Japan: Construction Market And Construction Business Licenses In Japan

1. Overview

The Japanese construction market these days has been quite active due to, among other items, the upcoming 2020 Tokyo Summer Olympics (which are actually now to be held in 2021), integrated resorts (“IRs”) including casinos to be developed in Japan¹ and 2025 World Exposition which will be held in Osaka. They attract not just Japanese construction companies but also overseas construction companies looking to develop projects in Japan.

Overseas construction companies may be able to make use of their existing relationship with property owners who conduct developments and/or constructions in Japan, and overseas construction companies with knowledge, experience and/or special construction methods relevant to the Japanese construction market may be able to make use of such knowledge, experience and/or special construction methods to enter into the Japanese construction market. However, in order to engage in construction activities in Japan, your company will need to obtain a Japanese construction business license - something that is not that easy to obtain without knowing the necessary steps to get one and engaging professional support.

We discuss below the basic requirements for obtaining a Japanese construction business license.

2. Entities eligible to apply for construction business licenses

Both Japanese subsidiaries and Japanese branches of foreign companies may apply for a Japanese construction business license. However, unless there is a specific reason to use a Japanese branch for the application process, foreign companies tend to choose to incorporate their Japanese subsidiary in order to have a separation of liabilities between the foreign company and its Japanese arm and also in order to avoid disclosure of certain information belonging to the foreign company (e.g., financial information) to the Japanese authorities in charge of Japanese construction business licenses.

Even if a Japanese branch is used as a foreign company's arm in Japan, registration of such Japanese branch is required – which is essentially the same as in the case of using a Japanese subsidiary.

3. Construction business license categories

There are 29 different categories of Japanese construction business licenses, of which there are two (2) general ones and 27 more specific ones (please see below for more details). An applicant needs to apply for at least category or categories of licenses depending on the nature of the construction work to be done.

Broadly speaking, there are two (2) different categories of licenses – one is the “ordinary construction business license” and the other is the “special construction business license”. Applicants that are prime contractors that subcontract at least JPY 40 million (in the case of either of the two (2) “general” construction business licenses, at least JPY 60 million) of a project to subcontractor(s) will need to apply for a special construction business license. Otherwise, an ordinary construction business license would suffice.

If an applicant has office(s) in only one (1) prefecture, an application for a construction business license needs to be filed with the local government in that prefecture. Applicants with offices in multiple prefectures need to apply with the Ministry of Land, Infrastructure, Transport and Tourism (the “MLIT”). Please note that even if an applicant has an office in only one (1) prefecture, that does not mean that such applicant may not engage in construction work in another prefecture. Therefore, applicants often choose to apply for prefectural construction business licenses in order to avoid long lead-times associated with MLIT construction business license applications (please see Section 5 below).

Construction business licenses are valid for five (5) years upon being granted.

4. Requirements

There are several requirements to obtain an ordinary or a special construction business license, and the procedures and required documents are slightly different depending on the prefecture with which you apply. We explain the general requirements below.

4.1 PRMO and FTE

An applicant for an ordinary or a special construction business license needs to have the following full time staff members:

(i) a person responsible for management and operations (“PRMO”) of the company as a director; and

(ii) a full-time engineer (“FTE”).

There is no requirement that the above two (2) jobs should be staffed by different people, however, and a single person can act in both positions if they are duly qualified.

PRMO (The requirements are the same for an ordinary and a special construction business license.)

An applicant needs to have a full-time director who:

• has at least five (5) years' experience in chief management² of a project/development in the construction category in which the applicant applies for a construction business license;
• has at least six (6) years' experience in chief management of a project/development in a construction category different from the one in which the applicant applies for a construction business license;
• was in a position equivalent to a chief management person of a project/development in the construction category in which the applicant applies for a construction business license and with (i) at least five (5) years' experience as an executive officer conducting overall management of a project/development in the construction category or (ii) at least six (6) years' experience assisting management of the same;
• was in a position equivalent to a chief management person of a project/development in a construction category different from the one in which the applicant applies for a construction business license and with at least six (6) years' experience as an executive officer conducting overall management of a project/development; or
• was individually approved by the MLIT as a person having experience equivalent to any of the above requirements (e.g., experience as a director of a foreign construction company)³.

FTE (for ordinary construction business licenses):

An applicant needs to have an FTE who:

• has a certain national qualification relevant to the construction category in which the applicant applies for a construction business license⁴;
• has (i) at least three (3) years' work experience relevant to the construction category in which the applicant applies for a construction business license after graduating from a certain course at a university or (ii) five (5) years' work experience relevant to the construction category in which the applicant applies for a construction business license after graduating from a certain course at a high school; or
• has ten (10) years' work experience relevant to the construction category in which the applicant applies for a construction business license.

FTE (for special construction business licenses):

An applicant needs to have an FTE who:

• has a certain national qualification relevant to the construction category in which the applicant applies for a construction business license⁵;
• depending on the construction category in which it applies for a construction business license, has a certain national qualification relevant to the construction category and two (2) years' supervisory work experience of prime contractor work for projects worth an amount of JPY 45 million or more;
• depending on the construction category in which it applies for a construction business license, has ten (10) years' relevant work experience and two (2) years' supervisory work experience of prime contractor work for projects worth an amount of JPY 45 million or more;
• depending on the construction category in which it applies for a construction business license, has certain relevant educational career (and certain relevant work experience) and two (2) years' supervisory work experience of prime contractor work for projects worth an amount of JPY 45 million or more; or
• has a construction qualification and/or experience overseas and was individually approved by the MLIT as a person having the relevant qualifications and/or experience equivalent to any of the above requirements⁶.

4.2 Sincerity

In order to obtain a construction business license, an applicant, its directors, and the like may not be “persons who most probably will commit an unfair act or act in bad faith”. If an applicant's (i) architect license, real estate brokerage license, or the like was revoked because of an unfair act or an act in bad faith and (ii) five (5) years have not yet passed after such revocation, a construction business license is not granted for such applicant.

4.3 Financial Background, etc.

Ordinary construction business license:

Any of the following financial requirements needs to be satisfied to obtain an ordinary construction business license:

• have a stated capital amount of JPY 5 million or more (for a new company) or net assets equal to JPY 5 million or more (for an existing company);
• have deposit amounts equal to JPY 5 million or more; or
• (for an existing company) have been operating for at least five (5) years after having been granted a construction business license.

Special construction business license:

All of the following financial requirements need to be satisfied to obtain a special construction business license:

• have a capital deficit (if any) ratio of 20% or less;
• have a current ratio of 75% or more; and
• have a stated capital amount of JPY 20 million or more and net assets equal to JPY 40 million or more.

4.4 Grounds for Disqualification

If an applicant, its directors, or the like fall under any of the grounds for disqualification (e.g., an adult ward, person under curatorship, bankrupt whose rights have not been restored, an anti-social force (e.g., a gangster)), a construction business license is not granted.

In addition to Sections 4.1 to 4.4 above, bank account openings, physical office set up (leased offices are fine) and enrollment of employees in the health insurance plan are, among other practical steps, also required.

5. Steps

It usually takes one (1) to one and a half (1.5) months to incorporate a Japanese subsidiary of a foreign company and to obtain a corporate registry of such Japanese subsidiary.

A bank account opening usually takes two (2) to four (4) weeks.

The most important and often difficult part of this entire process is hiring of personnel who have the necessary qualifications to obtain a construction business license for a certain category for which there is no standard time period. If an applicant already has a specific construction project under consideration for which a Japanese construction business license is required, the hiring work needs to be started well in advance of the commencement of such construction project. We can also assist with this process communicating with recruitment (headhunting) companies and/or construction industry contacts.

After this entire process and an application to the relevant prefectural government, a license is usually granted within 30 to 45 days (depending on the prefecture). MLIT construction business licenses usually take around 120 days to be granted.

Footnotes

1 It is planned that around or starting Winter 2021 the Japanese national government will select three (3) locations (prefectures) for the development of integrated resorts, which will make gambling legal in such selected locations only.

2 If he/she was a director (torishimariyaku), it is easy to prove to the authority that he/she has the necessary qualifications since they can be found in a corporate registry. Otherwise, it needs to be considered what documents an applicant can submit to the authority to prove this. Close communications with the authority is important for this purpose.

3 The requirements for the MLIT approval is not very clear and we need to prepare documents together with notarized Japanese translations to prove that a person satisfies such requirements.

4 For example, for the general architectural and construction work category, (i) a first class building construction management engineer, (ii) a second class building construction management engineer (not relating to “structure” or “finishing” but relating to “architecture”), (iii) a first class architect or (iv) a second class architect.

5 For example, for the general architectural and construction work category, (i) a first class building construction management engineer or (ii) a first class architect. The qualification requirement for a special construction business license is more strict than that for an ordinary construction business license.

6The requirements for the MLIT approval are not very clear and we need to prepare documents together with notarized Japanese translation to prove that a person satisfies such requirements.

Originally Published by DLA Piper, November 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.