📢 Newsletter: Foreign Direct Investment in Japanese IT Businesses – Key Considerations

1.       Overview

Foreign direct investments (FDI) in Japan are regulated under the Foreign Exchange and Foreign Trade Act (FEFTA). Foreign investors acquiring shares or other equity interests in Japanese companies may need to submit either:

• Prior Notification – filed before the investment with the Bank of Japan

• Post-Transaction Report – filed after the investment

A prior notification is required when all three of the following apply:

1. The investor is a foreign investor under FEFTA

2. The investment qualifies as a foreign direct investment or specific acquisition

3. The target company operates in a designated business sector

Among the designated sectors, IT-related businesses require special attention.

2.       IT Businesses Requiring Prior Notification

Under Appendix Table 2 of the FEFTA Cabinet Order, the following IT businesses are subject to prior notification:

• 3911 Contract-based Software Development – Creating computer programs under contract, including related research, analysis, and consulting

• 3912 Embedded Software – Developing software embedded in devices such as ICT equipment, transportation machinery, and home appliances

• 3913 Packaged Software – Creating packaged software programs and providing related analysis or consulting

• 3921 Information Processing Services – Commissioned information processing services, data entry, and data center operations

It is important to review not only the articles of incorporation but also the actual nature of the business to determine whether the target company falls under these categories.

3.       Definitions (Japan Standard Industrial Classification)

Here is a brief summary of the classification (revised October 2013):

Code	Category	Key Points	Examples	Exclusions
3911	Contract-based Software Development	Contracted program creation, including research/consulting	System development, system integration services	Packaged software [3913], embedded software [3912]
3912	Embedded Software	Software to control or enable device functionality	Software for ICT equipment, vehicles, appliances	Contract-based software [3911], device manufacturing [2969]
3913	Packaged Software	Creation of packaged computer programs	Packaged software development	Contract-based software [3911], game software [3914]
3921	Information Processing Services	Commissioned information processing and data services	Data centers, time-sharing services, data entry	—

4.       Key Exceptions

Software and information processing activities do not require prior notification if:

• They are carried out as an ancillary activity to a business that only requires post-transaction reporting, or

• They are performed solely for the benefit of a parent company or group company engaged exclusively in a post-reporting business

However, prior notification may still be required if:

• The company develops software on commission from a third party, or

• Provides information processing services that handle data owned by a third party

5.       METI’s Practical Interpretation

According to responses obtained from the Ministry of Economy, Trade and Industry (METI):

• If a Japanese subsidiary performs localization, technical support, data processing, or other operational activities related to software or IT services, these are generally considered prior notification businesses

• If the parent company simply distributes software in Japan without modification, no prior notification is usually required

6.       Core Industries and IoT Considerations

The FEFTA Cabinet Order also designates as a core industry:

“Software or services that perform management (including device reconfiguration or data collection) of systems or terminals from separate systems or terminals.”

This means businesses involved with IoT devices or remote management systems are highly likely to require prior notification.

⚠️ Disclaimer

This newsletter is provided for informational purposes only and does not constitute legal advice. Before making any investment, consult with a qualified professional to confirm whether prior notification is required under FEFTA.