Accounting & Taxes

Expanding into the Japanese market offers significant growth potential for global companies, but navigating its unique systems and regulations can be challenging.

When establishing a company in Japan, capital is more than just a numerical figure—it is a crucial factor directly linked to creditworthiness and fundraising ability.

This article provides a detailed explanation of the criteria used to assess capital levels of 500 million yen or more, along with the associated benefits, risks, and management challenges.

1. Standards and Background of a Capital of 500 Million Yen or More When Establishing a Company in Japan

There is no legal minimum capital requirement for establishing a joint-stock company in Japan.

While it is technically possible to set up a company with as little as 1 yen, a certain level of capital is generally necessary to establish corporate credibility, support future growth, and secure funding.

Under the Japanese Companies Act, capital serves as a symbol of business stability and company size. Companies with 500 million yen or more in capital are classified as "large companies".

Being categorized as a large company imposes specific legal obligations, such as appointing an accounting auditor, developing internal controls, and regularly disclosing financial information. It also subjects the company to an external standard tax, affecting its taxation in unique ways.

2. Advantages of Becoming a Large Company: Creditworthiness and Benefits

Companies with capital of 500 million yen or more can enjoy several advantages, including:

Enhanced Creditworthiness: A high capital amount is seen as an indicator of business stability and a strong management foundation. This directly improves credit ratings with local business partners, financial institutions, and investors. Consequently, companies are more likely to secure favorable transaction terms and loan conditions.
Stronger Fundraising Ability: Companies with substantial capital often have higher equity ratios, making it easier to obtain financing from banks and investors.
Greater Management Stability and Continuity: A large capital base supports both short-term cash flow and long-term financial stability, allowing companies to better withstand market fluctuations and economic changes.

3. Disadvantages of Becoming a Large Company: Costs and Risks

However, becoming a large company with capital of 500 million yen or more also comes with disadvantages and risks, including:

Higher Tax Burden: Companies exceeding a certain capital threshold are subject to an external standard tax, which is levied based on company size rather than profit. This means tax obligations persist even during periods of low profitability. Additionally, larger companies may face stricter corporate tax rates and local tax requirements.
Mandatory Appointment of an Accounting Auditor: Large companies must appoint an accounting auditor, such as an audit firm or a certified public accountant. Financial statements must undergo external audits, leading to additional costs and administrative burdens.

4. Considerations When Determining Capital Amount

Setting capital is not merely about choosing a figure; it is a critical management decision tied to a company’s long-term growth strategy and funding requirements.

Key considerations include accurately estimating capital needs for business expansion, such as initial investment, working capital, technology development, market entry, and mergers and acquisitions.

Aligning capital levels with the expectations of business partners and financial institutions can enhance corporate credibility. However, excessively high capital may complicate internal management and limit financial flexibility, making it essential to strike an optimal balance.

Furthermore, tax planning, future capital increases, and alignment with capital policies should be carefully assessed. Consulting with tax and accounting professionals can help optimize these decisions.

5. Procedures and Key Considerations for Mid-Term Capital Increases in Japan

Companies may opt for a mid-term capital increase as part of their growth strategy or to raise additional funds. The typical process includes:

Discussing new share issuance terms with investors
Holding a general meeting of shareholders to approve the issuance terms
Concluding stock subscription agreements with investors
Receiving investment funds
Registering the capital increase with the Legal Affairs Bureau

One critical requirement is that companies must apply for capital increase registration within two weeks of the final payment deadline specified in the subscription contract. Since capital increase procedures are complex and have significant implications, many companies seek local expert assistance.

6. Challenges and Solutions Specific to Foreign Companies

Foreign companies establishing subsidiaries in Japan often encounter challenges such as differences in accounting standards, tax regulations, and cultural and language barriers. Addressing these issues requires collaboration with local tax and accounting experts.

Hiring local staff, conducting regular training, and using interpretation and translation services can facilitate effective communication within the company and with external stakeholders.

Additionally, strengthening partnerships with local consultants and accounting firms while enhancing internal control and risk management systems helps ensure consistency with global accounting standards, ultimately improving a company’s competitiveness in Japan.

7. Impact of Japan’s Companies Act

Companies with capital of 500 million yen or more must comply with strict governance requirements under the Japanese Companies Act.

Regulatory obligations, including the development of internal controls, appointment of accounting auditors, and expanded financial disclosures, enhance transparency and corporate credibility. However, these measures also increase operational costs and management workload.

For foreign companies, aligning local governance practices with home-country requirements and global standards necessitates expert legal and regulatory advice. Building an appropriate internal system is crucial for ensuring compliance and operational efficiency.

8. Summary

This article has outlined the key considerations for foreign companies establishing subsidiaries in Japan with capital of 500 million yen or more, highlighting the associated advantages and disadvantages.

Although Japan has no legal minimum capital requirement, a substantial capital amount is typically necessary for securing creditworthiness, funding, and business growth. Companies with capital at this level are classified as large companies under the Companies Act, subjecting them to stricter compliance obligations, increased operating costs, and complex management requirements.

At the same time, a strong capital base offers major benefits, including enhanced credibility, improved fundraising ability, and greater financial stability, all of which contribute to long-term business success.

Additionally, practical considerations such as capital increase procedures, local regulatory compliance, and alignment with global standards are particularly important for foreign companies.

By carefully evaluating these factors and working closely with experts, foreign businesses can achieve sustainable growth and stable operations in the Japanese market.