In the Japanese business environment, the adjustment of a company’s capital structure is a crucial strategic decision-making process. Whether it is capital increase or capital reduction, it can have a profound impact on the company’s financial situation, business strategy and future development. For companies operating in the Japanese market or planning to enter the Japanese market, a deep understanding of the concepts, processes and impacts of capital increase and capital reduction is not only a requirement for compliance operations, but also the key to optimizing corporate structure and enhancing competitiveness.

Japanese company law has clear definitions and strict regulations on capital increase and capital reduction. Capital increase, or “zōshi”, refers to the act of a company increasing its registered capital through various means. This may be due to the company’s need to expand its business scale, or to improve its financial situation and enhance its credit. In contrast, capital reduction, or “reduction” (genshi), is the process of reducing a company’s registered capital. Capital reduction may be to optimize the capital structure, reduce unnecessary capital occupation, or as a strategy to deal with business difficulties.

It is worth noting that Japan’s capital increase and reduction procedures are different from those in many countries. Japanese company law emphasizes the protection of the interests of creditors and small shareholders, so a series of legal procedures and announcement requirements are set up during these capital changes. At the same time, due to the characteristics of Japan’s business culture, capital increase and reduction may also involve complex interpersonal relationships and corporate image considerations.

For companies that are doing or planning to do business in Japan, a comprehensive understanding of the relevant knowledge of capital increase and capital reduction is not only a legal compliance requirement, but also an important part of corporate strategic management. This article will introduce in detail the complete process of capital increase and capital reduction of Japanese companies, legal requirements, and practical considerations, providing comprehensive and practical guidance for companies.

Japanese company capital increase process

Capital increase of Japanese companies is an important strategic decision in the process of enterprise development, which can not only enhance the company’s financial strength, but also improve the company’s market reputation. In Japan, there are two main types of capital increase: paid capital increase and free capital increase. Paid capital increase means that the company raises funds by issuing new shares to existing shareholders or new investors, while free capital increase usually converts the company’s capital reserve or undistributed profits into capital without the need for shareholders to make additional capital contributions.

Before starting the capital increase process, the company needs to make adequate preparations. First, a shareholders’ meeting must be held and a capital increase resolution must be passed. For certain types of companies, such as joint stock companies, a board of directors meeting must also be held and a corresponding resolution must be made. These resolutions are not only legal requirements, but also an important step to ensure that the capital increase process is legal and compliant.

The specific steps of capital increase include multiple links and need to be handled with caution. First, the company needs to amend the articles of association according to the capital increase plan, especially the part involving registered capital and equity structure. Subsequently, the company needs to prepare a series of documents related to capital increase, including the resolution of the shareholders’ meeting (or board of directors), the amended articles of association, capital contribution certificate, etc. After preparation, the company needs to submit an application for capital increase registration to the Legal Affairs Bureau of the jurisdiction. When submitting the application, don’t forget to pay the corresponding registration fee, which is usually determined by the amount of capital increase.

After completing the capital increase registration, the company still has some follow-up work to do. First, the company may need to update the company seal to reflect the new registered capital information. Second, the company should promptly notify relevant parties, such as cooperative banks, tax bureaus, etc., to inform them of the change in the company’s capital. This is not only for business etiquette, but also to ensure that the company’s information is consistent in all aspects to avoid possible legal or financial problems in the future.

By carefully planning and executing the capital increase process, Japanese companies can successfully complete capital expansion and lay a solid foundation for further development of the company. However, given the complexity of the Japanese legal system, it is recommended that companies consult professional legal and financial advisors when conducting capital increases to ensure that the entire process is legal and compliant and to maximize the strategic benefits of capital increases.

Japanese company capital reduction process

During the course of business operations, Japanese companies may need to reduce capital for various reasons. Capital reduction is a complex process involving multiple steps and legal requirements. This article will detail the types of capital reductions, preparations, specific steps, and precautions for Japanese companies.

There are two main types of capital reduction: ordinary capital reduction and special capital reduction. Ordinary capital reduction means that the company reduces its capital to a certain amount, but still retains some of the capital. Special capital reduction means reducing the capital to zero, which usually occurs when the company is reorganized or restructured. No matter which type is chosen, the company needs to carefully consider its impact.

Before starting the capital reduction process, the company needs to make adequate preparations. First, a shareholders’ meeting must be held and a special resolution must be passed. This resolution must be agreed to by shareholders representing more than two-thirds of the total number of issued shares of the company. Second, the company must initiate a creditor protection procedure. This procedure is designed to protect the interests of creditors and is a special requirement of Japanese company law.

The specific steps of capital reduction include the following steps. First, the company needs to announce the capital reduction plan, usually through the official gazette and the company website. After the announcement, the company needs to give creditors a certain period (usually one month) to raise objections. If a creditor raises an objection, the company must negotiate with it or provide appropriate guarantees. Next, the company needs to prepare a series of documents, including a copy of the capital reduction resolution, a creditor objection handling report, etc. Finally, these documents are submitted to the Legal Affairs Bureau of the jurisdiction for registration.

After completing the capital reduction, the company has some important follow-up work. The first is to update the company seal, because the seal usually contains capital information. Secondly, the company needs to evaluate the impact of the capital reduction on taxes. Capital reduction may involve complex tax treatment. It is recommended to consult a tax expert to ensure compliance and optimize tax arrangements.

Although the capital reduction process in Japan is complex, it can be successfully completed as long as it is carefully planned and strictly complies with legal requirements. For Japanese companies considering capital reduction, it is recommended to hire professional legal and financial advisors to ensure that the entire process is legal and compliant and to maximize the strategic benefits of capital reduction.

Legal requirements specific to Japan

Japan has some unique legal requirements for company capital increase and capital reduction, which are designed to protect investors, creditors and the public interest. Understanding these special requirements is essential to successfully completing the capital increase or capital reduction process in Japan. Below we will introduce three main aspects in detail: the minimum capital system, the creditor protection system and the announcement obligation.

1. Minimum capital system

Japan used to have a strict minimum capital system, requiring a stock company (Kabushiki-Kaisha) to have a capital of at least 10 million yen, and a limited liability company (Godo-Kaisha) to have 3 million yen. However, since the implementation of the new Company Law in 2006, this requirement has been abolished. Now, in theory, a company can be registered with 1 yen.

Despite this, in practice, many Japanese financial institutions and business partners still prefer to cooperate with companies with higher capital, believing that this reflects the company’s strength and reputation. Therefore, although the law no longer requires a minimum capital, companies still need to consider industry standards and business needs when deciding on initial capital or the amount of additional capital.

2. Creditor protection system

Creditor protection is a very important procedure when reducing capital in Japan. The purpose of this system is to ensure that the company does not harm the interests of creditors when reducing capital. Specifically, when a company decides to reduce capital, it must follow the following steps:

First, the company needs to announce the capital reduction plan in the official gazette and on the company website, specifying the details of the capital reduction and the deadline for creditors to file objections. This deadline is usually not less than one month. During this period, creditors have the right to raise objections.

If any creditor raises an objection, the company must negotiate with it and may need to provide additional security or repay the relevant debt. Only after all creditors’ objections are resolved can the company proceed with the capital reduction procedure.

This system reflects the high regard that Japanese law places on the rights and interests of creditors and is also an important mechanism to ensure that the capital reduction process is fair and transparent.

3. Announcement Obligation

In Japan, both capital increase and capital reduction of a company involve important announcement obligations. This is not only a legal requirement, but also an important means to ensure the transparency of company operations. The main content and methods of the announcement are as follows:

For capital increase, the company needs to announce the capital increase plan in a timely manner after the shareholders’ meeting resolution, including the number of new shares issued, price and subscription method, etc. This information usually needs to be published on the company’s website and officially designated media.

The requirements for capital reduction announcements are more stringent. In addition to publishing on the company website and official media, it is also necessary to notify known creditors individually. The announcement must include the specific plan for capital reduction, the deadline within which creditors can raise objections, etc.

In addition, whether it is a capital increase or a capital reduction, it needs to be registered with the Legal Affairs Bureau after completion, and an announcement must be made again after the registration is completed to inform the public that the changes have taken effect.

These announcement obligations are not only a legal compliance requirement, but also an important measure to protect the rights and interests of investors, creditors and other stakeholders. For companies operating in Japan, strict compliance with these announcement requirements is the key to maintaining corporate reputation and avoiding legal risks.

Tax Impact of Capital Increase and Capital Reduction

When increasing or reducing capital in Japan, the tax impact is an important factor that cannot be ignored. Understanding the relevant tax considerations will not only help companies make wise financial decisions, but also effectively avoid potential tax risks. This section will focus on corporate tax considerations and related tax issues such as stamp duty.

1. Corporate tax considerations

From a corporate tax perspective, capital increase and capital reduction may have a profound impact on a company’s tax status. Capital increase usually does not directly trigger corporate tax burden, but may affect the company’s eligibility for various tax incentives. For example, certain preferential policies for small and medium-sized enterprises may no longer be applicable due to capital increase. On the other hand, capital reduction may lead to more complex tax consequences.

When reducing capital, if the company returns an amount to shareholders that exceeds their capital contribution, the excess amount may be considered a “deemed share” and subject to income tax. In addition, a capital reduction may affect the company’s right to carry forward losses. Under Japanese tax law, when a company’s capital is reduced to a certain level, unused losses from previous years may be restricted or invalidated.

It is worth noting that Japan has introduced a new economic security system since October 2023. The system requires companies in certain fields to report to the government in advance when making major capital changes, including large-scale capital increases or reductions. Although this does not directly involve taxation, it may indirectly affect the company’s tax strategy formulation.

2. Stamp duty and other related taxes and fees

During the capital increase and reduction process, companies also need to consider various related taxes and fees, the most common of which is stamp duty (stamp tax). In Japan, many legal documents related to capital increase and reduction are subject to stamp duty. For example, capital change resolutions are usually subject to stamp duty based on the amount of the change. As of 2024, stamp duty rates range from 200 yen to 600,000 yen, depending on the type of document and amount.

In addition to stamp duty, companies also need to consider registration exemption tax (登録免許税). This is a tax that must be paid when registering a change in capital at the Legal Affairs Bureau. For stock companies (株式会社), the tax rate for capital increase registration is 0.7% of the amount of capital increase, with a minimum tax of 150,000 yen. A fixed amount of 30,000 yen is required for capital reduction registration.

In addition, if the capital increase involves real estate contributions, real estate acquisition tax and registration tax may also need to be considered. Although these taxes and fees are not common items in the process of capital increase or reduction, they still need to be paid attention to in certain circumstances.

In general, the tax impact of capital increase and reduction is multifaceted and requires comprehensive consideration by the company’s management. It is recommended to consult a tax expert before making any capital changes to ensure a comprehensive understanding of the potential tax impact and to develop the best tax strategy. At the same time, it is also crucial to keep abreast of the latest changes in Japanese tax laws, as adjustments to tax policies may affect the decision-making and execution of capital increase and reduction.

Frequently Asked Questions and Answers

Q1: How long is the time period for capital increase and reduction?

A1: The time period for increasing or reducing capital varies depending on the specific circumstances of the company. Generally speaking:

The capital increase process is relatively quick and can generally be completed within 4-6 weeks. This includes steps such as preparing documents, holding a shareholders’ meeting, amending the company’s articles of association, and applying to the Legal Affairs Bureau.

The capital reduction process is relatively complicated, especially when it involves the creditor protection procedure, and the entire process may take 2-3 months. It is worth noting that the capital reduction announcement period takes at least one month, which is the shortest period required by law in order to protect the rights and interests of creditors.

Q2: What special considerations do foreign-invested enterprises have to take when increasing or reducing capital in Japan?

A2: When foreign-invested enterprises increase or reduce capital in Japan, they need to pay special attention to the following points:

• Foreign Exchange and Foreign Trade Act compliance: When making large investments in certain industries, you may need to report to the Japanese government in advance.
• Cross-border capital flows: The sources of capital increase often involve cross-border capital transfers, which require consideration of foreign exchange controls and international tax issues.
• Industry restrictions: Certain special industries (such as telecommunications and broadcasting) have restrictions on foreign shareholdings. When increasing capital, care should be taken not to exceed these restrictions.
• Professional assistance: It is recommended to hire professionals who are familiar with Japanese laws and international business to assist in the operation.

Q3: What are the common reasons for failure of capital increase or reduction? How to prevent it?

A3: Common reasons and preventive measures for failure of capital increase or reduction are as follows:

Common causes:

• Inadequate documentation
• Irregularities in legal proceedings
• Disagreements among shareholders
• Creditors strongly object (when reducing capital)

Precautions:

• Hire experienced legal advisors and accountants to ensure that all documents and procedures comply with the latest legal requirements.
• Before officially launching the process, communicate fully to gain the support of major shareholders.
• For capital reduction, communicate with major creditors in advance, explain the necessity and provide corresponding guarantee measures.
• Develop detailed timelines and contingency plans to deal with possible delays or obstacles.
• Comprehensively evaluate the impact of capital increase or reduction on all aspects of the company, including financial status, market image, employee morale, etc., to ensure that these actions can truly promote the company’s sustainable development.

Through these measures, most companies can successfully complete the capital increase and reduction procedures while maximizing their positive impact on the company’s development.

Case Study

1. Successful capital increase case

In 2022, TechWave Co., Ltd., a technology startup based in Tokyo, successfully completed a large-scale capital increase. The company’s original capital was 10 million yen, and through this capital increase, the capital was increased to 100 million yen. The capital increase process took about 2 months and was mainly participated by existing shareholders and a venture capital company. TechWave’s capital increase strategy is mainly based on its breakthrough progress in artificial intelligence technology and rapidly expanding market demand. The company’s management believes that sufficient funds will support it to increase its R&D investment, expand its talent team, and explore new market areas.

During the capital increase process, TechWave paid special attention to the compliance of the procedures. First, the company held a special shareholders meeting and obtained the unanimous consent of all shareholders. Subsequently, the company hired professional legal advisors and accountants to assist in the preparation of a detailed capital increase plan and related documents. Before submitting the application to the Tokyo Legal Affairs Bureau, the company also specially reviewed all documents to ensure that the information was accurate. It is worth mentioning that TechWave maintained close communication with investors throughout the process and answered their concerns in a timely manner, which laid a good foundation for the smooth progress of the capital increase.

After the capital increase was completed, TechWave quickly adjusted its business strategy and used the additional funds to develop a new generation of AI products and expand overseas markets. The company also attracted more high-quality talents by increasing employee salaries and benefits. This successful capital increase not only improved TechWave’s financial strength, but also greatly enhanced its competitiveness and influence in the industry.

2. Successful capital reduction case

In contrast to the capital increase case is the capital reduction case of Osaka Machinery Co., Ltd., a long-established manufacturing company in Osaka in 2023. The company was founded in the 1960s and was once a leader in Japan’s industrial machinery field. However, with the adjustment of industrial structure and intensified international competition, the company has continued to lose money in recent years. In order to optimize the financial structure and improve operating efficiency, the company decided to significantly reduce its capital.

Osaka Machinery’s original capital was 500 million yen, and the capital reduction plan will reduce it to 100 million yen. The capital reduction process took about three months in total, and the company’s management showed a high degree of professionalism and responsibility throughout the process. First, the company held a special meeting of the board of directors and shareholders to explain in detail the necessity and specific plan of the capital reduction, and obtained the necessary internal approvals. Subsequently, the company announced the capital reduction plan in the official gazette and on the company’s website in accordance with legal requirements, and gave creditors sufficient objection period.

During the period of creditor objection, the company actively communicated with major creditors, explaining that the capital reduction would not affect the company’s debt repayment ability, but would be beneficial to the company’s long-term development. Through patient communication and necessary guarantee measures, the company successfully resolved the creditors’ concerns. When preparing the capital reduction application documents, the company paid special attention to ensuring the accuracy and completeness of all information to avoid being returned by the Legal Affairs Bureau or requiring additional materials.

After the successful capital reduction, Osaka Machinery quickly implemented a series of reform measures. The company streamlined its organizational structure, closed some loss-making businesses, and concentrated resources on core product lines with competitive advantages. At the same time, the company also improved production efficiency by introducing new technologies. These measures enabled the company to turn losses into profits and regain market confidence. Osaka Machinery’s successful capital reduction case shows how to cope with operating difficulties through capital structure adjustments, and provides a useful reference for many Japanese companies facing similar challenges.

Conclusion

As important tools for corporate financial management, capital increase and capital reduction play a key role in the development of Japanese companies. The rational use of these two strategies can not only optimize the company’s capital structure, but also lay a solid foundation for the company’s strategic adjustment and long-term development. Capital increase can inject new vitality into the company and provide more funds to support business expansion, technological innovation or market development. Capital reduction may help the company reduce operating costs, improve financial conditions, and even play a role in self-rescue in times of crisis. Whether it is an emerging company in a period of rapid growth or an old company facing transformation challenges, it should deeply understand and flexibly use the management method of capital increase and capital reduction.

However, in Japan, a country with a strict legal system and a complex business environment, capital increase and capital reduction are by no means easy. From legal procedures to tax impacts, from balancing shareholder interests to protecting creditor rights, every link requires the support of professional knowledge and rich experience. A seemingly simple decision may involve professional judgments in multiple fields such as corporate law, tax law, and labor law. Therefore, we strongly recommend that companies seek help from professional organizations when considering capital increase or reduction. Hiring experienced legal advisors, accountants, and tax experts can not only ensure the compliance and smooth progress of the entire process, but also help companies better evaluate the pros and cons of various options and develop the best solution.

In the ever-changing business world, timely adjustment of the company’s capital structure may become the key to a company’s success. But at the same time, we must also realize that capital increase or reduction is not a panacea, but should be based on the company’s actual situation and long-term planning to make prudent decisions. Through the detailed introduction of this article, we hope to provide valuable reference for companies operating in Japan or planning to enter the Japanese market. But more importantly, we hope that readers can realize that in the complex Japanese business environment, the importance of professional knowledge and local experience cannot be overemphasized. Only by making full use of professional resources can companies seize opportunities and avoid risks in the wave of capital increase and reduction, and achieve real value enhancement and sustainable development.