Does the concept of a 'permanent establishment' apply when a foreign person invests in real estate and, if so, how much does it cost to set up such a permanent establishment, how long does it take and what corporate governance requirements apply?
The term ‘permanent establishment’ is not a generically used term in Japan, other than for tax purposes where the concept is relevant to the tax rights of the country in which a permanent establishment has been created. Generally, for tax reasons, investors who are not resident in Japan would seek to avoid creating a permanent establishment in Japan. A Japanese limited liability partnership (yugensekinin-jigyokumiai, LLP) is not popular for non-Japanese real estate investors since at least one partner needs to be a Japanese resident, and all the partners, in general, need to participate in the business of the LLP.
The basic cost of setting up an LLP is often minimal. There are, however, additional costs such as taking legal and tax advice on whether this is an appropriate vehicle and structure and substantial cost will be incurred in drafting and negotiating (where necessary) a suitable constitution for the investment vehicle which regulates the rights and obligations of the investors and as between the investors and the sponsor or investment manager.
An LLP can be established by execution of an LLP agreement, payment of capital and registration of the LLP. The establishment of an investment vehicle with negotiated terms which will be suited to investors and the raising of funding from investors for that investment vehicle may take considerable time and the relationship and rights and obligations between the partners are usually governed by an LLP agreement.
Where a Japanese incorporated company is used, the Companies Act applies. This provides a comprehensive code governing the rights and obligations of a company itself, its directors and shareholders. Where a Japanese branch of a foreign company is used, the Companies Act applies to some extent.