When foreign investors and others who are non-residents of Japan establish a corporation in Japan, this inward direct investment in Japan may be subject to prior notification requirements under the Foreign Exchange and Foreign Trade Law based on, among other things, the protection of national security concerns.
In some cases, foreign investors attempt to make an inward direct investment to Japan without completing the required prior notification for that investment. Since the prior notification procedures under the Foreign Exchange and Foreign Trade Act are complicated, it often takes time and money to complete it properly. For those reasons, as a foreign investor, you really need to think twice before investing in Japan without following and completing the required prior notification procedures.
This article provides an overview of the Foreign Exchange and Foreign Trade Act's prior notification requirements for inward direct investment as well as matters you should be careful about.
What do the terms “inward direct investment” and “specified acquisition” mean?
“Inward direct investment” refers to any of the following actions that involve a foreign investor in connection with a Japanese business (primarily the listed items below, but not limited to others).
- An acquisition [by a foreign investor] of 1% or more of the shares or voting rights of a Japanese domestic listed company, etc.
- An acquisition of shares or equity in a Japanese unlisted domestic company
- Consent to a proposal involving, among other matters, material changes in the business purpose of a domestic company, the appointment of directors or auditors, or the transfer of the entire business .
More specifically, for example, if you, as a foreign investor, establish a company in Japan and acquire its shares, or, if you acquire shares in a Japanese company, thereby becoming a new shareholder, you may exercise your voting rights as a shareholder at the general meeting of shareholders to appoint directors of the company whose shares you hold.
Whenever any of the actions in the bullet points above occur, it is necessary to determine whether that action would be considered inward direct investment, and if so, the necessary procedures for prior notification must be completed.
The term “specified acquisition” refers to the transfer (i.e. acquisition) of shares or equity interests in a domestic unlisted company by one foreign investor from another foreign investor. This is a different type of investment from inward direct investment .
Situations When a Prior Notice is Required
When making an inward direct investment or a specified acquisition, prior notification is required to the Minister of Finance and the Minister having jurisdiction over the business establishment if any of the following situations occur.
1 Based on the nationality or location of the foreign investor:
This applies when the nationality or country of residence of a foreign investor is a country or region other than Japan or the [countries and regions] on a list. Since the list contains many countries, please refer to the Bank of Japan’s website for details.
２ Depending on the business sector in which the foreign investor wishes to invest (i.e., investment in a “designated industry”)
When the business sector in which the foreign investor wishes to invest falls under the “designated business sector” category. The “designated business sectors” are determined not only by the business purpose stated in the company’s articles of incorporation, but also by the actual business activities conducted. These designated business sectors are frequently reviewed and new industries are added from time to time, so you will need to check the list each time you make an investment to see if your transaction falls into the category of one of the “designated business sectors”.
Designated Business Sectors
The designated business sectors include, among others, the manufacture and repair of weapons, aircraft, drones, rockets, and nuclear facilities equipment, and related software; certain metal mining; manufacturing, and software industries that possess certain technologies; the manufacture of certain pharmaceuticals and medical equipment; and the manufacturing of certain permanent magnets, semiconductors, lithium-ion storage batteries, and advanced electronic components. The above are representative examples, but is not an exhaustive list.
Core Businesses
“Core industries” are those designated business sectors which are considered to be particularly likely to be subject to national security concerns, etc., and other additional criteria may apply.
By way of example, “core industries” also include cybersecurity, electric power, gas, telecommunications, water supply, railways, certain segments of the petroleum industry, semiconductors, storage batteries, and advanced electronic components.
３ Iran-related Investors
Certain investments related to nuclear technology, etc., made by “Iranian persons” such as the Iranian government, natural persons of Iranian nationality, or legal entities established under Iranian law.
Procedures for prior notification
When a prior notification is required, be sure to follow the procedures below.
- Notifier: Submitted by the foreign investor. Not the Japanese company receiving the investment.
- Submission address: Notification to the Minister of Finance and the Minister in charge of the relevant business sector via the Bank of Japan.
- Submission period: Submit within 6 months prior to the date of the intended transaction or conduct.
- Prohibition period: As a general rule, no transactions or activities may be conducted for 30 days from the date of notification (the “prohibition period”). This period may be shortened once the review is completed.
If you submit a prior notification, you will receive an inquiry from the competent authority. The inquiry will cover a wide range of information, including information about the notifier and the purpose of the investment. The review process consists of two to three rounds of inquiries and responses. It may take some time to prepare your response as you will be asked some very detailed questions. However, the sooner you respond, the sooner the review process will be completed.
Once the review is complete, the case number will be posted on the Bank of Japan website. You will not be notified when the review is complete, so you will need to check the website yourself.
Once the review is complete, you will be able to make investments. Again, please keep in mind that these procedures must be taken separately for each investment.
What happens if you don’t submit the prior notification?
What are the disadvantages of not submitting the prior notification in advance? First of all, there are penalties and punishments. If a person makes an inward direct investment without filing the required prior notification, that person can be punished by imprisonment for not more than three years or a fine of not more than one million yen, or both.
However, if the value of the matter subject to the violation exceeds three times the amount of the fine, the fine will be three times the price or less, the fine cannot exceed an amount that is 3 times more than the value of the subject matter. As it is said, the amount of the fine is calculated to be up to 3 times the investment amount. As such, if the amount of the investment is large, then the amount of the fine could also be correspondingly large.
Please also keep in mind that if the transaction is considered to be an inward direct investment concerning national security, the Minister of Finance or the Minister having jurisdiction over the business sector may require additional necessary measures, such as the disposition of the shares held by the foreign investor, and the investment may eventually be rescinded.
How Kobe Legal Partners Can Help You!
Are you familiar with the complex requirements for the prior notification for inward indirect investments and specified acquisitions under the Foreign Exchange and Foreign Trade Act and the high risks involved in ignoring these required prior notification requirement? Believe it or not, there are some investors that are foolish enough to disregard these requirements under the Foreign Exchange and Foreign Trade Act, thereby running the risk of dire consequences.
In recent years, there has been an increase in investments in businesses that are likely to fall under the category of designated business sectors mentioned above, industries, such as AI-related development. Although not submitting the prior notification may reduce expenses, these violations are subject to very stiff penalties, and that risk is borne by the foreign investors. For that reason, we urge you to take the necessary procedures without being blindsided by attempts to reduce your expenses.