Doing business in Japan – Part 1

Tokyo
Tokyo

A guide to do business in Japan

In this blog, we’ll go through the legal system, foreign investment, currency rules and perks, and company vehicles. An overview of competition law, data security, and product liability and safety legislation, including redundancies and mass layoffs, is also available on the blog. There are also comprehensive summaries on taxation and tax residents, copyright, trademarks, and registered and unregistered design rights.

Overview

1. The main recent developments impacting your company

The Companies Act enacted in 2005 was first revised in 2014. It has undergone several revisions since then. The latest amendment came into force in 2021.

  • Improvement of Japanese corporate governance.
  • Questions about parent-subsidiary relationships.
  • Improvement of M&A transactions.

The amendments had the following impact:

  • A listed firm with no external manager must now clarify why the designation of an external manager is not suitable for the company.
  • Another governance structure is available which establishes an audit and supervisory committee instead of the statutory auditors.
  • A company must issue shares with a third-party allocation, which would alter the ownership of the corporation, through consent of the shareholders.
  • A parent company shareholder can, on behalf of a wholly owned subsidiary, take double derivative actions in order to exercise the liabilities of a fully owned subsidiary director.
  • In limited situations in which there is a breach of relevant legislation, a shareholder of a company may apply for a judgment on a corporate combination transaction (merger, spinoff, swap or share transfer). Before, A shareholder can only challenge the legitimacy of a company contract after the transaction has been concluded.
  • A 90 percent shareholder could cash out minority shareholders, which was always a required prerequisite, without receiving approval in the shareholders’ meeting.

In addition, on 1 June 2015, the Tokyo Stock Exchange adopted the Code of Corporate Governance, which was established jointly by the Financial Services Agency and the Tokyo Stock Exchange. It now extends to Japanese public firms (excluding foreign issuers). In the Corporate Governance Code, a variety of governance standards are set and listed entities are expected to “comply or explain” the principles.

One of the principles is the use of international administrators, and it is now advisable to include at least two external managers. Many Japanese listed corporations have expanded the number of foreign directors in reaction to the Corporate Governance Code. The Financial Services Department has recently released (in 2014) a management code that requires institutional investors to clarify how they perform their portfolio and investor obligations.

Significant tax changes were also enforced in 2017 and further reforms are done in 2018, which will impact M&A in Japan. Certain of these reforms include:

  • Cash-out treatment or share-exchange where at least two-thirds of a combined outgoing stock of the vanishing company or affiliate company are owned by the remaining company or parent company. Before the tax reform, cash-out mergers or stock exchanges in Japan were rarely used so target funds could be taxed. Tax postponement is now allowable as a result of such transactions, including part of the business of a corporation and the transfer of the stock of the business to shareholders in kind.
  • An proposed update to tax regulations in early 2018 would presumably allow for a deferment of share-for-share bidding offers of capital benefit income.

The update to the Civil Code was adopted on 2 June 2017 and it came into effect on 7 September 2021. This reform seeks to update the Civil Code introduced in 1896 to incorporate modern commercial activity and other societal developments, with a major effect on Japanese enterprises in some industries.

On 1 October 2017, the revised Foreign Exchange and Foreign Trade Act came into law. The following proposed rules contain the amendments:

  • Any foreign investor purchasing shares in non-listed firms involved in such national security companies (e.g. weapons, aircraft, spacecraft, nuclear reactors) from another foreign investor today is subject to a pre-transaction reporting obligation. 
  • A foreign investor who purchases any securities in violation, under the Foreign Exchange and Foreign Commerce Act, of pre-transaction requirements can be subject to a remedial order, including an order for the selling of any shares bought.
  • Infringement of export controls has increased judicial and regulatory penalties.

Legal system

1. The facts the legal system is based on

Japan has a system of civil law, while some regulatory regimes like securities regulations, are modelled on regulations in common law jurisdiction. No federal structure remains and the Supreme Court of Japan unites both judges.

Foreign investment

2. Restrictions on foreign investment

There is no regulation prohibiting foreign shareholdings in Japanese companies. However, in some sectors, such as broadcasting, telecommunications and aviation, exemptions occur with a set international maximum equity ratio.

Global investment can be subject to monitoring provisions prior to or during purchases under the Foreign Exchange and International Trade Act. The responsible ministries must, inter alia, be aware of any acquisition of the following via the Bank of Japan:

  • Shares of Japanese nationals in non-listed companies.
  • Shares of non-listed companies active in national security businesses (for example, the manufacture of weapons and nuclear reactors).
  • 10% or more shares of the listed companies.
  • In most instances, there is just a post-transaction audit that must be made shortly after the month in which the transactions are made by the fifteenth day of a month.

In some situations, pre-transaction reports and government screening are necessary, among other circumstances:

  • When a Japanese company is operating in industries like  weapons or nuclear technology, petroleum or agriculture.
  • If the investment comes from a nation in which Japan has not signed a treaty on inward direct investment.
  • Any inward direct investments made from Iran.

In these situations, there will be a waiting period of 30 days, normally reduced to 2 weeks when the investment is not national safety-related.

3. Limits on companies in those nations or areas

Japan has imposed economic sanctions on several countries, including North Korea and Russia, prohibiting certain trading activities.

4. Regulation of exchange control or currencies

Payments made or received by Japanese residents to or from foreign residents or non-residents within Japan must be reported under the Foreign Exchange and Foreign Trade Act.

5. Available investment grants or benefits

  • In November 2012, the Promotion Act for Japan as an Asian Business Hub was introduced in the hopes of attracting international companies to research and development centers. This law provides several advantages for international corporations to set up shop in Japan, including:
  • Tax breaks on income.
  • Patent fee reduction.

A few municipal governments also give distinct incentives to overseas businesses. One of the government’s major announcements in 2015 was “Promoting Foreign Direct Investment into Japan,” and further incentives are likely to be made available to foreign investors in the future.

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