The representative office is the easiest way of establishing an office in Japan, but is very restricted in the nature of the activities it can carry out and the number of employees.

The representative office is typically used when a
 foreign company wants to undertake market research or advertising in Japan, prior to making the more permanent commitment involved in a branch or subsidiary.

Overview
The representative office is only permitted to engage in limited activities. The following are permitted under Japanese domestic law:
(i) Purchase of assets (ii) Storage of assets (iii) Auxiliary services
(e.g. advertising, information gathering, market research)
The representative office cannot participate in sales activities, but can supply information to distributors, communicate prices and terms of sale and identify sales opportunities.
There is no legal restriction on the number of employees a representative office can have.

Formation Procedures
There are no legal registration requirements (i.e. it does not need to be registered with the Legal Affairs Bureau (as would be the case with a Branch or a Subsidiary).  In addition, there is no requirement to report the direct inward investment to the Ministry of Finance via the Bank of Japan which is required under the Foreign Exchange Law (for Branch entities).
However, where there are employees receiving remuneration paid into a Japanese bank account, there are payroll and social insurance registration requirements.

Shareholding Requirements
The representative office is simply an extension of the parent company and there are therefore no shareholding requirements or restrictions.

Control of the Company
The representative office is fully controlled by and simply an extension of the parent company and there are therefore no shareholding requirements or restrictions.  

The Representative Office needs to have a Representative resident of Japan (ie someone with a legal address and right to work in Japan).  

Employees and Payment of Salaries:
In order to pay salaries to employees and give them the same benefits of Health and Pension (Social Insurance) as enjoyed by other regular company employees, the process if relatively strict and a lot of paper work is required by the Social Insurance Office:

 
The Representative Office needs to prove the reality of its existence by showing:
- a lease for office space in its own name - the lease for a representative office’s office space may be signed between the head office in the home country and the Japanese building owner. In many cases, however, the owner will require that the representative office have a guarantor resident in Japan.
- a utility bill in the Representative Office name
- a copy of the contract between the representative and the foreign company

Bank Account:
It is possible for a representative office to open an ordinary operating account at a Japanese bank using an account name such as “Tom Smith, XXX Inc. Representative Office in Japan,” a hybrid of individual and corporate status. 

Books and Records
The representative office is not required to retain books and records in Japan.
However, for consumption tax purposes, where the representative office claims the input tax credits, it is required to retain books and records in Japan. There is no statutory audit requirement.
 
Taxation
Representative offices are not subject to taxation in Japan.
However, if the representative office exceeds the permitted functions outlined above, there is a risk that it will be subject to full Japanese taxation.

The profits that would become subject to taxation under these circumstances would then be subject to negotiation between the company and the Japanese authorities.

 

source: www.jetro.org