Foreign Company Registration Under the Companies Act

Under the Japanese Companies Act, a foreign company (i.e., a company incorporated under foreign law) needs to appoint a local representative person with a residential address in Japan (Local Representative Person) before carrying out continuous business transactions in Japan,¹ and the company may not carry out these transactions before completing its commercial registration of foreign companies with the Legal Affairs Bureau (Foreign Company Registration).² The Local Representative Person has the statutory authority to do any and all judicial and extra-judicial acts on behalf of the foreign company in connection with the Japanese business,³ although this authority can be limited internally by signing an agreement between the foreign company and the Local Representative Person.

The administrative penalty for failing to file Foreign Company Registration is a fine of JPY 1 million or less, and a foreign company carrying out transactions continuously in Japan is further subjected to the potential risk of an additional fine equivalent to the applicable Registration and License Tax amount.

Historically, Foreign Company Registration had not been strictly enforced by the Ministry of Justice; however, this is changing. The Ministry of Justice is becoming much more active recently because many Japanese users of popular multinational platform service providers complained that they had been struggling to identify some basic information about the platform service providers, such as the company's registered address and the representative person's name. The information is critical for anyone wishing to file a lawsuit against these multinational platform service providers. Therefore, the failure by these platform service providers to follow Foreign Company Registration requirements under the Companies Act prevents Japanese users from obtaining such information, which ultimately and unreasonably hinders these users from excising their right to conduct legal actions again these platform service providers.

Since 2021, the Ministry of Justice has started demanding tens of multinational platform service providers comply with the Foreign Company Registration, and on 30 June 2022, the Ministry submitted the names of the platform service providers who failed to file Foreign Company Registrations to the Tokyo District Court, recommending the court to issue penalty orders against these platform service providers.

Tax Ruling

The potential risks associated with having permanent establishment (PE) in Japan had been considered one of the reasons foreign companies were hesitant to register themselves with the Legal Affairs Bureau. While multinational platform service providers became aware of the Foreign Company Registration requirements after the demands by the Ministry of Justice, the question of whether the appointment of a Local Representative Person and filing of a Foreign Company Registration constitute a foreign company's PE in Japan remained uncertain.

However, a recent ruling shed some light on this murky situation. Given such circumstances, an Irish company sought guidance from the Tokyo Regional Taxation Bureau and requested the tax bureau’s view on the PE risk. The Tokyo Regional Taxation Bureau considered and responded to the request on 22 February 2023 (the Ruling). The Ruling was publicly announced on the NTA's website recently.⁴

The fact pattern of the Ruling is that an Irish company (the Company), which is an Irish tax resident for the purpose of the Japan-Ireland Double Tax Treaty (the DTT), has conducted an online marketplace business (the Business) and submitted the telecommunication business filing under the Japanese Telecommunications Business Act because the Business for Japanese users is likely to fall under the regulated activities.

Given such a regulatory filing, the Company was encouraged by the Ministry of Justice to appoint a Local Representative Person and file Foreign Company Registration pursuant to the Companies Act and retained an external lawyer in Japan (the Lawyer), where the Lawyer (i) is appointed as the Local Representative Person of the Company and (ii) if the Lawyer receives litigation documents for a lawsuit to which the Company is a party, is authorized to notify the Company of the delivery of the litigation documents and send the copies of such documents to the Company (the Services).

In this case, the Lawyer has never been and will not be engaged in or involved with the Business and is not authorized to any power or authority relating to the Business. Also, under the agreement between the Lawyer and the Company, the Company has no rights to use the Lawyer's office for the Business.

Based on the above fact pattern, the Tokyo Regional Taxation Bureau confirmed that (a) the Lawyer's office (which is presumably registered as the address of the Company's Local Representative Person) would not constitute a PE under Article 6(1) of the DTT⁵ and (b) the Lawyer would not be viewed as a dependent agent (i.e., contract concluding agent or fills order agent) under Article 6(5) of the DTT;⁶ therefore, the appointment of the Lawyer as the Local Representative Person, filing of the Foreign Company Registration, and the Services (if performed) by the Lawyer would not constitute a PE for the DTT purposes.

Key Takeaway

Even though the Ruling is not legally binding and does not generally apply to any foreign companies without having a physical presence in Japan, this Ruling provides much-needed clarity on the potential Japanese PE risks for foreign companies filing Foreign Company Registration under the Companies Act.

Nevertheless, since it is often unclear in practice whether a foreign company doing business for Japanese customers/users needs to file Foreign Company Registration, it would be highly recommended to consult with a specialist to assess the potential Japanese registration obligations as well as associated tax risks.

¹Article 817(1) of the Companies Act.
²Article 818(1) of the Companies Act.
³ Article 817(2) of the Companies Act.
⁴https://www.nta.go.jp/about/organization/tokyo/bunshokaito/hojin/230222/index.htm (in Japanese only)
⁵ The text of Article 6(1) of the DTT is as follows: “For the purposes of this Convention, the term permanent establishment means a fixed place of business in which the business of the enterprise is wholly or partly carried on.”
⁶ The text of Article 6(5) of the DTT is as follows: “A person acting in a Contracting State on behalf of an enterprise of the other Contracting State - other than an agent of an independent status to whom the provisions of paragraph 6 of this Article apply - shall be deemed to be a permanent establishment in the first-mentioned Contracting State if:
(a)he has, and habitually exercises in that Contracting State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise, or
(b)he maintains in that Contracting State a stock of goods or merchandise belonging to the enterprise from which he regularly fills orders on behalf of the enterprise.”