Key Points Japanese Companies Should Consider When Contemplating Overseas Expansion: An In-Depth Explanation

“When planning to establish a corporation overseas, as in ‘We are planning to set up a company abroad,’ it is crucial for businesses to be aware of the legal regulations in the country they are expanding into. To seize business opportunities and develop operations, appropriate knowledge and understanding of foreign laws are indispensable.”

This article will clearly introduce specific steps for companies to successfully expand overseas and measures to minimize risks.

Methods of International Expansion

There are primarily three methods for a company to expand internationally:

• Local Subsidiary
• Overseas Branch
• Representative Office

When establishing a local subsidiary, a new corporation is formed based on the laws of the host country. This is the most common structure for conducting business within the country and is suitable for companies aiming for growth.

On the other hand, setting up an overseas branch involves direct management and operation by the domestic head office, as a strategy to address the overseas market. While a branch requires close coordination with the head office, it allows for a certain degree of autonomy in its activities.

Establishing a representative office is an effective way to research the potential of foreign markets and to build relationships with specific business partners.

The following sections will provide a detailed explanation of each method.

Local Subsidiaries

A local subsidiary refers to the establishment of a legally independent corporation in a foreign country to provide a framework for conducting business overseas. To set up a subsidiary, it is necessary to confirm the legal requirements of the target country and primarily undertake the following procedures:

• Corporate registration
• Tax registration
• Business licensing
• Employment contracts

Based on the laws of the country or region, you will choose the form of the corporation. Since the legal responsibilities and tax treatments vary depending on the corporate form, careful consideration is required to ensure the appropriate structure is selected.

Establishing a local subsidiary can lead to the adaptation to local needs and market personalityistics, and the expectation of effective marketing and customer support.

However, attention must be paid to risks arising from changes in laws and regulations, as well as cultural differences.

While it is an important means to succeed in a new market, a thorough understanding of local laws and systems is essential, necessitating the support of experts or consultants and a cautious business strategy.

Overseas Branches

Overseas branches are established in countries or regions different from the headquarters to conduct business activities. While maintaining a certain degree of independence from the headquarters, their decision-making and operational policies are based on directives from the headquarters. As they are legally integrated with the headquarters and part of the same corporation, branches share both the risks and profits of the headquarters.

In order to establish a branch, it is necessary to verify the legal requirements of the target country or region, and to complete procedures such as company registration, obtaining business permits, and tax registration.

By establishing a branch, a company can approach the local market more closely. It also allows for direct interaction with local consumers and business partners, and the ability to respond to the region-specific needs.

However, even with overseas branches, it is essential to address the legal requirements, tax regulations, and cultural differences of the foreign country. It is necessary to proceed cautiously and strategically, often with the assistance of local legal and tax experts.

Liaison Offices

A liaison office refers to a temporary base established by a company outside the country or region where its headquarters is located. In many cases, these offices are operated by representatives dispatched from the headquarters.

The purpose of a liaison office is to effectively carry out temporary business activities such as market research and sales operations. Therefore, it is often considered as a preliminary step before establishing a full-fledged local subsidiary or an overseas branch.

When setting up a liaison office, it is important to verify the local legal requirements and regulations and to comply with the necessary procedures. Depending on the nature of the business and the region, different legal procedures and permissions may be required.

The main advantage of a liaison office is that it allows a company to start expanding overseas relatively quickly and at a lower cost. It is useful as the first step for companies entering new markets. However, local laws may impose restrictions on business activities and employment, which could limit the operations of the liaison office.

If considering a full-scale entry or expansion, it may be necessary to establish a legal entity (such as a corporation or branch) in the future.

Legal Considerations for International Expansion

When a company is considering international expansion, there are three key legal aspects to keep in mind:

• Local legal regulations
• Labor and tax management
• Language and communication

First and foremost, understanding the local legal regulations is crucial. It is essential to be well-versed in the business practices, laws, and regulations of the target country. Failure to appropriately address these can lead to unexpected legal issues. Additionally, comprehending the differences in labor and tax laws, as well as communication practices in business, is also vital. Laws and cultures vary significantly from country to country, and region to region, necessitating a tailored strategy to effectively navigate these differences.

Understanding Local Regulations

Understanding and appropriately responding to local regulations is a critical point of consideration for businesses expanding overseas.

• Permits and registrations required before starting operations
• Legal protection of intellectual property rights (such as patents, trademarks, and copyrights)
• Environmental law requirements

Depending on the industry and the nature of the business, specific regulations different from the above may apply. For example, businesses in the financial or pharmaceutical sectors are generally subject to stringent regulations.

Violating local regulations can result in penalties. It is crucial for companies to ensure compliance and to rigorously adhere to legal requirements.

Key Points in Labor Management and Taxation

Firstly, in labor management, the important points are as follows:

• Establishing appropriate employment contracts based on local laws
• Compliance with laws regarding working hours and termination procedures
• A compensation system that is suitable for local standards
• Consideration of social security and health insurance in salaries and allowances

Additionally, it is advisable to define occupational safety and health, as well as employee education and training, as part of labor management.

Next, in taxation, the important points are as follows:

• Tax systems such as corporate tax and consumption tax
• Deadlines for tax filings
• Appropriate transfer pricing
• Available tax incentives

By properly managing these aspects, you can adapt to the local legal and tax systems, enabling international business expansion.

Consideration for Language and Cultural Differences is Necessary

Language and communication are critical considerations when a company expands overseas. It is essential to understand the primary language of the target country or region and have the capability to conduct business locally.

When business operations and communications are active, placing bilingual personnel who speak the local language can lead to a smooth business expansion. If communication in a different language environment is challenging, make use of interpreters or translation support.

Beyond language, understanding cultural backgrounds and nuances is also crucial. When expanding overseas, it is necessary to respect the local culture and adhere to appropriate business etiquette.

As an internal policy, initiatives such as providing proper education on cross-cultural communication to assigned team members can be considered.

Related article: What is International Legal Affairs Necessary for Overseas Expansion? Explaining the Required Skills and Job Content[ja]

Key Points for Transactions and Contracts in Overseas Expansion

When expanding overseas, companies must consider many factors, but transactions and contracts are particularly crucial. Establishing dispute resolution clauses and governing law in contracts clarifies the methods for resolving disputes and the applicable laws should a conflict arise.

In the event of a legal issue, it is essential to be prepared for a swift resolution.

Dispute Resolution and Governing Law Clauses

In overseas transactions, it is important to define dispute resolution clauses and governing law in the contract.

Dispute resolution clauses specify the methods for resolving conflicts that may arise from the contract. Options for dispute resolution include litigation, arbitration, and mediation, with arbitration often being the preferred choice in international contracts. If arbitration is chosen, the arbitration institution and procedures should be clearly stated.

The governing law clause determines the law that will apply in the event of a dispute. When companies from different countries engage in transactions, it is common to agree on which country’s or region’s law will apply in case of a dispute. Specifically, the following should be defined:

• The country where the parties’ headquarters are located
• The region where the contract will be executed
• The central location of the transaction

Including these clauses in the contract facilitates smoother dispute resolution.

Drafting the Contract

When engaging in overseas transactions, it is crucial to create a contract tailored to the specific circumstances of the case. In addition to the aforementioned dispute resolution and governing law clauses, the main matters that should be defined in the contract are as follows:

• Basic information such as the contract’s effective period
• Conditions related to the provision of goods or services, pricing, and payment
• Liability for damages
• Conditions for termination of the contract
• Non-disclosure agreements

When contracting, it is important to clearly indicate the transaction conditions and legal elements. It is advisable to seek professional advice and legal checks to draft the contract appropriately.

Reference: Japan Commercial Arbitration Association | How to Write an Arbitration Clause[ja]

Summary: Having a Partner to Consult in Case of Disputes Brings Peace of Mind

When expanding a business overseas, companies have options such as establishing local subsidiaries, branches, or representative offices. It is crucial to choose the right form based on an understanding of each entity’s personalityistics and advantages. Furthermore, it is essential to be well-informed about local legal regulations, labor, and tax matters, and to stipulate the governing law in case of disputes in the contract.

Deepen your understanding of foreign legal regulations to aim for smooth business operations. In situations where legal support is needed, we recommend consulting with experienced professionals.

Guidance on Measures by Our Firm

Monolith Law Office is a law firm with extensive experience in both IT, particularly the internet, and legal matters. In recent years, global business has been expanding increasingly, and the need for legal checks by experts is growing more than ever. Our firm provides solutions for international legal affairs.

Areas of practice at Monolith Law Office: International Legal Affairs & Overseas Business[ja]