Foreign Laws Governing Japanese Companies: Is It Possible?

Japan is a civil law country with a fully independent judiciary and a consistently applied body of commercial law. The country's legal system is based on five major legal codes: Civil, Civil Procedure, Commercial, Criminal, and Criminal Procedure. Foreign judgments are recognized and enforced by Japanese courts under certain conditions. The Companies Act, which covers the formation, organization, operation, and management of companies, is the main source of corporate governance rules in Japan. The country's business landscape is dominated by stock companies (kabushiki kaisha) listed on the Tokyo Stock Exchange (TSE), which is one of the largest equity markets globally. While Japan generally encourages foreign direct investment, economic sanctions have been imposed on countries like North Korea, Iran, and Russia, restricting certain trade activities.

Foreign companies and foreign law

Foreign companies and the laws that govern them can be a complex issue, and this is no different when it comes to Japan. In general, a foreign corporation is one that is incorporated or registered under the laws of a foreign country while operating in another. Japan, as a civil law country, has a fully independent judiciary and a consistently applied body of commercial law.

The country has actively encouraged foreign direct investment (FDI) and has sought to ease the legal and administrative burdens on foreign investors. For example, Japan has made significant reforms to its Companies Act and Financial Instruments and Exchange Act. It also has a dedicated Intellectual Property High Court to handle IP-related cases, which has improved the country's IP environment.

However, there are still some complexities and potential challenges for foreign companies operating in Japan. For instance, while there are no restrictions on expanding business operations, certain transactions by agents or resellers may be prohibited under applicable laws. Additionally, Japan's tax laws offer many incentives for businesses, but understanding and navigating these can be challenging.

To operate in Japan, foreign companies must adhere to specific terms and conditions prescribed by the state. They are generally required to appoint and maintain a registered agent and office, and to qualify or register before transacting business. Failure to follow these rules can result in penalties, including fines or injunctions preventing further business in that state.

In conclusion, while Japan has made efforts to attract foreign investment and has a generally favourable environment for foreign companies, understanding and complying with the specific laws, regulations, and requirements of the country is essential for any foreign business seeking to operate there.

Taxation of foreign companies

Japan is a civil law country with a fully independent judiciary and a consistently applied body of commercial law. Foreign judgments are recognized and enforced by Japanese courts under certain conditions. Japan has a complex, multilayer system to calculate corporate income tax.

Japanese corporations are subject to Japanese corporate income taxes on their worldwide income. To avoid double taxation of foreign-source income, Japanese corporations can claim a tax credit against corporation and inhabitant taxes for foreign income taxes paid directly. This is defined as taxes that are incurred directly by the taxpayer, levied by foreign governments and local authorities according to local tax laws, levied on corporate income, and have the same characteristics as Japanese income tax, corporation tax, and local income-based taxes.

To prevent domestic corporations from evading taxes by retaining income through a foreign subsidiary in a tax haven, a domestic corporation is taxed by including in its taxable income an amount corresponding to its interest in the retained earnings of that foreign subsidiary. If a corporation's borrowing from an overseas controlling shareholder exceeds three times its equity, interest on borrowing corresponding to the excess cannot be deducted from taxable income.

Japan introduced an income tax exemption for foreign dividends remitted by non-Japanese subsidiaries of Japanese corporations in 2009, moving towards a more territorial system of taxation. The structure of the Japanese CFC rules is now similar to many other countries, beginning with a determination of whether a foreign company is a CFC for corporate income tax purposes. This combines a total ownership threshold with a single ownership threshold, as well as an additional de facto test to target specific tax arrangements.

To prevent double taxation, a foreign tax credit system is also in place. This provides credits for foreign taxes paid directly by a domestic corporation on income earned outside Japan, credits for amounts of tax that have been specially reduced or exempted under a tax convention, and credits for foreign taxes corresponding to the income of a specified foreign subsidiary that has been combined with the income of a domestic corporation under an anti-tax haven taxation system. A Foreign Dividend Exclusion system has been introduced to avoid international double taxation, allowing domestic corporations to exclude a certain amount of dividend income from qualifying foreign subsidiaries from their taxable income.

Japan has a floating exchange rate and has not intervened in the foreign exchange markets since November 2011. Investment remittances are freely permitted, and the country has privatized most former state-owned enterprises. The government actively encourages foreign direct investment and has sought to ease legal and administrative burdens on foreign investors.

Corporate governance

The Companies Act (Act No. 86 of 2005) is the main source of corporate governance rules in Japan. It governs the formation, organisation, operation, and management of companies, including foreign companies incorporated under the laws of another country. The Act has undergone major reforms, with the most recent revisions in 2021 aiming to enhance governance standards for listed companies on the Prime Market. These revisions include provisions for increased independent outside directors, improved climate change disclosures, and the use of electronic voting platforms.

The business vehicles most commonly used in Japan are joint stock companies (kabushiki kaisha) and limited liability companies (godo kaisha). Joint stock companies are the most prevalent, and they offer limited liability to their shareholders and members. Establishing a joint stock company in Japan involves registering with the local legal bureau and paying a fee of 0.7% of paid-in capital (with a minimum of JPY150,000). The articles of incorporation, certified by a Japanese public notary, are crucial for registration.

Foreign companies investing in Japan should be aware of the applicable tax treaties and withholding tax rates. The absence of a tax treaty with Japan can result in a withholding tax rate of 20.42% on dividends, interest, and IP royalties. However, tax treaties may reduce or exempt withholding taxes. Additionally, the Foreign Exchange and Foreign Trade Act (FEFTA) imposes reporting requirements on payments made or received by Japanese residents to or from foreign countries or non-residents within Japan.

Japan has a well-established intellectual property (IP) regime, with an Intellectual Property High Court established in 2005 to expedite IP-related cases. The country actively encourages foreign direct investment (FDI) and has implemented reforms to ease legal and administrative burdens on foreign investors.

Labour laws

Japanese labour law is governed by several acts and regulations, including the Labour Standards Act (LSA), the Labour Union Act (LUA), the Labour Contract Law (LCL), the Industrial Safety and Health Act, the Employment Security Act, and the Equal Employment Opportunity Act. These laws outline the rights and obligations of both employees and employers in Japan.

The LSA, enacted in 1947, sets out minimum standards for employment contracts, including working hours, overtime pay, and discrimination in pay based on gender. Article 36, Part 2 of the LSA, for example, prevents companies from increasing an employee's working hours beyond their contract without consultation and a signed agreement. It also mandates that any overtime work must be paid at a premium rate of an additional 25-50%. The LSA also includes provisions for fixed-term contracts, with a maximum duration of three years, although there are no limits on renewals.

The LUA governs collective labour relationships and grants labour unions the right to act collectively, including the right to strike. It also provides immunity to workers engaging in proper and justifiable actions from criminal and civil liabilities, protecting them from unfavourable treatments by their employers.

The LCL, on the other hand, governs individual labour relationships by outlining the principles for entering into and changing labour contracts through voluntary negotiations between employees and employers.

Other notable aspects of Japanese labour law include the right to unionise and collectively bargain under Article 28 of the Japanese Constitution. Additionally, part-time workers with indefinite contracts have the right to equal treatment with full-time workers since 2008.

In terms of termination, Japanese law requires that the termination of regular employment be considered objectively and deemed reasonable and appropriate upon social convention. Typical grounds for termination include an employee's inability to work due to injury or illness, breach of work duties or disciplines, and redundancy due to economic reasons. Termination due to redundancy is considered a last resort, and employers must make their best effort to avoid it. There is no statutory obligation to pay severance allowance upon termination, except when payment is in lieu of notice.

Japan has also introduced "digital nomad" visas for foreign remote workers, valid for up to six months, as of April 1, 2024.

Intellectual property laws

Japan has a strong and well-established legal framework for protecting intellectual property rights, governed by the Japanese Patent Office (JPO) and embedded in the Japanese government's commitment to fostering innovation. This framework includes various laws such as the Patent Act, the Utility Model Act, the Design Act, the Trademark Act, the Copyright Act, and the Unfair Competition Prevention Act (UCPA).

The JPO is responsible for registering and granting patents, utility models, and designs, while the Japan Copyright Office handles copyright registration and administration. To ensure maximum protection for intellectual property in Japan, it is important to register your patents, trademarks, designs, and copyrights with these appropriate authorities. Before registering, it is advisable to conduct a search to ensure your intellectual property does not infringe on the rights of others.

The JPO also assists with international patent applications through the World Intellectual Property Organization (WIPO), helping businesses secure exclusive rights to their innovations globally. Japan is a signatory to several international conventions, such as the Patent Cooperation Treaty and the Paris Convention for the Protection of Industrial Property, which offer an extended layer of IP protection.

Court decisions in Japan can impact the interpretation of IP rights and agreements, and staying updated with these decisions can provide insights into the evolving landscape of IP law in the country. For example, amendments to Japan's patent law have provided patent term extensions for pharmaceuticals, preserving the exclusivity of a patentee's rights for a longer period.

It is important for businesses to understand Japan's unique IP landscape to safeguard their IP rights effectively. This includes incorporating protective measures such as non-disclosure clauses and confidentiality agreements when sharing IP with potential business partners or investors.

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