There Are Good Reasons to Hire a Local Resident as Representative Director in Japan
By Jongheon Kim, Senior Advisor, APAC, Radius
On March 16, 2015, Japan’s Ministry of Justice eliminated a longstanding law requiring foreign companies to appoint at least one resident of Japan as a representative director. The ministry made the change to streamline the process of establishing a legal entity in Japan and promote foreign investment. The change applies to two of the three most popular entity options for foreign companies expanding into Japan: KKs (Kabushiki Kaisha, similar to joint stock companies) and GKs (godo gaisha, similar to limited liability companies). (The requirement remains for the third most-popular entity option, branch offices of foreign organizations.)
The lifting of the local-resident requirement was welcome news for multinationals looking to establish operations in Japan. In addition to reducing red tape, foreign organizations with a KK or GK have gained a significant measure of control over their Japan operations. They now no longer need to scramble to find a trusted local resident to appoint as a director of their operations, and indeed may theoretically run those Japan-based companies from a US-based HQ.
US companies in this situation should, however, know that while regulations no longer require a local Japanese resident to serve as a director for a KK or GK, there are still substantial benefits associated with employing a local resident as a director.
To begin with, employing a director that is a resident of Japan is customary and shows an understanding of and commitment to local business culture and etiquette. The value created by a local representative director in transacting local business cannot be overestimated. For example, certain transactions require the personal attendance of a director. These transactions include applications for business licenses, bank accounts and lease agreements, to name a few.
There are other benefits to engaging a local resident as representative director. For example, when you incorporate an entity in Japan, you must evidence the initial investment of share capital. Where a local representative director has been appointed, this requirement may be satisfied by using the director’s own personal bank account. Absent a local resident director, the requirement becomes more difficult, either necessitating the establishment of an escrow account or the use of a local third party as the initial subscribing shareholder. Both of these solutions add complexity and delays to an already demanding process.
The fact that there are continuing benefits to having a local resident director no doubt explains why most organizations have not replaced them with foreign appointees and why the business of third-party nominees has not waned. On this last point nominee directors from third-party firms are often preferred to internal office holders for two important reasons that I will now address.
First, third-party firms can provide significant internal control related to company seals. Company seals in Japan are used like signatures to execute legally binding documents, and unfortunately they can be misused. To take one dramatic example, before its collapse Lehman Brothers lost millions of dollars in a fraud involving forged documents stamped with a Japanese company seal. A local third-party provider of director services can maintain the company seal and help ensure that it’s used only in appropriate situations and in accordance with the company’s corporate governance policies.
It should also be noted that in the event of legal proceedings, Japanese courts will pursue foreign directors in the absence of a local-resident representative director. A foreign director in this situation may be required to appear in a Japanese court. Indeed, one of the key factors in removing the local-director requirement was the assurance by the Supreme Court that foreign directors would be subject to its jurisdiction.
In addition to providing internal control related to company seals, a local-resident representative director can provide a company with tax savings. Bonuses and commission payments issued to directors are not deductible for corporate tax purposes. Since internal appointees invariably also hold senior employment positions with generous bonus schemes, this means that appointing an internal director can add considerably to a company’s tax bill. A third-party nominee on the other hand is paid a relatively modest service fee and so provides a more tax-efficient means of fulfilling the representative-director requirement.