Capitalizing a Japanese kabushiki kaisha

Capitalizing a Japanese kabushiki kaisha

Because of these capitalization amounts, setting up so-called paper companies can become a rather capital-intensive undertaking in Japan.

Kabushiki kaishas have also been the most popular corporate form for American firms. In fact, I've never seen a foreign firm operate as a yugen kaisha. Most of the foreign firms with a direct presence in Japan operate as either branches of the foreign parent, or as KK's. Due to the increased capitalization amounts required to set up a KK, I think there will be a shift to branches in the future.

But if you've decided to go with a kabushiki kaisha, let's see how the KK would be established.

First, capital contributions should be in the form of cash. It is not common to have an "investment in kind" where a patent or similar intangible asset serves as a capital contribution. These are uncommon because a court examiner must be appointed to determine the value of the asset.

To avoid this, in the case of a joint venture, one partner supplies enough cash, in the form of equity or a loan, to the joint venture company. With this cash, the joint venture then buys the asset from the other partner. Note this purchase may generate a taxable gain for the seller.

Preferred shares are allowed to be issued, but very few Japanese firms issue preferred shares.

Once a kabushiki kaisha is established, the company may receive equity infusions or capital increases from the parent. Interest on loans is deductible for the subsidiary, but interest payments to the parent are subject to a 10% withholding tax. Repayment of principal to the parent is tax free.

Note that because Japanese companies generally have higher debt to equity ratios than similar companies in America, higher leverage is acceptable in Japan.

To establish the KK, articles of incorporation should be drawn up and notarized. Note Japanese firms usually do not have bylaws, because the articles themselves are rather comprehensive.

Next the company's sponsors subscribe to shares and then transfer the capital funds to a bank account. Because several sponsors must be in Japan to handle incorporation procedures, a resident attorney and his or her associates usually serve as the sponsors. These initial sponsors then transfer their shares to the foreign firm wishing to set up the company.

A shareholder's meeting is then convened and directors and the auditor are selected. At least one of the directors is selected as the representative director, and one representative director must be a resident of Japan. Finally, the company and its directors must be registered with the proper authorities.