Japan payroll and tax overview.

Japan is one of East Asia’s largest economies and the world’s third-largest by GDP. Situated on the western rim of the Pacific Ocean and historically regarded as a gateway to Asia, Japan has grown to become the fourth-largest importer and fourth-largest exporter in the world, with top trading partners including the United States, China, South Korea, and Taiwan, along with other major economies across Europe and Asia. Japan’s economy is highly developed and driven by its industrial capacity which includes the production of electronics, motor vehicles, tools, chemicals, and steel. Agriculture is also important to the Japanese economy and accounts for 13% of the country’s land use, as is the fishing industry which represents 15% of the global catch. Japan offers an open, stable business environment with a low-tax revenue system and a consumer base of around 126 million people. In 2019, Japan’s GDP reached an estimated $5.2 trillion dollars with a growth rate of around 0.7%. Japan is a member of the UN, the G7, APEC, and ASEAN, and was ranked 29 on the World Bank’s Ease of Doing Business Survey 2019.

Why Invest in Japan?

There are plenty of reasons for investors to seek opportunities in Japan:

• Economic resilience: Japan’s economy is steadily recovering from the 2008 financial crisis, with a predicted GDP growth of 1.5% over the next 5 years. Pro-business government policies have introduced low interest rates and ongoing industrial deregulation.
• Business infrastructure: Japan’s business landscape is extremely favourable, and was ranked 6th in the world by the Global Competitiveness Report 2015-2016. 54 of the Fortune Global 500 companies have headquarters in Japan.
• R&D opportunities: Japan is committed on a cultural level to innovation and technological progress, and is a world leader in research and development, devoting around 4% of its gross domestic spend to the field. Reflecting this trend, strong intellectual property laws reinforce innovative commercial projects.
• Skilled labour: Almost 50% of Japan’s 25-34 year old demographic have some form of university-level or tertiary qualification. Japan’s citizens are amongst the most educated in the world, with a consistently high rating in STEM subjects. Various government incentive packages are available to foreign companies hiring skilled domestic workers.
• Global hub: Japan is a global business hub, and its businesses benefit from a world class transportation network. Japan’s transport infrastructure includes air and sea links to Asia and the United States, and a rail network which transports 23 billion passengers per year with an average delay of only 36 seconds.

Foreign Direct Investment in Japan

Japan is recognised as a leading innovative economy, which welcomes inward investment. Its political stability has high living standards and societal focus on innovation poise to the country's continued success. The Government appreciates the importance of foreign investment, providing incentives to attract investors and single point contacts in key Government agencies to streamline and simplify setting up business in Japan.

Registering a Company and Establishing an Entity in Japan

In order to set up an entity in Japan, it is important to understand the procedure and follow the steps detailed below:

Business Model Determination

Determines the types of business models the Japanese entity ("JPCO") has available, preferably through advice from accounting firms. It is critical at this stage to engaged an accounting firm able to provide advice on Japanese legal aspects.

Legal Procedures

After the appropriate business model and entity type are determined, the JPCO must register a fixed place of business; this would require engaging a Japanese law firm to establish the entity. It is important to confirm at this stage whether the business is subject to any regulatory requirements.

Enrolment in Social Insurance Programs

When an entity opens an office where they employ a director or an employee (including representative offices and branch offices), the entity is obliged to be registered for the National Social and Labour Insurance programs. Japan has five different types of social and labour insurance: Health Insurance, Pension, Nursing Care (applicable for the employees over the age of 40 only) Workman’s Compensation and Employment Insurance. The registration forms must be submitted to the authorities by the due date.

• Health Insurance and Pension - To the National Pension office within 5 days of business establishment
• Workman’s Compensation - To the Labor Standards Inspection Office within 10 days of hiring the first worker after the establishment of the entity
• Employment Insurance - To the Public Employment Security Office (so-called `Hello Work`) within 10 days of hiring the first worker after the establishment of the entity

Accounting and Payroll Set-Up

Following the establishment of JPCO, engage a professional accountant for the following:

• To set up an accounting system, compatible with reporting requirements with the Japanese accounting standards and tax regulations
• Complete the initial tax and payroll filings with the relevant governmental authorities
• Review your employment agreements for compliance with the Japanese Labour Laws and tax filing requirements

The following information is requested by the Registration Office:

• Name and address of every incorporator
• Amount of investment from each incorporator
• Name of the company
• Registration address
• Purpose of the business
• Directors (can be a non-resident)
• Auditors (if needed)
• Representative director
• Capital
• Unit of investment
• Fiscal year
• The first fiscal year

The following will be required before making the registration:

• Registration seals or signatures of each of the incorporators
• Certificate of registration seals or certificate of signatures of each of the incorporators
• Certificate of registration seal of representative director
• Copy of a bankbook (passbook) to make sure remittance of capital

Business Banking in Japan

In Japan, it is not mandatory to make payments to employees or the authorities from an in-country bank account. Certain payments such as social and labour premium, tax, and some utility payments can only be done with a Japanese bank account. Furthermore, most taxes can only be paid via bank window; ultimately, it is best to set up a bank account in Japan.

Working Days and Working Hours in Japan

The working week in Japan is Monday to Friday, typically from 9:00am to 6:00pm, eight hours a day with one hour mandatory break. Statutory working hours are 8 hours per day, 40 hours per week.

The fixed working hours of each firm shall not be longer than the legal hours unless the firm meets the exceptions such as Flex-time system. When the employer wants to extend working hours or have an employee work on holidays, the so-called “36 agreement” (a written agreement about overtime work and work on holidays) should be concluded between an employer and employees and submitted to the Labor Standards Inspection Office in advance. The employer should pay extra for overtime and work on statutory holidays. In most Japanese entities, employees are given two days within a week such as Saturdays and Sundays as weekly days off.

Basic Facts about Japan

General Information

Japan is an East Asian state on the western rim of the Pacific Ocean. It comprises four main islands - Honshu, Hokkaido, Kyushu, and Shikoku - along with thousands of smaller landmasses. Ancient Japan developed as an empire, but was ruled by feudal lords, known as Shoguns, and remained relatively isolated from the rest of the world until the mid-19th century - after which point it began to venture beyond its borders both culturally and politically. Today, as a member of the UN and other important organisations, Japan is a modern and highly developed country, and plays an important regional and global role. Japan’s living standards are amongst the highest in the world - its citizens enjoy the highest life-expectancy and the lowest infant mortality rate. Much of Japan is mountainous or heavily forested, meaning urban centres cluster around the islands’ coastlines. The country is temperate and mild, but weather conditions can vary greatly throughout the year: from harsh winters with heavy snowfall, to sweltering, humid summers.

Full Name: Japan

Population: 126.3 million (World Bank, 2019)

Capital: Tokyo

Major Language: Japanese

Major Religion: Shintoism, Buddhism

Monetary Unit: Yen

Main Exports: Vehicles, computer parts, chemicals, scientific instruments and watches

GNI per Capita: US $44,810 (World Bank, 2019)

Internet Domain: .jp

International Dialling Code: +81

Income Tax in Japan

There are two main taxes – National Income Tax (the equivalent of Federal Tax for the US) and Inhabitant Tax (also known as Resident Tax). In Japan, income taxes on salary are calculated and withheld from the employee’s salary.

The tax year runs from 1st January to 31st December. The Japanese tax authorities do not allow extensions of time to file the tax return. Penalty fee is calculated case by case. In general, if the tax return is filed late, a 5% (or possibly 15% - 20%) penalty is immediately assessed on the tax balance due.

National Income Tax

Income tax is levied at progressive rates, from 5% to 45%. Taxable income consists of employment income, retirement income, rental income from real property, forestry income, business income, interest income, dividend income, capital gains from real estate, capital gains from securities, ordinary capital gains, occasional income and miscellaneous income.

In general, a non-resident is liable for Japan's national income tax at a flat rate of 20.42% of their Japanese source income.

Inhabitant Tax

Those who live in Japan for, in principle, over 1 year as of January 1st are obliged to pay inhabitant tax to the prefectural governments and municipal governments in Japan. The aggregate local inhabitant tax rate is 10%. The amount of inhabitant tax is calculated based on the previous year’s income. Therefore, for a new expat in Japan, it is not until 1 year that the inhabitant tax will be imposed.

Social Security in Japan

Social Security payment is due at the end of each month. The company will receive a notification of the amount that is due. Both the employer and employee (approximately a 50/50 split in the cost) pay for the premiums for social benefits. The employee portion will be taken directly from Gross Monthly Salary along with other statutory deductions such as National Income Tax and Inhabitant Tax.

*As for labor insurance, a director may not apply for the insurance unless he/she works as an employee concurrently under the control of upper management. In Japan, a director is not regarded as an employee by law and different rules may be applied unless indicated otherwise.

Reporting Tax in Japan

January:

1. Income Reports and Annual Withholding Income Tax Summary

（法定調書 / 給与支払い報告書）

The summary of withholding tax ‘Annual Compensation Report’ can be submitted by a payroll provider. It must be submitted to the tax office between 1st and 31st January each year with the information from the previous year. This report must be signed by the client.

May:

2. Determination of Inhabitant Tax （住民税決定通知）

By end of May, companies will receive letters called “Notification of the Special Levy Amount to the Company/ Business” (特別徴収税額通知書). They are issued by each employee’s municipal government to notify annual and monthly amount of withholding inhabitant tax for each employee. Newly calculated inhabitant tax amount will be applied for the following year (June to May of next year).

June to July:

3. Fiscal Year Renewal of Labor Insurance （年度更新）

The report ‘Workers Compensation Calculation and Insurance Report’ which can be submitted by a payroll provider must be submitted to The Labour Standards Inspection office or Prefectural Labour Bureau between 1st June and 10th July for the period of April to March of the previous year. This report must be signed by the client.

In addition, each company is required to pay the “estimated annual premium” for labor insurance of the following year to make up the balance between the actual premium and last year’s estimated premium.

July:

4. Determination and Payment of Social Insurance Premiums （月額算定基礎届）

By 10th July, the amounts of remuneration paid in April, May and June have to be reported to the Social Insurance Office. The office will determine the amount of social insurance premium accordingly, and this will be applied for the following insurance year (September to August of next year).

December:

5. Year-End Income Tax Adjustment （年末調整）

Year-end income tax adjustment has to be done at the moment of the last payment of salary, etc. in the year. This process settles the discrepancy for each person between the amount of total salary during the year. For most people receiving a salary, this plays an important role as a substitute for filing a final return.

Accordingly:

6. Bonus Payment Report （賞与支払届）

In Japan, usually, a season bonus is paid twice a year in Summer and Winter. The actual bonus payment is also subject to social insurance. Within 5 days of the bonus payment, an application should be filed at the local Social Insurance Office.

New Employees in Japan

Employees are obliged to be registered for the Social Insurances within 5 days of the employment. Part-time workers are included as far as the working time is 3/4 or more than that of normal employees. The office and each director/employee should be registered at the local Social Insurance Office (and Health Insurance Association or Qualified Pension Fund, if applicable). It does not matter what nationality the employee has (i.e., secondee) unless special treatments apply to certain countries such as Germany, Korea, the USA, the UK, Australia, Canada, France, Belgium, Netherlands and Czech. As of Oct. 2019, Japan concluded the Social Security Agreement with 20 countries to eliminate dual coverage of the social security.

Expat new starts must provide the following information when registering with the authorities:

• Copy of Passport
• Signed Contract
• Work Permit
• Attached Registration Form
• Registration Card
• My Number Card

Below are the deadlines for expat new starts to be registered with the relevant authorities:

• Pension and Health Insurance Forms (within 5 days from employment)
• Employment Insurance (within 10 days from employment)

Leavers in Japan

An employee should follow specified procedures when he or she chooses to leave a job. An employment contract is terminated with two weeks’ notice for an employee without fixed-term contract unless provided otherwise in working regulations. However, an employee on a monthly salary needs to give notice in the first half of a salary period to resign at the beginning of the next salary period (The Civil Code Article 627).

In cases where an employee is contracted to work for a specified period of time, he/she should resign when the period of the contract expires and the contract of employment will be terminated. Resignation during the specified contract period is not allowed in principle without any proper, unavoidable reason. In cases when the contract prescribes regulations concerning registration, the employee should follow these.

Regarding dismissal, this is when an employer unilaterally terminates his/her employee’s employment contract. In accordance with Civil Law, an employer as one party of an employment contract has a right to propose to terminate it. However, as dismissal affects an employee’s life, Japanese labor laws impose severe restrictions on dismissal.

Unless otherwise stated and if requested, the company must pay the employees their final pay within seven days from the final day.

Notifications must be made to the Social Insurance Office and Employment Insurance Office.

Payroll in Japan

Payroll reports must be kept for 3 or 7 years (depending on the document).

It is legally acceptable in Japan to provide employees with online payslips.