Convergence of Japanese
GAAP with IFRS
Selected Topics
from the 2006 Tax Reform Act
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OKAMOTO & COMPANY
International Accounting Office
/ Hanato Tax Accountant Office
Hirakawacho Daiichi Seimei Building 1F,
1-2-10 Hirakawacho, Chiyoda-ku Tokyo Japan 102-0093
TEL +81-3-5276-0900
FAX +81-3-5276-0950
E-mail:info@okamoto-co.com
| The New Corporate Law | Japanese... |
The new Corporation Law ("new Law") was implemented on May 1, 2006. The new Law is designed to stimulate the formation of new entities and allow more flexible corporate management. The purpose of this revision is to modernize both formally (i.e. language used was modernized by converting from classical literary Japanese to modern colloquial Japanese) and substantially the overall corporate legislation in response to the changing social and economic circumstances. The main changes under the new Law are as follows:
| 1. | Changes to the entity types | ||
| (1) | Abolishment of Yugen Kaisha (Yk) | ||
| (2) | New form of corporation: LLC | ||
| The new Law provides for a new form of legal entity namely, the Limited- liability Company or LLC, called "Godo-Gaisha" in Japanese. However, unfortunately the Godo-Gaisya is not a pass-through entity level. | |||
| 2. | Requirements in establishing companies | ||
| (1) | Elimination of minimum-capital requirement | ||
| (2) | Elimination of capital deposit certificate | ||
| (3) | Relaxation on the treatment of investments in kind | ||
| 3. | Corporate organizational structure | |
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Prior to the new Law, all Kabushiki Kaisha (KKs) were required to place at least three board members and
at least one statutory auditor regardless of the corporate size and closed shareholdings. Under the new Law, companies with an articles of incorporation, which stipulates a restriction on stock transfers (i.e. closely-held corporation) can flexibly choose a corporate organizational structure which fits their needs. For a closely-held corporation, a corporate structure of one director with no statutory auditor is permitted. |
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| 4. | Treatment on the distribution of dividends | |
| Under certain circumstances, dividends can be distributed multiple times in a year. Furthermore dividend payments may be approved, subject to certain conditions, by a resolution of the board of directors. | ||
| 5. | Revised form of financial reports | |
| Under the new Law, "the Statement of proposition for appropriation of earnings" was abolished. A new "Statement of Changes in Shareholders' Equity" is now required. | ||
| 6. | Directors’ responsibility on internal controls | |
| The board of directors must adopt a resolution on the fundamental policies for internal control. This requirement applies to all large companies (i.e. corporate with capital of 500 million yen or more, or with liabilities of 20 billion yen or more). | ||
| 7. | Other revisions and issues | ||
| (1) | Pseudo-foreign companies | ||
| The new Law stipulates that pseudo-foreign companies principally cannot continue to conduct transactions in Japan to prevent businesses from evading Japanese corporate legislation. The pseudo-foreign companies (called giji gaioku-gaisha) are defined as companies incorporated outside of Japan but primary operations are based in Japan. | |||
| (2) | Introduction of board of directors decisions by written vote | ||
| (3) | Terms of directors and corporate auditors | ||
| Under the new Law, the terms of directors and statutory auditors can be extended up to 10 years as long as the KKs are a closely-held company. | |||
| (4) | Redefining the "subsidiaries" | ||
| (5) | Notification to shareholders through website | ||
| Notices to shareholders such as invitations to shareholders' meeting and financial reports can now be made through the company website under certain conditions (such provisions must be included in the articles of incorporation). | |||
| (6) | Flexibility in bond issuances | ||
| (7) | Revisions to facilitate corporate reorganizations | ||
Although there is more flexibility in the new Law, the enforcement is known to increase. We recommend you discuss any concerns on the above with your legal advisor.