Godo Kaisha

Overview

Godo Kaisha (“GK”) is a type of corporate entity introduced with the enactment of revisions to the Companies Act in 2006, that places emphasis on the personal relationship between company members, and is characterized by granting the company considerable flexibility with respect to methods of decision making for operations, distribution of profits and other internal matters.

Checkable

GK is an entity eligible to be treated as disregarded entity for US tax purposes.  

Kabushiki Kaisha (“K.K.”) entity is a per se corporation for US federal income tax purposes and is not a “checkable” entity.  

Capital registration tax 

From a Japanese tax viewpoint, there is generally no significant difference between a GK and a KK.   Strictly speaking, there is a difference related to capital registration tax.   

For a KK’s initial contribution, registration tax is imposed on its stated capital at a rate of 0.7%, subject to a minimum tax of JPY 150,000. 

For a GK’s initial contribution, registration tax is imposed on its stated capital at a rate of 0.7%, subject to a minimum tax of JPY 60,000. 

Both a KK and a GK would be subject to capital registration tax at a rate of 0.7% on any subsequent increase of its stated capital, subject to a minimum tax of JPY 30,000.   

However, a KK is required to recognize at least 50% of paid-in capital that is contributed as stated capital, whereas a GK is not required to treat any portion of an additional capital contribution as stated capital.  Thus, if a GK books the entire amount of a contribution as capital surplus, it would not be subject to any capital registration tax on a capital increase. 

Factor-based enterprise tax 

In addition, GK entity is better to avoid the factor-based enterprise tax which apply to companies with stated capital 100M or more.  Some components like capita levy, value added levy (salaries, interest, rent fees and income) are not creditable for U.S. tax purposes. 

Factor-based enterprise taxes, of which some components may not be creditable for U.S. foreign tax credit purposes, would not be imposed if the company’s stated capital is JPY 100 million or less. 

Less prestigious

There are some downsides from a business perspective.  As far as we know, a G.K. is less prestigious than a K.K. in Japan.  Therefore, we heard that a G.K. may be at a disadvantage when it comes to doing business or experience difficulty in recruiting senior Japanese employees.  

Subject to confirmation with Japanese legal counsel, it is our understanding that, as a Japanese G.K. is essentially equivalent to a U.S. LLC where ownership and management are closely integrated, a member is expected to be directly engaged in the management of a G.K.  As such, if a member is a body corporate, it must appoint a natural person as an operating officer (“Shokumu Shikkosha”) who acts on its behalf, and the operating officer appointed should be treated as a director whose compensation is subject to limitations on deductibility for Japanese tax purposes. 

In Japanese business culture, the KK structure continues to be more popular, with better financial credibility.  In recent years, however, GKs have become increasingly accepted.  If you need only a simple Japanese subsidiary that will be run by a foreign parent company, the GK form is an option worth considering. 

Introduction