Japan's Inward Direct Investment Management System

• Basis Regulations: Foreign Exchange and Foreign Trade Act (hereinafter referred to as the Foreign Exchange Act)

  • URL: https://elaws.e-gov.go.jp/search/elawsSearch/elaws_search/lsg0500/detail?lawId=324AC0000000228

• Definition: Refer to the URL below (Foreign Exchange Act Q&A in-house direct investment, specific acquisition 1p)

  • URL: https://www.boj.or.jp/about/services/tame/faq/data/tn-qa.pdf

• Amendment of the law (June 2020)

  • URL: https://www.boj.or.jp/about/services/tame/faq/data/t_naito.pdf

  • Changes: To strengthen national security and promote safe investment, Introduction of a pre-reporting exemption system (applied according to foreign finance departments, general investors, and items) Strengthening pre-review responses (10% → 1% or more based on reporting)

• Regulatory Method: Foreign Exchange Act in terms of stability guarantees, it is mandatory for some industries to report in advance when foreign investors make direct inward investments
  In addition, if the results of the examination are necessary, the opinions of the Council, such as customs duties and foreign exchange, may be heard and the details of the investment may be changed or recommended and ordered to be suspended
  (Articles 26 and 27 of the Foreign Exchange Act)

  • (Core industries) Reporting required through preliminary screening

  • Exemption from prior reporting (designated industries other than core industries) and follow-up reporting required

• Subject of examination: Ministry of Finance and Office of Business Administration

• Target fields and industries: Regulation of weapons and energy projects from the perspective of national safety and public order, etc.

• Penalties: imprisonment for not more than three years or a fine of not more than 1 million yen (if exceeding 1 million yen, not more than three times the object) in the case of non-reported investment, etc.

Investment Declaration Procedure

• Preliminary report

  • A preliminary report must be applied to the Minister of Finance and the Minister of Business via the Bank of Japan in a form determined by a direct investment order within six months of the date of performing the transaction or action
    (Article 27, Paragraph 1 of the Foreign Exchange Act, Article 3, Paragraph 3 of the Direct Investment Order)
    The number of submissions is +2 from the Minister of Finance + the Minister of Business Administration (Direct Investment Order Article 3, Paragraph 3).

  • The pre-report of inward direct investment cannot be carried out until 30 days have elapsed after the Bank of Japan accepted the report to examine whether it interferes with Japan's safety (called the prohibition period)
    However, the prohibition period is usually two weeks (Article 2, Paragraph 2 of the Foreign Exchange Act, Article 10, Paragraph 2 of the Direct Investment Order).

  • Some laws were revised to promote administrative procedures using ICT technology. 　　Pre-reporting of in-house direct investment submitted to the Bank of Japan will be possible online through the Bank of Japan's foreign exchange law online system.

  • URL: https://www.boj.or.jp/about/services/tame/t-denshi/index.htm

• Post-Mortem report

  • The post-report must be applied to the Minister of Finance and the Minister of Business via the Bank of Japan by the 15th of the following month (if the 15th of the following month is a holiday, the previous business day).(Article 55(52) of the Foreign Exchange Act, Article 6(31) of the Direct Investment Order)
    In addition, the number of submissions shall be prepared by the Minister of Finance + the Minister of Business (Direct Investment Order 6, Paragraph 2).

Definition of foreign investors

• A nonresident individual

• A corporation or organization established in accordance with foreign laws or regulations, or a corporation or organization based in a foreign country

• Where the voting rights ratio directly or indirectly held by a person falling under or exceeds 50%

• Where a majority of members or related members who hold 50% or more of the investment ratio of a union or a similar organization are specified foreign investors

• In corporations and organizations (i.e., individual non-residents have a majority of executives or executives with representative authority investment incentives

The Japanese central government's preferential treatment for foreign-invested companies currently does not exist

• There is nothing specialized in foreign-invested companies, but there are various incentives that foreign-invested companies can also receive:
  「 Preferential tax measures under the Local Base Enhancement Tax System

  • URL: https://www.chisou.go.jp/tiiki/tiikisaisei/sakusei.html

• Foreign companies with headquarters functions in 23 wards of Tokyo can receive preferential treatment from 23 wards of Tokyo if they open and expand headquarters functions in local cities other than Tokyo (some areas other than Tokyo).
  ※In the case of opening and expanding the functions of the headquarters in the provinces

• Facility investment tax cut (office tax cut)

  • Target: Buildings, building accessories, and structures of specific business facilities (head office functions)

  • Acquisition price: 25 million yen or more (small and medium-sized enterprises 10 million yen or more)

  • Tax measures: 15% special amortization or 4% tax deduction for the acquisition price of specific business facilities (in the case of expansion-type projects)

• Employment promotion tax:

  • Tax credit of up to 900,000 yen per employee increase

  • Application requirements have been eased since 2018

Among the incentives for foreign-invested companies in Japan, special zones, sandbox systems (demonstration systems such as new technologies), R&D taxation, preferential treatment for introducing high-level human resources from foreign countries, There are incentives related to disaster rehabilitation support.

※ Examples of incentives

• Drug Development Venture Ecosystem Enhancement Project

• Maintenance projects such as biopharmaceutical manufacturing bases to strengthen vaccine production systems

• Development of local data center locations

• Research and development project to strengthen the foundation of post 5G information and communication system

• Securing a Domestic Production Base for Advanced Semiconductors

• Subsidies to promote the introduction of clean energy automobiles and infrastructure

※ For more information, see the Ministry of Economy, Trade and Industry's "Incentives for Businesses Available to Foreign Companies" at https://www.meti.go.jp/policy/investment/index.html

On the other hand, in the case of local governments, there is preferential treatment only for foreign-affiliated companies.

※ Examples of incentives specialized in foreign-invested enterprises by local governments

• Ibaraki Prefecture "Ibaraki Prefecture Subsidies for Foreign Subsidiaries, etc."

  • URL: https://www.invest.indus.pref.ibaraki.jp/

  • Subsidized expenses incurred in establishing a base (market research expenses, registration expenses, etc.) within 1/2 (within 2 million yen)

  • Subsidized within 1/2 (within 2.4 million yen) of the rent of the office, etc
    within 12 months from the commencement of the lease

  • Subsidized R&D expenses (labor expenses, outsourcing expenses, consumables expenses, depreciation expenses, etc.) within a quarter (within 2 million yen)

• Kanagawa Prefecture "Select Kanagawa NEXT Corporate Attraction Promotion Rent Subsidy"

  • URL: https://www.pref.kanagawa.jp/docs/pw3/selectkanagawanext/index.html#menu

  • Rent subsidies for factories, research institutes, offices, etc
    for foreign-invested companies in the prefecture (upper limit of 16 million yen)

• Chiba Prefecture "Rental subsidy for foreign companies"

  • URL: https://www.pref.chiba.lg.jp/rich/gaishi-yuuchi/gaishi-chinryou.html

  • Rent subsidy (one-third of the annual rent or the subsidy limit is lower
    The subsidy limit is 600,000 yen for less than five business workers.1.8 million yen for 5 people or more)

※ For other details, refer to the following URL: "Incentives for JETRO Foreign and Foreign Companies, etc.":
https://www.jetro.go.jp/invest/support.html Restrictions and Prohibitions (Industry)

Basically, it is possible to enter all industries, and in principle, it is reported afterwards
However, some industries separately determined by the Japanese government must report in advance or obtain prior permission
The following industries are subject to pre-reporting:

• Defense-related (weapons, aircraft, etc.)

• Related to military-only cargo (manufacturing of export control products)

• Public utilities (electricity, water supply, broadcasting, etc.)

※ For more information, see URL 1p Foreign Exchange Act Q&A Direct Investment and Specific Acquisition:
https://www.boj.or.jp/about/services/tame/faq/data/tn-qa.pdf (revised in October 2021)

As the industries subject to pre-reporting have become stricter, those that fall under key industries among designated industries need to be reported in advance:

• Industries subject to pre-examination (13 sectors in total): Key industries, including weapons and energy projects, to promote national safety and public order

  • Core industries (1) (applied on June 07, 2020): A total of 12 fields of weapons, aircraft, space, nuclear power, military-only products, cybersecurity, electricity, gas, telecommunications, water, railways, and oil
    https://www.mof.go.jp/international_policy/gaitame_kawase/press_release/kanrenshiryou01_20200424.pdf

  • Core industries (2) (subject to July 15, 2020): Pharmaceuticals and advanced management medical devices
    https://www.meti.go.jp/press/2020/06/20200615001/20200615001-1.pdf

  • Core industries ( (subject to Oct. 5, 2021): Mineral resources
    https://www.meti.go.jp/press/2021/10/20211005005/20211005005-1.pdf

Investment Zone Overview
Special Economic Zones and Free Trade Zones

Japan does not specifically designate areas such as special industrial complexes to attract investment from foreign companies
In general, each local government has created industrial complexes or industrial complexes to attract domestic and foreign companies without a particular distinction
Despite this, special national strategic zones exist.

National Strategic Special Zone



The Special National Strategy Zone, (hereinafter referred to as the National Strategic Zone plays a key role in the growth strategy, the third arrow of the Abe administration's economic policy known as “Abenomics”
It is a system aimed at creating new industries and employment and revitalizing the region by easing regulations such as medical, agricultural, and urban development only in the special zone, and has established itself as a secret card to break through rock regulation (meaning difficult to innovate regulations).

• The National Strategic Special Zone Act was established in December 2013, and since 6 zones were selected in May 2014, 3 zones were added in August 2015, 3 zones were added in January 2016, and 3 zones were designated in April 2022

• As of April 2022, 64 special zones (urban regeneration, start-up, foreign talent, tourism, medical care, nursing, childcare, employment, education, agriculture, forestry and fisheries, near future technologies and sandboxes, nationwide realization), There are a total of 121 projects, including 57 projects nationwide
  The basic trend is to decide on the project to utilize regulatory reform (zone plan) at the district meeting and acknowledge it by the Prime Minister after an advisory meeting, and 437 projects have been recognized as regulatory reform projects as of March 2023.

Existing special zones (structural reform special zones, comprehensive special zones)

• Even before the Abe administration's national strategic special zone was established, existing special zones such as "structural reform special zone" and "comprehensive special zone" existed in Japan
  The "special structural reform zone" was introduced as a deregulation policy of the Koizumi Cabinet and took effect on April 1, 2003
  As of April 2023, there were 1,402 special structural reform special zone plans (recognition) as a system to promote local projects by recognizing national regulatory special cases that do not fit the situation in each region.
  As of April 2022, there are 1,377 special structural reform zones (recognized) as a system to promote local projects by recognizing special cases for regulations in countries that do not meet the situation in each region.

• On the other hand, the Comprehensive Special Zone」 is a system that concentrates policy resources in areas that take advanced measures based on the government's new growth strategy
  There are two types: the Regional Revitalization Comprehensive Zone (41 regions) aimed at fostering local industries and improving regional power, and the International Strategic Special Zone (7 regions) aimed at fostering industries with international competitiveness.

• The difference between the existing special zone and the National Strategic Special Zone is that all existing special zones are designated by local governments, but the National Strategic Special Zone is subject to zones
  In addition, in the previous special zone, deregulation or exclusion was based on applications from each local government, but in the National Strategic Special Zone, the government-led policy is determined based on proposals from the zone
  The establishment of an advisory council chaired by the prime minister also reflects the color of a state-led special zone.

* Note: Cabinet Office's National Strategic Special Zone website (https://www.chisou.go.jp/tiiki/kokusentoc/index.html)

Direct investment support program for regions

• In May 2018, the Japanese government decided to operate the Regional Direct Investment Support Program (Secretariat: Ministry of Economy, Trade and Industry, JETRO), a strategy to attract foreign companies by local governments with regional characteristics.

• After that, each local government participating in the program provided specific support for attracting activities
  Currently, a total of 30 local governments, including Sapporo (July 2020) and Higashi Hiroshima (March 2021), have participated in the direct investment support program, and each local government is actively seeking to attract unique investment locations.

* Note: JETRO 'Direct Investment Support Program for Regional Targets (https://www.jetro.go.jp/invest/jetros_support/localgovernments/)

Major Regional Areas of Japan

Shizuoka Prefecture



• Number of factory locations: 1st (9 cases), 3rd place (972,000㎡)

• Number of factory locations of foreign companies: No. 1 (41 cases), Site area: No. 1 (554,000㎡)

• Population: 3.77 million

• area: 7,777 km²

• GDP: about 17.44 trillion yen

• industrial land price (per 1㎡, square): 47,600 yen

• Key industries: oil and machinery, electrical machinery, chemical engineering, beverages and food, paper/pulp

• Features: Geographically near the center of Japan Location, within a 300km radius, there are the metropolitan area, Nagoya area, and Kinki area
  The Shin-Tomei Expressway, a domestic transportation aorta, has been maintained, and has excellent transportation accessibility
  In addition, manufacturing industries competing for the top share in Japan and the world, such as Yamaha Engine, Suzuki Motor, Kawai Musical Instruments, Lowland, Hamamatsu Hotonics, Suzuyo, and Yazaki Start-ups, have established bases in a wide range of fields.

• Reference: Shizuoka Prefecture Corporate Location Guide
  http://www.pref.shizuoka.jp/sangyou/sa-530/index.html

Nagano County



• Number of factory locations: 7th (39 cases), factory location area: 12th (452,000㎡)

• Number of factory locations for foreign companies: 3rd (21 cases), Site area: 4th (315,000㎡)

• Population: 2.15 million,

• area: 13,561 km²

• GDP: 8.2723 trillion yen

• industrial land price (per 1㎡, square): 22,000 yen

• Major industries: electricity and electronics, information, machinery, food, tourism products, tourism

• Reference: Nagano Prefecture Industrial Location Guide
  http://www.nagano-ritti-navi.jp/

Tochigi County



• Number of factory locations: 8th (38 cases), factory location area: 4th (967,000㎡)

• Number of factory locations for foreign companies: 4th (18 cases), site area: 2nd (488,000㎡)

• Population: 1.79 million

• area: 6,097 km²

• GDP: about 9.1513 trillion yen

• Industrial land price (per 1㎡, square): 15,700 yen

• Key industries: automotive/aerospace, medical machinery, optics, environment, food

• Reference: Guidance on corporate location
  http://www.pref.tochigi.lg.jp/kogyo/

Fukushima Prefecture



• Number of factory locations: 76 cases, factory location area: 511,000㎡ (as of 2019)

• Population: 1.8 million

• area: 13,780 km²

• GDP: about 7.905.4 trillion yen

• Industrial land price (per square meter, per square meter): 3,300-15,000 yen

• Major industries: chemicals, machinery, metal products, transportation machinery, food, wood, etc

• Reference: Fukushima Prefecture Corporate Location Guide
  http://www4.pref.fukushima.jp/investment/

Form of Investment Advancement
Corporation (Subsidiary)



Foreign companies can become investors and establish an independent corporation in Japan
Once legal personality is granted, it is possible to open a bank account and rent real estate in the name of the subsidiary
Therefore, the debt incurred by the activities of the subsidiary belongs to the subsidiary itself, and the foreign company has limited liability as an investor, as prescribed by law
If a foreign company intends to establish a subsidiary in Japan, it must select the type of corporation to be established from the options prescribed by the Japanese Company Act
Under the Company Act, there are four types of corporations: KK (stock company), limited liability company (LLC), joint venture company, and general partnership company
However, since the investor is unlimitedly responsible for the debts of the subsidiary, most joint venture and general partnership companies choose either a stock company or a limited liability company
These are the most suitable types of businesses for foreign companies that want to operate in Japan.

Corporation

Shareholders of a corporation are limited liability to only the amount invested, and directors are responsible for management
A corporation has a general shareholders' meeting composed of all shareholders, a board of directors that decides on the company's business execution, and an auditor that audits the company's accounting and directors' business execution and protects the interests of shareholders. Under the Company Act, the establishment of the company's board of directors was arbitrary for companies with restrictions on the transfer of stocks, and the establishment of auditors was arbitrarily changed for companies that did not install the board of directors
For this reason, small companies often did not have audits, and an institution called accounting advisors was newly established, allowing them to jointly perform the company's accounting work with directors.

General Flowchart of Incorporation Procedures Decide on the outline of the establishment of a corporation -> Preparation of the parent company's registration certificate, etc
and preparation of affidavit for the parent company's outline and signature (certification by a notary) -> Transfer of capital to the account of the promoter or CEO at the time of establishment -> Certificate of a registration of a corporation

Joint Venture (Japanese LLC)

In principle, investors and managers are consistent, and the operation of the organization is simple because it is a limited liability
Another characteristic is that profits can be distributed regardless of the investment ratio, so internal autonomy is free. A joint venture company consists of one or more unlimited and limited liability employees, and the capital is small and the procedure is relatively simple
However, it should be noted that unlimited liability employees, like individual business owners, follow responsibility to the end.

General Partnership

A joint venture is characterized by simple establishment and operation like a joint venture
A general partnership company is composed of only unlimited liability employees, and its responsibility is unlimited, so sufficient review is needed before establishment.

Branch



The branch can be seen as a business office of a foreign company established in Japan
Since direct business activities are not possible, the branch is the easiest base for foreign companies to carry out business activities in Japan
Business activities can be initiated by establishing a branch, selecting a representative for the branch, and registering necessary matters
It is also possible to open a bank account and rent real estate under the name of the branch.

A 'local corporation' serves the same purpose as a branch as a base for direct business activities
However, the key difference is that the branch is not legally recognized as an independent corporation and is treated as a part of the foreign company
Therefore, bond debts arising from branch activities are directly attributed to the foreign companies
This form of business is suitable for entities such as non-profit corporations and financial institutions that are not conducive to corporate operation, or for Japanese companies expecting them to become cost centers with the premise of a short-term withdrawal.

Branch Installation Procedure:

• Appointment of a representative (branch manager) in Japan

• establishment of a business office

• an application for registration

If there is no separate business office, you must apply for registration at the competent registry office of the representative's Japanese address in Japan. When establishing a business office in Japan, the following registration matters and attached documents must be attached to the competent registration office at the location of the business office.

Matters necessary for registration:

• The law governing the establishment of a foreign company

• Name of representative in Japan and address in Japan

• Method of public announcement pursuant to the provisions of the Establishment Criteria Act

• Method of Public Notice in Japan

• Date of establishment of headquarters in overseas, etc

Necessary attached documents at the time of registration:

• Written confirmation of the existence of the head office

• Letter certifying the qualification of a representative in Japan

• In addition to the articles of incorporation of a foreign company, a document that can identify the nature of a foreign company

A written oath is prepared as a proof of the above registered matters, etc., and is certified by the competent authority of the country of the head office or the consul of the Japanese consulate in Japan, or other authorized institutions.

Here, the competent authority refers to a notary public overseas, such as a lawyer, and in principle, the oath is conducted by the representative director of the foreign headquarters or a representative in Japan
The necessary documents for performing an oath statement at the foreign Consulate in Japan are as follows:

• Documents necessary for the certification of the written oath

• Registered copy of the foreign headquarters

• Seal certificate of the foreign headquarters

• Minutes of the foreign headquarters

• Letter of Appointment of Representative of Japan, etc

If you prepare documents such as oath documents and apply for registration at the relevant legal office, you can receive a copy of the register in about one to two weeks
A copy of the register is required to apply for the issuance of a certificate of recognition of residence status by a representative, etc., so you can apply after receiving a copy of the register
When changes such as registered matters occur after the establishment of the branch, documents proving the decision of the headquarters are required, such as attaching the minutes of the board of directors of the foreign headquarters.

Cost of installing branch offices:

• Registration and license tax: 90,000 yen

• Other expenses (company seal, etc.): 10,000-20,000 yen

After registering the branch, you must report it to various government offices
Tax offices, metropolitan and provincial governments (local governments, metropolitan and provincial governments), departments in charge of basic local governments, labor standards supervision, public job security offices, and social insurance offices
Each has a submission period, so you must report it without omission.

Liaison Office



The resident office is established as a base for foreign companies to conduct preparatory and auxiliary activities for full-fledged business operations in Japan
Activities such as market research, information collection, purchasing goods, and advertising can be carried out, but direct business activities are not permitted
Moreover, there is no requirement to complete registration procedures when establishing an office for expatriates
As it is not possible to open a bank account or lease real estate in the name of the resident office, individuals such as the headquarters of a foreign company or the representative of the resident office become parties to these contracts as agents
This form of business is suitable if the intention is to conduct limited activities, such as commissioning and market research, before engaging in full-scale business development.

Installation Procedure

In the case of establishing a resident office, it is not a concept governed by company law, thus eliminating the need for registration
However, the size of the office, for instance, the residence of the Japanese representative, may be closely associated with the representative's residency status
Therefore, it is advisable to make this determination with careful consideration.

To begin the process, once the representative of the expatriate office is identified, they travel to Japan and select the appropriate office space
Subsequently, after preparing all the necessary documents, they proceed to the Immigration Bureau to apply for a certificate of recognition of residence status.

Upon receipt of the certificate of recognition of residence status, the representative can obtain a visa from the Japanese Embassy in home country and enter Japan
Upon arrival, a stay card is issued at the airport
Full-fledged activities can commence after completing essential procedures in Japan, such as reporting one's residence and opening a bank account.

Reported Items After Installation

In the case of the resident office, business activities are not allowed, so there is no special report
In the case of hiring expatriates working at the expatriate office and local employees in Japan, the obligation to report and pay withholding taxes on the salaries of local employees arises.

Corporation

• Capital: 1 yen or more

• Number of Investors: 1 or more

• Investor/head office responsibility to the company's creditors: The amount of investment is limited.

• Transfer of equity: principle is free
  It is also possible to stipulate the same purpose as "stock transfer requires approval from the board of directors."

• Number of executives required: at least one person (for a company with limited stock transfer)

• Statutory Executive Term: Within 10 Years

• Regular shareholder (employee) general meeting: principle held annually

• Is it possible to disclose shares (equity shares): Yes

• Whether it is possible to change its organization to a corporation: It is possible to change its organization to a joint company

• Profit and loss distribution: distribution according to investment ratio

• Taxation on profits: Taxation on dividends of profits and shareholders' profits of stock companies

Joint Company (Japanese LLC)

• Capital: 1 yen or more

• Number of Investors: 1 or more

• Investor/head office responsibility to the company's creditors: The amount of investment is limited.

• Transfer of equity: freedom of principle
  It is also possible to stipulate the same purpose as "stock transfer requires approval from the board of directors."

• Number of executives required: no statutory executive regulations
  In principle, all employees become executives, but other provisions may be provided in the articles of association.

• Statutory Executive Term: No Term of Office

• Regular shareholders' meeting: No need to hold

• Whether or not shares (equity shares) can be disclosed: No

• Can I change my organization to a corporation: Possible

• Profit and loss distribution: The articles of association can set a different distribution ratio from the investment ratio.

• Taxation on Profits: Taxation on profits of joint companies and dividends of profits to shareholders

Private Business Operator

• Qualification: As long as there is no problem with the qualification of residence and there is no restriction by law, foreigners can also do business as private business owners in Japan.

• Capital: not required separately.

• Establishment procedure: A 'personal business opening report' (submitted within one month of opening) must be submitted to the competent tax office, and a 'personal business opening report' must be submitted to the local government office.

• Income tax: December 31st is the settlement date, and the final return of income tax must be made by March 15th of the following year.

• Other taxes: In addition to income tax, personal resident tax, personal business tax, and consumption tax (value added tax) are generally levied.

• Note: Individual businesses' income tax is calculated as an excess progressive tax, so taxes rise as profits increase
  On the other hand, in the case of corporations, the corporate tax rate is constant, so if the income exceeds a certain level, the corporate form is advantageous.

Joint Company

• Capital: No basis.

• Investor/Head Office Liability to the Company: No limit.

• Transfer of equity interest: No equity interest.

• Number of executives required: 1 or more representatives in Japan

• Statutory Executive Term: No Term.

• Regular shareholder (employee) General Meeting: No need to hold.

• Is it possible to disclose shares (equity shares): No equity shares.

• Whether it is possible to change the organization to a corporation: Not possible
  Branch closures, registration of the retirement of all representatives in Japan, and establishment of a corporation must be carried out separately.

• Taxation on profits: In principle, tax on income generated in Japan