Article: Closing a Branch Office in Japan

Article written by Michio Matsuzaki.

Part 1) Branch Office Closure due to withdrawal from the Japanese market

If a foreign company has set up a branch office in Japan, which has unfortunately been yielding little in terms of sales and profits, it may consider withdrawing from the Japanese market altogether. Another reason a foreign company may consider closing down its branch office in Japan could be that the business has successfully grown, and as a result of this, the company decides to upgrade its branch office to a subsidiary company in order to conduct their business on a larger scale. Under the Companies Act of Japan, a branch office may, however, not be directly transformed into another type of corporate entity such as a KK or a GK, but must remain legally existing unless it has closed down. In the meantime the Foreign Company would need to establish a KK or a GK separately from the branch office in order to conduct their business as a subsidiary company.

Even if a branch office of a foreign company in Japan has no sales or profits the foreign company still has to pay a minimum amount of local taxes such as JPY 70,000 in total every year, for example, in the case of a corporation with capital of JPY10 million or less and with 50 employees or less.

Therefore, it may be a good idea to legally close down the branch office even if some costs would be incurred due to legal procedures.

The following example shows the various legal procedures which the board of a foreign company would face if it decided to close down its branch office in Japan.

Step 1: The foreign company is obliged to run a public notice in an official gazette about the closure of its branch office due to a reason such as the resignation of all representative(s) of the branch office or something else, and also to send the same notices to all creditors of the branch office in Japan one by one by postal mail etc. This is to protect the rights of creditors. (The Companies Act, Article 820)

Step 2: If there are no claims from creditors for 1 month (or perhaps longer) after the public notice, the foreign company will then be able to officially confirm the closure of its branch office by a board resolution etc. (The Companies Act, Article 820)

 Step 3: The foreign company must then prepare various legal documents (such as an affidavit and other documents) in order to verify the legality of the foreign company's corporate entity, the execution of the obligations of public notice as mentioned above, to confirm the branch office's closure as well as the authority of the person who is to carry out the legal procedures representing a foreign company as the liquidator.

Step 4: Representatives of the foreign company must then appear at a Legal Affairs Bureau in the jurisdiction of the branch office's location in Japan and complete the registry application to close down the branch office. This usually takes more or less 1 week to complete at the Legal Affairs Bureau from the date of application.

* In case the reasons for the closure of the branch office are different from the ones listed above, i.e. because of an order from a court or due to a claim from creditors or other stakeholders etc. the legal procedures would be different from the above example.

Part 2) Upgrading a Branch Office to a Subsidiary Company 

On the other hand, in the event that a foreign company has set up a branch office in Japan whose business has fortunately been successful so far, and now this foreign company plans to upgrade its branch office into a subsidiary company, how can the foreign company do this? 

On the other hand, in the event that a foreign company has set up a branch office in Japan whose business has fortunately been successful so far, and now this foreign company plans to upgrade its branch office into a subsidiary company, how can the foreign company do this?

The major difference between a branch office and a subsidiary company as legal entities is, in short, that a subsidiary company is an independent legal entity under Japanese law while a branch office is just an organ of a foreign company. Accordingly, a subsidiary company has the authority to conduct legal and business activities under its own legal capacity and is subject to all relevant laws and regulations as well as to other superior authorities such as resolutions from general meetings etc. In other words a subsidiary of a foreign company may receive more credibility from Japanese markets, increased flexibility regarding decision-making and authority to more easily go through legal procedures as regards business operations etc. 

As for the various legal procedures a foreign company must go through to upgrade its branch office to a subsidiary company, unfortunately a foreign company cannot “directly transform” a branch office into a subsidiary company. That is, a foreign company has to first close down its branch office and can meanwhile establish a new subsidiary company as a completely separate legal entity. Therefore, a foreign company needs to go through the legal procedures for closing down a branch office as described above and also the legal procedures for registering the newly-established subsidiary company as a KK or a GK. In the case of a subsidiary company, its parent company can be a shareholder of the new company in a corporate capacity. Meanwhile however, a corporate entity cannot be a board member of another company, only individuals can be board members.