The Decision That Shapes Your First Five Years
When incorporating a kabushiki kaisha (KK (株式会社)) or godo kaisha (GK (合同会社)) in Japan, one of the first decisions is how much paid-in capital (資本金 (shihonkin)) to register. This is a decision that most foreign companies underestimate because the legal minimum is so low: ¥1 (one yen) for both entity types under the Companies Act (会社法).
The legal minimum and the commercially sensible amount are different questions.
The capital amount you register at formation affects: whether you are exempt from consumption tax (JCT) collection in your first operating years, whether you qualify for SME tax treatment under corporate tax law, what banks expect when you apply for an account, and how credible your entity appears to enterprise counterparties and customs authorities.
This guide works through each threshold that matters and translates them into practical guidance for foreign companies entering Japan.
What Paid-In Capital Is and Is Not
Under the Companies Act (会社法), the paid-in capital (資本金) represents the funds contributed by shareholders at or after incorporation that are formally recorded as stated capital in the company's balance sheet and on the commercial registry.
What it is:
(a) A registered, publicly disclosed figure on the commercial registry (shogyo toki (商業登記))
(b) A balance sheet category that represents the permanent equity base of the company
(c) A threshold-setting figure that determines how several regulatory and tax rules apply
What it is not:
(a) A minimum operating cash balance. The company is not required to maintain ¥X in a bank account just because its stated capital is ¥X. Capital can be deployed for operations immediately after formation.
(b) A limit on losses. A company can operate at a loss and exceed its capital in cumulative losses; this triggers certain reporting obligations but does not automatically result in dissolution.
(c) Necessarily equal to the total funds the foreign parent has committed to the Japan subsidiary. Additional funding from the parent can be structured as shareholder loans or additional capital contributions depending on what makes sense for tax and operational purposes.
Minimum Capital: The Legal Floor
The Companies Act (会社法) abolished minimum capital requirements in 2006. Both KK and GK can be incorporated with ¥1 of stated capital.
In practice, ¥1 capital is effectively not viable. A company with ¥1 stated capital:
(a) Will be declined by virtually all Japanese banks for corporate account applications, as banks treat stated capital as a proxy for operational seriousness
(b) Will face heightened scrutiny from customs authorities and enterprise counterparties who review the commercial registry
(c) Signals that the founders have not thought through the capitalization question, which creates doubt about operational readiness
The practical minimum for a foreign-owned entity seeking to operate credibly in Japan is ¥1,000,000 to ¥5,000,000, with ¥3,000,000 to ¥5,000,000 being the most common range for entities seeking bank accounts and enterprise client relationships.
Threshold 1: ¥10,000,000 - The Consumption Tax (JCT) Exemption Line
This is the threshold with the most immediate financial impact on a newly incorporated company.
The general rule under Consumption Tax Act (消費税法): A newly incorporated company is exempt from the obligation to collect and remit consumption tax (消費税 (shohizei)) for its first two fiscal years, provided that its stated capital at formation is below ¥10,000,000.
If stated capital is ¥10,000,000 or above at incorporation: The JCT exemption does not apply, and the company must register as a JCT-paying business (kazei jigyo-sha (課税事業者)) from the first day of operations. It must collect 10% JCT on taxable sales and remit it to the tax authorities.
What this means in practice:
(a) If your capital is below ¥10,000,000: You will typically have a two-year window in which you do not need to collect JCT on your sales (subject to exceptions; see below). During this period, you still pay JCT on your purchases but cannot recover it as input tax credit, so the net position depends on whether you are primarily selling or primarily purchasing.
(b) If your capital is ¥10,000,000 or above: JCT obligations begin immediately. For a B2B business selling to other JCT-registered businesses, this is typically neutral (your customer recovers the JCT as input tax). For a business with significant B2C sales or sales to non-JCT-registered buyers, the immediate JCT obligation increases the effective cost of your offering by 10%.
Important exceptions and complexity: The JCT exemption regime is governed by multiple criteria beyond stated capital, including whether the company's taxable sales exceed the threshold in certain prior periods. Tax treatment for non-resident or foreign-owned entities may also differ from the general rule. Engage a qualified tax accountant (税理士) before making the capitalization decision on JCT grounds. See also JCT Tax Representative Guide.
Practical guidance: If your business is primarily B2B and your counterparties are JCT-registered businesses, the JCT exemption provides minimal cash flow advantage because your customers recover the JCT in any case. For businesses with B2C or mixed revenue, the two-year exemption provides meaningful cash flow benefit, and staying below ¥10,000,000 is worth considering.
Threshold 2: ¥100,000,000 - The Large Company (大会社) Line
Under the Companies Act (会社法) and the Corporate Tax Act (法人税法), companies with stated capital (or stated capital plus additional paid-in capital in certain calculations) at or above ¥100,000,000 are classified as "large companies" (大会社 / 大法人) for specific purposes.
What the ¥100,000,000 threshold triggers:
(a) Corporate governance obligations under the Companies Act (会社法): Large KKs with capital of ¥500,000,000 or more (or those with listed shares) are subject to mandatory audit committee or accounting auditor (kaikei kansanin (会計監査人)) requirements. Below ¥500,000,000 stated capital (the more common foreign-owned entity range), the specific governance requirements depend on whether the company elects certain corporate governance structures, but ¥100,000,000 is still a relevant marker for additional statutory audit requirements in some configurations.
(b) SME preferential tax rates under 法人税法: Japanese SME tax provisions (including reduced corporate tax rates on the first ¥8,000,000 of taxable income) are available only to companies whose capital is below ¥100,000,000 and who are not subsidiaries of large companies. Foreign subsidiaries of large multinational parents may not qualify for SME rates regardless of their own capital amount, because the group relationship matters.
(c) Mandatory electronic tax filing: Companies with capital of ¥100,000,000 or above are required to file certain corporate tax returns electronically.
(d) Consumption tax and size-based surcharges: Under the Local Tax Act (地方税法), the local business tax (jigyo zei (事業税)) calculation for large companies (defined differently in local tax law, but ¥100,000,000 is a common marker) includes a size-based levy (gaigata hyojun kazei (外形標準課税)) on payroll and capital, not just on taxable income. This creates a minimum local business tax obligation even in loss years.
Practical guidance: Most foreign-owned Japan subsidiaries that are market-entry or representative entities do not approach the ¥100,000,000 threshold voluntarily. The threshold becomes relevant when a company is raising capital for a significant Japan operation, in which case the tax and governance implications should be explicitly modeled with a tax advisor.
Threshold 3: ¥5,000,000 - The Social Insurance and Practical Floor
Below ¥5,000,000, some insurance-type calculations and general creditworthiness assessments begin to treat the entity as having minimal commercial credibility. This is not a hard statutory threshold in the way the JCT and large company thresholds are, but it operates as a practical floor in several contexts:
(a) Bank account applications: many regional banks and some megabanks informally target ¥3,000,000 to ¥10,000,000 as the minimum capital they expect from a new foreign-owned applicant
(b) Supplier and customer due diligence: enterprise procurement departments often review stated capital as part of vendor onboarding; sub-¥1,000,000 capital flags as a risk indicator
(c) Customs creditworthiness: Customs authorities assess importer credibility based on multiple factors; very low stated capital can be one negative indicator
What Capital Amount Should You Choose?
Drawing the thresholds together, the practical decision for most foreign companies is:
If you are a B2B services or consulting entity with no physical goods, capital below ¥10,000,000 for your first two years: Set capital at ¥3,000,000 to ¥5,000,000. You stay below the JCT threshold, appear credible to banks and counterparties, and keep the registration tax at the statutory minimum (¥150,000 for KK, ¥60,000 for GK). The two-year JCT exemption is useful if your early revenues are B2C or mixed.
If you are an import/export trading company or need customs credibility from day one: Consider ¥5,000,000 to ¥10,000,000. This provides credibility with customs authorities and enterprise customers. Stay below ¥10,000,000 if the JCT exemption has cash flow value for your model; exceed it if you need to project greater scale.
If you are a regulated entity (financial, medical, telecom) or need to meet a specific ministry's capitalization requirement: Check the sector-specific minimum capital requirements with your regulatory advisor. Some regulated activities have minimum capital requirements that exceed the general Companies Act floor significantly.
If you plan to grow rapidly and raise equity in Japan: Incorporate with the capital that reflects the anticipated first-round investment rather than an artificially low figure. Increasing capital later triggers additional registration tax (0.7% of the incremental amount) and a formal shareholders' resolution.
If you are entering via acquisition of an existing shell KK: The shell's existing stated capital is what it is. If you need to align the capital with your capitalization plan, you can increase or reduce capital post-acquisition through a formal procedure. See Japan Capital Increase Guide.
Capital Increase vs. Starting Right
Many foreign companies incorporate with artificially low capital (¥100,000 or ¥1,000,000) with the intention of increasing it later if the Japan business succeeds. This approach has real costs:
(a) Additional registration tax on increase: 0.7% of the incremental capital amount (no minimum on increases, just the 0.7% rate).
(b) Shareholder resolution requirement: For a KK, a capital increase requires a board resolution and, in most cases, a shareholders' general meeting resolution. For a foreign parent acting as sole shareholder, this means producing a proper shareholders' written resolution, having it translated and authenticated if required by the bank, and registering the change at the Legal Affairs Bureau.
(c) Bank KYC re-documentation: The bank will typically require updated documentation reflecting the new capital amount.
The cost of a capital increase is meaningful but not prohibitive. The greater risk of starting too low is signaling under-capitalization to banks and counterparties in the critical early period when the company is establishing its credibility. Starting with the right capital amount is typically the better approach.
Foreign Parent Capital Injection: Equity vs. Shareholder Loan
When a foreign parent funds its Japan subsidiary, the injection can take two forms: equity (subscription for new shares or units, increasing stated capital) or shareholder loan (a debt instrument from the parent to the subsidiary). The choice affects:
(a) Repatriation flexibility: Equity capital is more constrained to repatriate (requires distribution of dividends or capital reduction); shareholder loans can be repaid as the business generates cash.
(b) Transfer pricing: Interest on shareholder loans is subject to Japan transfer pricing rules (the interest rate must be arm's length). Equity has no transfer pricing obligation but dividends paid back to the parent are subject to withholding tax.
(c) Registration tax: Only capital formally recorded as stated capital (資本金) triggers registration tax. Funds recorded as additional paid-in capital (shihon joyo-kin (資本剰余金)) via a split of the subscription amount between capital and surplus do not trigger additional registration tax in some circumstances.
(d) Optics: The commercial registry shows only the stated capital figure, not shareholder loan balances. For credibility with banks and counterparties, stated capital matters more than the total funding picture.
The optimal structure depends on the expected funding trajectory, repatriation plan, and tax position. Engage a Japan tax accountant (税理士) before the first capital contribution.
How Aplash Can Help
Aplash supports the entity structuring decision, including capital amount planning, when foreign companies are preparing for Japan market entry. We assess the interaction between capitalization, import and regulatory credibility, and the company's specific business model before the structure is set.
For companies entering Japan through import activity, we also assess whether full entity incorporation is the right first step, or whether an IOR structure (Aplash acts as importer) removes the need for a Japan entity in the near term. Capitalization questions are most relevant for companies that are establishing a Japan operating entity.
See also: KK vs. GK Guide, Japan Company Formation Cost Guide, Japan Capital Increase Guide, Japan Company Incorporation Guide, and JCT Tax Representative Guide.
This article is for informational purposes. It does not constitute legal, tax, or financial advice. Tax thresholds and regulations are subject to change; the JCT exemption rule in particular has been subject to multiple amendments and applies subject to several criteria. Verify current rules with a qualified Japan-licensed tax accountant (税理士) before making capitalization decisions.