan?
When considering a Japan subsidiary
- Does the group want the Japan business to operate as a separate legal entity?
- Is it important to separate the legal liability of the Japan business from the foreign parent?
- Can transactions with the foreign parent be managed as intercompany transactions?
- Has the group considered Japanese withholding tax and treaty treatment for future dividends?
Neither structure is always better. The right choice depends on how the Japan business will operate and how the group wants to manage the relationship between Japan and the overseas head office or parent company.
6. Can you convert a Japan branch into a subsidiary?
A Japan branch cannot simply be converted into a KK or GK through a statutory corporate reorganization.
If the group later decides to operate through a subsidiary, it will generally need to establish a new Japanese company and separately consider the transfer of the relevant business, contracts, assets, liabilities, and the closure of the branch.
For that reason, it is better not to assume that a branch can later be switched into a subsidiary with a simple filing.
Conclusion: think beyond the initial setup
The basic difference is simple: a Japan branch is part of the foreign head office, while a Japan subsidiary is a separate Japanese legal entity.
That difference affects legal liability, representative requirements, PE-attributable income, internal dealings, related-party transactions, and the tax treatment of profit repatriation.
Especially when entering Japan with a small team, it is worth looking beyond the initial setup cost and considering how accounting, tax compliance, and head-office reporting will work after the business starts.
You set up the entity once. Accounting and tax continue every year.
How CKO can help
CKO Accounting & Tax Office supports foreign companies entering Japan withaccounting and tax setup for Japan branches and subsidiaries, bookkeeping and monthly accounting, Japanese tax compliance, and reporting to overseas headquarters.
We can also help with practical post-setup issues such as PE accounting, head-office cost allocations, intercompany transactions, and Japanese withholding tax on payments to foreign parent companies.
This article is for general information only and does not constitute legal or tax advice. The appropriate treatment depends on the facts and circumstances, including the nature of the business, the location of the foreign head office or parent company, transaction structure, and any applicable tax treaty.