Japan

Registrations and Establishing an Entity

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 engage 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), Industrial Accident Compensation and Employment Insurance. The registration forms must be submitted to the authorities by the due date.

• Health Insurance and Pension: To the Pension office within 5 days of business establishment
• Industrial Accident Compensation: To the Labor Standards Inspection Office within 10 days of hiring the first worker after 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 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 of 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 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 verify remittance of capital

Banking

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 setup a bank account in Japan.

Working Week

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, 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.

Leave Entitlements

Holiday Accrual / Calculations
An employee is entitled to a certain number of days off work other than public days off/holidays which depends on the company policy and length of service. Employees should consult the company handbook for this.

Maternity Leave

• Before childbirth: 6 weeks leave or 14 weeks leave for a multiple pregnancy, given on request
• After childbirth: 8 weeks leave is mandatory regardless of whether a woman wants to work
• If a person is enrolled in National Health Insurance or Employees’ Health Insurance, they may receive a lump-sum birth reimbursement if they request it (National Health Insurance Law, Article 58). The amount is currently set at 500,000 Yen, per child in the case of twins.
• A person who enrolled in Employees’ Health Insurance (not available with National Health Insurance) can receive a Maternity Allowance (approximately two-thirds of the daily standard wage is paid). This allowance is payable from 42 days before the birth of a baby (98 days for multiple babies), until 56 days after the delivery.

• Childcare leave applies to both female and male employees. Childcare leave starts from the day after maternity leave ends (i.e. 8 weeks after the birth date) to the day until the child reaches the age of one. This can be extended under specific conditions to the age of one year and six months or two years.
• Upon application to their employer, an employee may take childcare leave during the period until their child reaches one year of age. However, if both parents want to take childcare leave, they can do so for a period of one year during the period until the child reaches one year and two months of age. Under specific circumstances, this can be extended until the child reaches one year and six months of age or two years of age.
• An employee who is covered by employment insurance is entitled to 67% of their regular salary during the childcare leave period. From the 181st day, entitlement becomes 50%.

• Sick leave is not mandatory under Japanese labor law. Sick leave benefit depends on individual employment contracts, office regulations and other factors specific to the company. When employees get sick, they use their paid holidays to take a leave of absence.

Tax, Employee Provident Fund, Social Security & Human Resource Development

Income Tax

There are two main taxes – National Income Tax (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 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

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 insurances, a director may not apply for the insurances 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.

Annual Reporting

January:

• 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:

• 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:

• Fiscal Year Renewal of Labor Insurance (年度更新）
• The report ‘Industrial accident 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 the previous year. This report must be signed by the client.

July:

• 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 Pension 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:

• Year-End Income Tax Adjustment (年末調整）
• Year-end income tax adjustment has to be done at the moment of 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.

Bonus Payment Report (賞与支払届）

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

Payroll Records

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

Payslips

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

New Employees

• 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. Additionally, even if their working hours are less than 3/4 of the normal employees, part-time workers may still qualify if they meet specific criteria and are employed by companies of a certain size. This rule is applicable to companies with more than 100 employees from October 2022, and more than 50 employees from October 2024.
• The office and each director/employee should be registered at the local Pension 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, U.S.A., U.K., Australia, Canada, France, Belgium, Netherlands and Czech. As of Dec 2023, Japan concluded the Social Security Agreement with 22 countries to eliminate dual coverage of the social security.

Expat New Starts Must Provide:

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

Deadlines for Expat Registrations:

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

Leavers

• 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.
• In cases where an employee is contracted to work for a specified period of time, he/she should resign when the period of 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 Pension Office and Employment Insurance Office.

Employee Benefits

Expenses

General expenses usually include commuting expenses like to and from work - place to home. Expenses up to JPY 150,000 are Non-Taxable per month.

Car Mileage

Commuting expenses that are added to a director or Employee’s basic salary are tax exempt up to a certain limit. Individuals commuting in their own car are tax exempt based on the distance in which they commute. The following are the limits.

• Less than 2 km – All taxable
• 2 km to 10 km – up to JPY 4,200
• 10 km to 15 km – up to JPY 7,100
• 15 km to 25 km – up to JPY 12,900
• 25 km to 35 km – up to JPY 18,700
• 35 km to 45 km – up to JPY 24,400
• 45 km to 55 km – up to JPY 28,000
• 55 km or more – JPY 31,600

Overtime/Working on Holidays

The Japanese Labor Law fixes the extra payment for overtime hours. When employees work overtime or work on holidays, an additional payment to the hourly base salary applies:

• Weekdays and Non-Statutory Holidays (up to 60 hours): 125%
• Weekdays and Non-Statutory Holidays (exceeding 60 hours): 150%
• Night-time (22.00 – 5.00 / *23.00 – 6.00): Additional 25%
• Statutory Holidays: 135%
• Statutory Holidays Night-time: 160%
• *In case permitted by the authority

To Work in Japan

Foreigner Nationals, who wish to work in Japan, need to get a Work Visa from the Japanese Embassy or consulate outside of Japan, prior to entering the country.

In order to apply for Certificate of Eligibility in Japan, you are required to collect and submit numerous documents at the Immigration Service Agency in Japan before you are planning to work in Japan.

Processing Time

One to three months are required to get approval for Certificate of Eligibility.

Specialism

There are over a dozen such statuses of Residence, each allowing the holder to work only in a specific Professional Industry.

Professional Qualifications

A University Degree or considerable professional experience in the applicant’s field of work is required to qualify for a Working Visa. Most types of Working Visas require an Employer as a sponsor.

Residence

Residence permission is granted in periods of 6 months, one, three or five years and can be extended upon application if approved.

• Year-end adjustment replaces personal tax filing for most residents
• Social insurance treaties exist with 22 countries
• Fringe benefits subject to complex valuation
• National holidays and bonus payments are culturally significant

Further Information For more information, or assistance with Japan tax enquiries please contact: gi@activpayroll.com

About This Payroll and Tax Overview Please note that this document gives general guidance only and should not be regarded as an authoritative or complete statement of the law, regulations or tax position in any country. You should always seek specific advice for each specific situation. This document should not be relied upon as professional advice and activpayroll accepts no liability for reliance on its contents.